New details about First Michigan Bank Corp.'s pending sale to Huntington Bancshares offer a sobering glimpse of the problems facing smaller banks in today's merger and acquisition market.
First Michigan agreed to sell itself to Huntington at almost no premium over market value and had to pay its investment banker dearly to do it.
On May 5, Columbus, Ohio-based Huntington, which has $21.6 billion of assets, said it would buy Holland, Mich.-based First Michigan, which has $3.6 billion of assets, for $908 million in stock. That price represents only a 2.4% premium over First Michigan's share price the day the deal was announced - about one-eighth market average.
The companies' shareholders will vote on the proposed deal Sept. 9 and 10, according to proxy materials filed with the Securities and Exchange Commission last week.
First Michigan has agreed to pay its financial adviser, Merrill Lynch & Co., 0.8% of the "aggregate purchase price," or $7.26 million. Huntington, meanwhile, will pay its adviser, Morgan Stanley & Co., only $1 million.
All this illustrates just how difficult many smaller and midsize banks are finding it to sell at a time when interest from bigger banks is fading.
"There's a lot of nervousness out there among the First of Michigans," said Robert L. Freedman, partner at the law firm Silver, Freedman & Taff in Washington, who specializes in mergers between midsize banks. "They see the market is drying up, and they're wondering what will happen to the ones that are left."
This growing sense of urgency pushed First Michigan to start exploring a sale last August, when the bank's board authorized management and Merrill Lynch to find buyers.
Originally, it appears the board misjudged the market. Merrill Lynch found a number of companies interested in expanding into Michigan, "but at levels which were not deemed acceptable from (First Michigan) management's or the board's perspective," according to the proxy.
An unnamed banking company went so far as to conduct due diligence but made no formal offer, and discussions were terminated in January, the proxy said.
In February, Huntington called Merrill Lynch. The First Michigan board decided such a merger would be "sufficiently attractive," and in April negotiations got under way.
The First Michigan board justified its decision to sell at only a 2.4% premium by telling investors in the proxy that the company's share price was already inflated by takeover speculation. First of Michigan shares rose 30.5% from Oct. 1 until the day before the merger was announced. The Standard & Poor's bank index rose 25.9% in the same period.
Although premiums have been declining over the past year as bank stock prices soared, deals involving banks of similar size average 20% premiums, according to SNL Securities.
Even if the merger isn't completed, Huntington stands to get a piece of First Michigan. The agreement grants Huntington the right to buy 19.9% of First of Michigan shares at $29.275 each. "That way, Huntington stands to benefit if someone else buys First of Michigan above that price," Mr. Freedman said. If the deal is not completed, First of Michigan has agreed to pay Huntington a $22 million termination fee.
First Michigan also is willing to reimburse Huntington for its merger- related expenses if - as is expected - shareholders approve the deal.
Mr. Freedman said it was "unusual" for a seller to agree to pay its acquirer something whether or not they merge.