The land-rush pace of bank acquisitions this year has given sellers the power to insist on "walkaway" provisions in merger agreements.
As the name implies, these provisions allow sellers to abort a merger if a buyer's stock price plunges below a specified level.
The deal announced earlier this week by Barnett Banks Inc. to buy First Florida Banks Inc. includes a walkaway clause.
So do planned acquisitions by Banc One Corp. of Valley National Corp. and Team Bancshares as well as the pending purchase by NBD Bancorp of INB Financial Corp.
Sellers in all these transactions were among the few major banks left to buy in their markets. All carried hefty price tags that startled Wall Street and cast at least a temporary pall over stock prices of the buyers.
"Obviously, sellers in the current environment have had the leverage to demand this kind of protection against market risk," said Lawrence A. Cohn, bank analyst at PaineWebber Inc.
Time Can Cost Money
Nearly all large bank acquisitions are paid for with stock, and market risk can mount during the regulatory review periods.
For example, BankAmerica Corp.'s acquisition of Security Pacific Corp. was unveiled last Aug. 12, but not completed until eight months later, on April 22.
"It is a risk-sharing mechanism," said Edward D. Herlihy, a bank merger specialist at the New York law firm of Wachtell, Lipton, Rosen & Katz.
Caps and formulas known as collars limiting acquisition price increases have long been a feature in deals, but walkaway provisions are a more recent development, he said.
The stock price of Barnett, based in Jacksonville, Fla., has fallen over 9% since last Friday. That was the last trading session before it announced it was paying stock now valued at $808 million, or the equivalent of 2.4 times book value, for First Florida, based in Tampa.
Tampa-based First Florida can walk away from the deal if Barnett's stock price declines 20% before the deal closes - not expected until December.
That means Barnett's stock price cannot fall below $31.40 versus $39.25 a week ago. Barnett was unchanged at $35.625 Thursday afternoon.
Triggering the Protection
However, Barnett also has protection. The walkaway provision cannot be triggered by a general decline in bank stock prices unless Barnett does considerably worse than its peers - a decline 20 percentage points more than Standard & Poor's regional bank stock index.
Moreover, the provision refers to Barnett's average stock price during a specific "valuation period." That is the 20-day period up to six days before the deal is set to close.
Walkaway provisions can benefit both parties. A drop in the price of a buyer's stock between the unveiling and closing of a deal would mean less value for exchanged shares of selling shareholders but also probably more dilution for shareholders of the buyer.
At Barnett's Thursday stock price, First Florida owners will get $50.59 a share, down from $55.75 a week ago.
The ceiling in the agreement limits the price to $69.67. Since the exchange ratio is 1.42 Barnett shares for each First Florida share, the ceiling would take effect if Barnett's stock price rises over $49.
In Banc One's deal for Valley National, Phoenix, the agreement provided Valley an escape clause if shares of Banc One, based in Columbus, Ohio, fall below $40, or 15% below the price the day before the deal was announced. It also must underperform the stocks of a specific group of peer banks. Banc One shares were trading at $45.875 on Thursday afternoon.
If Banc One's share price is between $40 and $42, the agreement calls for renegotiation of the acqusition price.
Banc One agreed to pay $1.2 billion, or 2.2 times book value, for Valley National, a price that raised eyebrows among many investors.