The Chemical-TCF merger that almost wasn’t

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The management structure of the company being formed by Chemical Financial in Detroit and TCF Financial in Wayzata, Minn., would have looked different had there not been a late-year swoon in bank stocks.

Chemical and TCF had settled on a draft term sheet last fall that would have given David Provost, the $21.5 billion-asset Chemical’s president and CEO, the same posts at the new company, according to a regulatory filing tied to the $3.6 billion deal.

Craig Dahl, the $23.5 billion-asset TCF’s chairman, president and CEO, was set to become the bank’s CEO. He would have succeeded Provost as the company’s CEO 18 months after the deal’s completion.

But discussions ended on Nov. 2 after trading prices for each company “worsened substantially,” making it challenging to “agree on a mutually acceptable exchange ratio,” the filing said.

When talks resumed a few weeks later, Chemical agreed to immediately make Dahl the new company’s president and CEO, with Provost serving as the bank’s chairman. The proposed size of the board was also expanded, from 14 directors to 16, with even representation under both scenarios.

The changes highlight how important social issues are to mergers of similarly sized banks.

“In mergers of equals, the headquarters, company name and management tend to be huge factors because the deals don’t tend to have large premiums,” said R. Scott Siefers, an analyst at Sandler O’Neill.

“The change is a timing difference since” Dahl was set to eventually become CEO, Siefers said. “It is a subtle difference, but important nonetheless. … These social issues carry great weight.”

While he wasn’t privy to the details of the negotiations, Chemical spokesman Tom Wennerberg said the CEO change was representative of Provost and the relationship he had forged with Dahl during the merger talks.

Provost “is the type of executive who will do what needs to be done to make the right deal successful,” Wennerberg said. “It is emblematic of the relationship and an effort to ensure that the deal got done by casting aside roles and titles.”

Merger conversations between the companies began in May 2018 when Dahl contacted Provost to discuss industry trends. The executives met in Detroit on May 21, and the companies entered into a confidentiality agreement three days later.

Gary Torgow, Chemical’s chairman, was brought into the discussions on June 19. Torgow is set to become the new company’s chairman.

Executives of both companies met in Chicago on June 25 to discuss their businesses and the potential of a merger. A month later, Provost, Torgow and Dahl met in Minneapolis to continue discussions, covering topics such as board composition, management structure, the company name and the headquarters.

During a Sept. 7 meeting, TCF’s board debated the company’s options, including organic growth, buying smaller banks, a larger transaction or merging with Chemical. Directors authorized management to continue talking with Chemical.

Chemical in mid-September provided TCF with an initial term sheet proposing a 90% stock transaction, a 14-member board and Torgow as chairman. Provost would have been president and CEO, while Dahl would have been the bank’s chairman and CEO.

The term sheet recommended keeping the TCF name and basing the company in Detroit.

TCF agreed to most of the terms, though it wanted an all-stock transaction. It also pushed for Dahl, in addition to becoming the bank’s chairman and CEO, to also serve as the new company’s vice chairman and chief operating officer.

TCF also proposed that, for three years after closing, any changes to the board or senior executive roles would require approval from three-fourths of the board.

The companies spent most of October hammering out the details of a deal, including the method for determining an exchange ratio, board governance and management structure and the location of the headquarters and major operational centers.

Then market volatility set in, and the companies agreed to discontinue discussions.

Chemical’s shares fell by 37% between Sept. 17 and Dec. 17. TCF’s stock slid by 25% over the same period.

It didn’t take long for the companies to revisit the deal.

Provost, Torgow and Dahl, during a meeting at an industry conference on Nov. 30, agreed to take another look at the benefits of a merger, “notwithstanding the … stock market volatility,” the filing said.

Chemical sent TCF a new term sheet in December that proposed having Dahl become CEO, while expanding the size of the board by two directors. Provost would become the company’s vice chairman and chairman of the bank.

The move seemingly spurred a new round of negotiations.

Several executives from Chemical and TCF met in Detroit on Jan. 9 to discuss each company’s anticipated standalone earnings, management and potential cost costs and revenue enhancements.

Dahl attended a Jan. 10 meeting of Chemical’s board, where he shared his strategic vision for the new company, cultural compatibility and business opportunities. Two weeks later, the companies agreed on a fixed at-the-market exchange ratio of roughly 0.51 shares of Chemical stock, based on each company’s stock price on Jan. 25.

Chemical’s board changed the company’s bylaws on Jan. 27 to address the adjournment and postponement of shareholder meetings. The board also changed the bylaws to require that certain types of litigation against the company, executives or directors must go through certain courts in Michigan.

The board also determined that Chemical would make a donation to a foundation in southeast Michigan dedicated to revitalization and community reinvestment efforts. Then the board unanimously approved the merger.

TCF’s directors also approved the merger on Jan. 27. The deal, announced the next day, is expected to close this fall.

The merger will create a $45 billion-asset bank with $34 billion of deposits and more than 500 branches across nine Midwestern and Western states.

“The new TCF will have attractive positions in both its product suite and market footprint as well as a more-diversified loan portfolio and increased lending capabilities across asset classes, geographies and industry verticals,” Dahl said in a press release announcing the deal.

The companies plan to reduce annual overhead by $180 million by 2020, mostly through the consolidation of back-office functions. They expect minimal branch closings since there is little branch overlap.

The companies expect to incur $325 million in merger-related charges. The deal is expected to be 31% accretive to TCF's earnings per share and 17% accretive for Chemical. It should take about three years to earn back an expected 7.9% dilution of tangible book value.

The filing provided more information on the new company’s board, disclosing that directors will be locked into their posts for the first 36 months after closing unless three-fourths of the board approves a change. Six of the directors will be TCF officers, including Dahl.

Dahl and Provost are also locked into their executive posts for three years unless 75% of the directors vote to remove them.

“I don’t know how common that requirement is, but it helps to ensure some sort of consensus and prevents either side from having too much power too quickly,” Siefers said.

Dahl, under terms of an amended employment agreement, is set to make a nearly $1.1 million salary. He is eligible for an annual bonus equal to his base salary and annual equity-based awards with a target value of more than $2 million.

Dahl in 2018 had a base salary of $926,000. He also collected a $1.5 million incentive bonus.

TCF agreed to pay Provost and Torgow $950,000 annual salaries, along with potential bonuses equal to their salaries and the potential to earn up to $1.9 million in annual equity-based awards. Each will receive a car allowance and reimbursement for two country clubs.

Provost and Torgow each received a $457,000 salary last year. Neither got a bonus.

Provost, Torgow and Dahl will have 24-month noncompetition and nonsolicitation covenants if they leave TCF.

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