Cash was king in 1994.

As the merger market boomed, banks resurrected an old technique of using stock buybacks in conjunction with mergers as a means of funding deals. At the same time, foreign-owned banks found that greenbacks were not always enough when buying U.S. banks.

It was also a year in which some special incentives were needed to compete in a market that buyers saw as having overheated prices.

The most notable example of the trend was the year's biggest deal: BankAmerica Corp.'s acquisition of Chicago-based Continental Bank Corp. The $1.9 billion deal included $939 million in cash, plus 21.25 million newly issued shares of common stock.

The structure allowed Continental shareholders to choose between cash and a tax-free stock swap.

"Sellers are less strident about taking all stock in their transaction," said Jim Hale, managing director of the financial services group at Montgomery Securities in San Francisco.

But capital-rich acquirers also have reason to like the cash alternative because of its purchase accounting treatment. "The most important factor in the decision to use cash is the impact on the buyer's earnings per share, because the capital markets have made it clear they won't accept dilution," he said.

Scores of other acquisitions involved buybacks - either before or after. In another Chicago deal, both the target and acquiring bank bought back stock in conjunction with the sale.

In August, Milwaukee-based Firstar Corp. agreed to acquire First Colonial Bankshares for about $314 million or about 1.9 times book value. To fund the deal, Firstar said it would repurchase up to 765,000 of its shares and issue up to 6.94 million in new stock to acquire the suburban Chicago bank. First Colonial also planned to buy back some its own stock as part of the transaction.

"It made sense to use the cash that way," said one investment banker, who asked not to be identified. "It made the deals nondilutive and was a good way to speed surplus capital."

Not everyone saw it that way.

"It's misleading and inappropriate to characterize these deals as antidilutive when they are not," said Reid Nagle, president of SNL Securities in Charlottesville, Va.

He noted that some banks and advisers compared the dilutiveness of the buyback deals to the dilution that would have occurred in the same acquisition without a buyback. A better way to look at it, Mr. Nagle contended, would be to compare how shareholders would have fared if there had been a stock buyback without an acquisition.

Looking ahead this year, most experts expect the merger-related stock buybacks to continue. But the stock swap could be replaced - on a limited basis - by straight cash deals if congressional Republicans get their way on efforts to cut capital gains taxes.

While some in the GOP have talked about halving the current 28% tax, many bank M&A lawyers say that a cut to 20% is more realistic. If that were to happen, they say, many privately owned small banks could decide to cash out for something other than stock.

"I think the level of small-bank deals could pick up 25%-30% if there is a significant cut in capital gains," said one M&A lawyer. "Many people don't really want bank stock unless it is from a really growth-oriented bank like Norwest. But cash they can spend anywhere, and it makes estate planning less complicated."

But cash wasn't enough for everybody last year.

Foreign-owned banks have historically been cash buyers because their stocks generally have not been listed on a U.S. exchange. That began to change in 1994.

In July, London-based National Westminster Bank said it would pay $300 million for Central Jersey Bancorp. The deal was paid for with cash, but about 55% of the purchase price was paid with American depositary receipts which would allow some shareholders a tax-free stock swap. It marked the first time such a combination was used.

A few months later, Bank of Montreal issued 13 million shares, which began trading Oct. 27 on the New York Stock Exchange, to expand its Chicago-based Harris Bankcorp franchise. The deal to acquire Suburban Bancorp increased Bank of Montreal's ownership by Americans to 10%.

Observers in the Chicago market said the dual listing in Canada and the United States was prompted by the refusal by Suburban's owners to accept a traditional cash buyout. Others said a more important factor was Bank of Montreal's plan to generate half its earnings and ownership from south of the border by early in the next century.

But cash was not the most interesting part of some deals in 1994.

In May, Fleet Financial Group agreed to pay $420 million in cash and stock to acquire NBB Bancorp, a Massachusetts thrift. But the creative part of the deal was a unique sweetener in which NBB shareholders would receive warrants for 2.5 million shares of Fleet stock.

Under the deal, Fleet gave 0.277 warrants for each NBB share, with a strike price of $43.88 and a term of six years, exercisable one year after closing.

Observers speculated that the warrants were a way to allow Fleet's newest shareholders to share in stock price appreciation from much publicized cost-cutting or from a frequently rumored takeover by a larger acquirer anxious to enter New England.

Either way, many agreed the sweetener was one way to compete in the pricey Massachusetts market and to defer the current cost of the deal.

"You could see this kind of structure more in the future, especially if price expectations stay high," said one New York merger adviser. "It's a great way of meeting the (price) demands of the market without having to pay it all out today."

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