Who Am I Really Negotiating With? Inside a Bank M&A Deal

Middleburg Financial's biggest shareholder played a central role in the Virginia company's recent agreement to sell itself.

David Sokol, a former protégé of billionaire investor Warren Buffett, held meetings with representatives of both Middleburg and the buyer, Access National in Reston, Va., in the months leading up to the companies' merger agreement, according to a regulatory filing tied to the $233 million deal.

The $1.4 billion-asset Access National also agreed to reimburse Sokol up to $500,000 in out-of-pocket expenses, the filing said.

The story behind the deal highlights just how much influence an investor can have when he or she amasses a large stake in a bank. Sokol controls about 29% of the $1.3 billion-asset Middleburg's stock and, as a result, will own about 14% of Access National's shares when the sale is completed.

In fact, Sokol's decision to sell a block of his Middleburg shares in February started the bank down the path to selling, the filing said. Middleburg's board asked Sander O'Neill, the bank's eventual merger adviser, to help with the stock transaction. In the process discussions occurred between Sokol and management over Middleburg's future, after which the investor submitted a March 31 regulatory filing calling on the company to sell itself.

To be sure, other factors played into Middleburg's decision to find a buyer. Notably, management was concerned about the company's low loan-to-deposit ratio, which stood at 77% at Sept. 30, the filing said. Access National's ratio at the end of the third quarter was 87%, and the combined company would have an 81% ratio.

Still, Sokol's filing got the attention of Access National, which had never agreed to buy a bank before but was looking at potential targets. It contacted Middleburg in April, within weeks of Sokol's March filing.

As discussions progressed, Access National's board began focusing more attention on Sokol, deciding in late June to "refrain from comprehensive due diligence involving the time and expense of third parties" until a representative could "meet, interview and forge a favorable opinion concerning the potential relationship" with the investor.

A gathering finally took place on Sept. 19, when Sokol, representatives for each bank and their respective advisers met to discuss a possible deal and Sokol's "outlook for his continued investment in the combined company." Sokol then met privately with Access National CEO Michael Clarke and Chairman Michael Anzilotti, and "all parties … agreed there was [a] compelling case to proceed," the filing said.

While the companies were ironing out the final details, Sokol agreed to support the merger and hold onto his 2.1 million shares of Middleburg stock. Access National agreed to reimburse Sokol for certain expenses tied to the talks.

To put Sokol's 29% stake into context, Middleburg's directors and top executives collectively own just 5.25% of its stock, according to the recent filing. The company's other large shareholder, Wellington Management Group, has a nearly 7% stake.

The parties announced the deal on Oct. 24, characterizing it as a merger of equals. While such deals rarely exist — Access National's shareholders will control about 53.5% of the stock — it was clear that efforts were made to balance power. Though Access National will have seven of the 13 board seats, John Lee IV from Middleburg will became chairman. Middleburg CEO Gary Shook will run the investment group and Jeffrey Culver, the seller's chief operating officer, will have the same post at Access National.

Need any further evidence of Sokol's pivotal role? Just read the registration statement for the deal. His name is literally all over it, appearing 59 times in the document.