The sliding stock market has created a cloud of uncertainty over KeyCorp's planned purchase of McDonald & Co., the investment banking firm.
Because of hits that occurred last week and continued into Monday, KeyCorp stock is no longer worth enough to close the deal as initially planned.
At the very least, KeyCorp faces issuing more stock, making the deal more expensive and dilutive to its shareholders. At the most extreme-if shares continue falling-the McDonald board will have the option to scrap the deal.
The development is among the first examples of agreements facing restructuring because of the current stock market setback. Banks pegged their deals to stock prices at the time of their announcements, which were months ago, and now shares have skidded.
With its stock trading at $36, KeyCorp agreed in mid-June to issue 0.95 of its shares for each McDonald share.
But on Monday, KeyCorp stock fell 87.5 cents, to $32.125-below the $33 floor set by the companies' boards to complete the merger under original terms. If shares stay down, KeyCorp would be forced to issue 1.06 shares for each share of McDonald & Co. And if shares fall below $29 and stay there, the McDonald board has the option to renegotiate or scrap the deal.
The shares still have a chance to rebound, because the merger is not slated to close until this fall.
But the clock is running. On Monday, McDonald set Sept. 15 as the date for its shareholders to vote on the deal. The McDonald board unanimously recommends that the deal be completed, emphasizing long-term value for shareholders, according to a filing with the Securities and Exchange Commission.
With some market watchers expecting a prolonged slump in the stock market, KeyCorp may well have to up its ante to keep the deal in the $650 million range that McDonald shareholders were promised.
The way the market is going, KeyCorp stock "could be at $29 tomorrow," said Nancy Bush, banking analyst at Ryan, Beck & Co. Any renegotiation "would only make an already expensive deal more expensive," Ms. Bush said.
She and some other analysts have criticized the deal as too expensive for the services that the regional brokerage and investment bank can supply.
A spokesman for KeyCorp acknowledged the market difficulties but declined further comment. A spokesman for McDonald also declined to comment.
McDonald stock closed Monday at $32.125, off 50 cents, and very near the $32.9375 price at which it traded when the deal with KeyCorp was announced.
The market was not kind to KeyCorp and other bank shares on Monday, as financial institutions' shares continued to slump and outpace losses by several other industries. The Standard & Poor's bank index fell 1.53%, and the Dow Jones industrial average dipped 0.27%. The Nasdaq bank index slipped 0.47%, and the S&P 500 lost 0.58%.
Traders were hoping that a flight to quality would place investors in large-cap financial stocks, but the group largely languished.
Among the small group of bank stocks able to gain, Commerce Bancshares added 25 cents, to $49.875, and Zions Bancorp rose 18.75 cents, to $48.4375.
Bankers Trust lost $3.5625, to $101.375; J.P. Morgan & Co. slipped $3.3125, to $120.1875; and Wells Fargo & Co. fell $2.625, to $333.3125.
The coming days are likely to see more skittishness, analysts said. "This is a choppy market," with investors concerned about economic problems in Asia and hearings involving the President in Washington, said Salvatore J. DiMartino, banking analyst at Advest Group.
Mr. DiMartino sees opportunities in BancOne Corp., BankBoston Corp., and Fleet Financial Group.