After raising its previously rejected bid by 32%, BankAmerica Corp. has struck an agreement to buy back the publicly owned shares of its credit card merchant processing subsidiary.
The deal, by which BankAmerica wanted to lock up 100% control of what it deemed a strategically important transaction processing function, had been held up pending a reassessment of the subsidiary's value.
The Charlotte, N.C., banking company upped its offer for 16.3 million class A common shares by $5 each, to $20.50, raising the total cash price to $333 million from the $252 million when the buyback proposal was floated in October.
Upon the anticipated completion at the end of the first quarter next year, BA Merchant Services would be wholly owned by Bank of America. Since the partial spinoff two years ago, BankAmerica through class B shareholdings retained 66.6% of the economic interest and 95.2% of the voting power.
The earlier proposal was rejected as inadequate by independent directors, who were advised by Credit Suisse First Boston and outside legal counsel. BankAmerica said Tuesday that the revised offer was unanimously approved by the BA Merchant Services board.
The companies also said they agreed in principle to settle several shareholder lawsuits that challenged the original offer. The settlements are subject to final documentation and court approval, and no other details were disclosed.
The machinations are a byproduct of BankAmerica Corp.'s merger with NationsBank Corp. and a decision to concentrate activities within the old BankAmerica's merchant processing unit.
In November, BankAmerica sold its 20% stake in Unified Merchant Services, a joint merchant-acquiring venture NationsBank had with First Data Corp.
"The new Bank of America is very interested in managing and controlling its own destiny," said Stanley Anderson, president of Anderson and Associates, Arvada, Colo.
Other post-merger actions have included the sale of the Robertson Stephens investment bank and pullbacks from some less strategically important geographical areas. On Tuesday, BankAmerica announced the sale of eight Alaska branches to Northrim Bank of Anchorage (see page 4).
In processing card transactions for merchants, "their No. 1 thing is to keep growing this business and have a broader relationship with the merchant," said Richard Weingarten, an analyst with Salomon Smith Barney. "They can leverage their checking account relationships and credit card processing relationships to get more business."
Mr. Weingarten said BankAmerica was paying a "pretty reasonable premium" that assumes solid earnings growth. The $20.50 offer is 20 times Mr. Weingarten's estimate of 1999 earnings.
"Bank of America wants to be in the acquiring side of the business," said David Robertson, president of The Nilson Report, an industry newsletter based in Oxnard, Calif. "They want to differentiate their product and feel they can best do that by being an in-house provider."
BankAmerica did not make executives unavailable for comment. Spokesman Dennis Wyss said "the proposals to purchase the stock result from a reassessment of Bank of America's strategy."
No management changes are planned, Mr. Wyss said. Sharif M. Bayyari will remain president and chief executive officer, reporting to G. Patrick Phillips, who oversees card services for BankAmerica.
Some observers questioned what the focus on BA Merchant Services will mean for Vital Processing Services of Tempe, Ariz. Mr. Robertson said BA has been bringing in-house the processing of store terminals that had been delegated to Vital, which is co-owned by Visa U.S.A. and Total System Services Inc.
This does not necessarily mean BA Merchant Services "will pull the rug out" from Vital, Mr. Robertson said, but "it's clear they want to run their own show."
He said BankAmerica would benefit most in merchant services if it can take full advantage of both its vast branch network and backroom scale economies. Few companies have both ingredients.
"The margins are much better in providing features and functionality unavailable from your competitors," Mr. Robertson said.