A Houston company formed to buy a community bank is being forced to liquidate after its hedge fund owners vetoed the deal, according to its chief executive.

Coastal Bancshares Acquisition Corp. was formed in 2004 and raised roughly $30 million in a public offering. In April it announced it would buy the $137 million-asset Intercontinental National Bank in San Antonio for $16.8 million in cash. The plan was to expand Intercontinental into Austin and ultimately sell it for a profit.

But Coastal's founder and CEO, Cary Grossman, said the Intercontinental deal fell through Thursday because it failed to win approval from owners holding at least 80.1% of its shares.

Coastal must liquidate, because it had promised investors it would go out of business if it did not have a deal in the works by August and closed by Feb. 18, 2007.

When Coastal went public, its shares sold for $6, and each share came with two warrants that investors could then sell. Many investors sold the warrants for 65 cents each, effectively reducing the cost of the shares to $4.70.

If Coastal pays out $5.45 ($30 million divided among the 5.5 million public shares outstanding) the investors who sold their warrants would make a 75-cent profit on each share.

"The only people who win are the investment bankers, who reaped their fees, and the hedge funds, who knew all along that there is no downside for them," Mr. Grossman said.

He blamed the deal's collapse on hedge funds, which he estimated own between 50% and 60% of Coastal's stock. The funds never intended to retain the stock over the long term but invested in Coastal because they saw an arbitrage opportunity, he said.

Mr. Grossman would not name the hedge funds. But a search of Securities and Exchange Commission filings found three that own more than 5% of Coastal's shares: Amaranth Advisors LLC of Greenwich, Conn., Sapling LLC of New York, and Weiss Asset Management LLC of Boston.

A spokeswoman for Weiss said it does not discuss its positions in companies. Sapling and Amaranth did not return phones calls. (Amaranth imploded last month after losing $6 billion on natural gas investments.)

Insiders hold 1 million Coastal shares, and stand to lose their investment.

"I'm beyond upset, but all you can do is move on," Mr. Grossman said. "It is a tremendous loss of time on my part and a tremendous loss of money on the part of the investors, my friends."

Coastal was the first banking company in which he has been involved, and he said he has no interest in starting another.

Mr. Grossman said that he was not surprised by the arbitrage, but that the markets were friendlier to specified-purpose acquisition companies - also known as SPACs - like Coastal when his company was founded.

Often after an acquisition was announced, he said, the price of the SPAC's stock would rise above the buyback price, and hedge funds would sell the shares on the open market instead of waiting to be bought out. Coastal's stock, however, did not budge after the Intercontinental deal was announced, and the hedge funds saw liquidation as the only way to make a quick profit on their investment, he said.

Mr. Grossman said he became aware that hedge funds held a large stake in Coastal in mid-summer. His company started looking for "more friendly investors" to buy out the hedge funds, but it could not find enough, he said.

Stephen Skaggs, the president and a partner at Bank Advisory Group Inc., which represented Intercontinental in its deal with Coastal, said last week that several potential buyers have shown interest in acquiring Intercontinental.

Steven Pritchard, the president and CEO of Intercontinental, said the bank has not decided whether to continue with plans to sell. The deal with Coastal was attractive, he said, because Coastal would have let his bank maintain its autonomy while infusing it with capital so that it could grow faster.

"We are standing back and going to reevaluate what our options are and our opportunities are," Mr. Pritchard said Monday. "It's still too early to tell."

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