Over the past decade, stakeout agreements like the one just announced by NationsBank and MNC Financial have culminated in acquisitions only 20% of the time. But in the latest example, the deck appears stacked for NationsBank to win its prize.
Indeed, though both parties technically retain the right to scuttle an eventual merger, the fate of the deal is, in fact, largely in NationsBank's hands.
Here's why: Interstate banking laws limit the number of suitors that might make an 11th-hour bid for Baltimore-based MNC. What's more NationsBank, the country's fourth-largest bank company, has built in a kind of poison pill that would make it more expensive for another bidder.
The net effect is that MNC, which has $16 billion in assets, would be tough for anyone else to swallow.
The Wild Card
That is, of course, assuming that North Carolina-based NationsBank, which agreed last month to acquire a 16% stake in MNC for $200 million, wants to exercise its option to buy.
The real wild card is whether MNC will keep making progress at shrinking its problem assets, which still equal a hefty 8.4% of total assets.
But with MNC apparently on the rebound, it seems likely that by September 1997, when the option expires, Nationsbank will go ahead with the deal.
Since the early 1980s, only four of 20 bank stakeouts resulted in acquisitions, according to a recent study by the New York law firm of Wachtell, Lipton, Rosen & Katz.
In the case of New York-based Chemical Banking Corp., interstate barriers prevented it from buying Florida National Banks of Florida Inc. The Jacksonville company ended up linking with First Union Corp. of Charlotte, N.C.
And State Street Bank in Boston once had a stakeout agreement with Worcester (Mass.) Bancorp, but that company took a better offer from Shawmut National Corp. of Hartford, Conn.
Under the Nationsbank deal, the acquisition price would be based on MNC's book value, currently $10.29 a share. The price would range from 125% of book value this year to 150% in 1997. MNC shareholders are guaranteed at least $14 a share through 1995 and $15 in 1996 or 1997. MNC's shares now trade at $10.50.
Should MNC accept another offer higher than the minimum price. NationsBank's 16% stake would automatically increase to 24.9%. That would ensure a 50% profit on its investment and add at least $100 million (calculated from current prices) to the acquirer's price.
In other words, the buyer would incur a premium equal to 10.5% of MNC's current market value of about $950 million.
(Should MNC deteriorate and end up accepting an offer below $14 a share. NationsBank would still get its $200 million back, plus interest compounded at 20% a year.)
Another protection for NationsBank: The pool of potential acquirers is limited by interstate banking limits. Maryland permits acquisitions only by companies based in most southern states, Pennsylvania, and Delaware.
The other likely acquirers - First Union, CoreStates Financial Corp. of Philadelphia, and PNC Financial Corp. and Mellon Bank Corp., both of Pittsburgh - probably could not win a bidding war with the larger NationsBank, especially considering the added premium they would have to pay.
$1.45 Billion Minimum
At $14 a share, NationsBank would pay about $1.45 billion to acquire MNC, including its $200 million initial stake.
Analyst John Bailey of Ferris, Baker Watts Inc. in Washington estimates on the basis of MNC's current trends that the takeout price will not exceed $14 before the end of 1994.
Another analyst, John Heffern of Alex. Brown & Sons Inc. in Baltimore, calculated in a recent report that NationsBank might have to pay $18 to $19 a share for MNC in 1995 if book value continued to grow.
NationsBank shareholders would figure to benefit handsomely from a recovery at MNC.
Moshe A. Orenbuch, banking analyst with Sanford C. Bernstein & Co. in New York, estimates that MNC's core earnings combined with merger-related cost savings could contribute nearly $350 million a year pretax, or $200 million after taxes. This assumes that MNC brings its annual loan-loss provisions down to a more normal $70 million.
MNC, which has been struggling with bad real estate loans, took $428 million in provisions last year, followed by $88.3 million in the first six months of this year. The level is expected to keep dropping in the next few years as the company works its way through bad loans and shrinks its balance sheet.
NationsBank's Maryland-Washington network of 108 branches partly overlaps MNC's 235-office system. Because of this overlap, Mr. Orenbuch said, NationsBank could eliminate 30% of MNC's expense base (excluding foreclosed real estate costs) for annual savings of $175 million to $200 million.
"This is a deal that is constructive for NationsBank," Mr. Orenbuch said, providing "an opportunity to expand rationally at a reasonable price."
He said NationsBank is unlikely to exercise its option until MNC's nonperforming assets have fallen below $1 billion, perhaps to the $500 million to $700 million range.
At the end of the second quarter, MNC had $1.4 billion in nonperforming loans.
The knowledge that, for now, NationsBank is the only game in town has depressed MNC's stock, which had been driven up by arbitagers betting on a quick takeover.
The share fell 25 cents when the agreement was announced on July 17. In the weeks since, it has settled in at $10.50 a share, down 7% from its July 16 close of $11.25 and 11% under NationsBank's entry price of $11.75 a share.
"The arbitragers aren't getting cashed out the way they wanted," said analyst Anthony R. Davis, with Wheat First Securities Inc. in Richmond.