Along with the bonanza they have created for major investment banks, the recent banking industry megadeals may have established a new formula for how the advisers get paid.
NationsBank Corp. and BankAmerica Corp., which signed a merger pact in April, are compensating their investment bankers on the basis of their ability to promote the companies' stocks, according to a Securities and Exchange Commission filing.
The firms in that $60 billion deal, Merrill Lynch & Co. and Goldman, Sachs & Co., not only would collect at least $25 million each in traditional advisory fees, but also would get 0.2% of the increase in market valuations of NationsBank and BankAmerica between the announcement date and the last trading day before the closing.
The investment banks could pocket $50 million apiece.
For obvious reasons, sales forces at Merrill and Goldman are touting the stocks fervently this summer.
Though it is not unusual for investment banking fees to vary with the final acquisition price in an all-stock merger, it is uncommon for fees on both sides of a deal to be so directly linked to stock performance, merger advisers say. And never have the stakes been so high for an investment bank in touting the stock of a merging corporation.
Merger experts expect that the pay-for-performance standard will be used more frequently.
"Incenting people to do a good job is certainly not a bad idea," said H. Rodgin Cohen, a partner at Sullivan & Cromwell, New York, who has provided legal advice on many of the biggest bank mergers, though not on the NationsBank-BankAmerica deal.
The arrangement works like this: NationsBank and BankAmerica would pay investment bankers a set fee (Merrill $25 million, Goldman $27.5 million), plus 0.2% of the combined increase in market value of NationsBank and BankAmerica, up to a maximum of $50 million each.
If the merger had closed June 26, according to the SEC document filed on Tuesday, Merrill would have been paid $28.3 million and Goldman $30.8 million.
The fee arrangement is quite different from those of previous bank megamergers.
First Union Corp. paid Morgan Stanley a flat $22 million for advice in its acquisition of CoreStates Financial Corp., while CoreStates paid Credit Suisse First Boston and J.P. Morgan & Co. $16.6 million each, a fee of 10 basis points that was based on stock prices the day the deal was announced.
Banc One Corp. and First Chicago NBD Corp. which announced their deal the same day as NationsBank-BankAmerica, both agreed to pay their investment bankers flat fees ranging from $13.1 million to $16.5 million.
Both BankAmerica's and NationsBank's shares peaked July 14 and have been falling of late. BankAmerica closed Tuesday down $4.9375, to $83.75, and NationsBank fell $4.0625, to $74.8125.
But the companies have performed better than most banks since their merger was announced April 13. Since then, BankAmerica has fallen 3.3% and NationsBank 2.2%, while the Philadelphia Keefe Bruyette & Woods Bank Index, which comprises large banks, has fallen 10.2%.
Merrill Lynch's and Goldman Sachs' fees may be linked as much to their sales forces' abilities to move stocks as to their merger advisory talents, because their investment bankers seemingly had little to do with arranging the NationsBank-BankAmerica merger-at least at the beginning.
According to the regulatory filing, merger talks began "in the direct course" of phone conversations between the companies' chief financial officers, who were discussing legislative matters in Washington that affected banks. The two executives agreed to meet March 27 to discuss a possible merger, and on April 1 NationsBank chief executive officer Hugh L. McColl Jr. met his counterpart at BankAmerica Corp., David A. Coulter.
The next day the CEOs agreed to recommend a merger of equals to their respective boards and start examining each other's books.
NationsBank's board met April 6 and hired Merrill Lynch for a fairness opinion. BankAmerica had retained Goldman Sachs earlier. BankAmerica's board approved on April 9, NationsBank's the next day.