Stock Plunge Not Threatening Deals Yet, Experts Say

By Elstein, Aaron | American Banker, October 29, 1997 | Go to article overview

Stock Plunge Not Threatening Deals Yet, Experts Say


Elstein, Aaron, American Banker


Bank stock prices will have to fall further than they did Monday before they start to threaten pending mergers, industry experts say.

The sharp decline in bank stocks sounded alarms among investors that some of the deals might dissolve.

Because banks seldom spend cash to finance mergers, but instead offer their stock to the seller's shareholders, most deals contain language to allow for termination if the buyer's stock falls below a prescribed level.

But though the share value of every bank took a serious hit Monday, few deals seem to be in danger.

"You need a long, steady decline in bank stock prices, a drop of about 20 to 25%, before the options to terminate a deal come into effect," said Michael T. Mayes, head of the financial institutions group at Advest Inc., an investment bank that advises small and midsize banks on mergers.

And even if a bank's stock did fall that far, most big deals nowadays contain index provisions to protect the deals.

For example, NationsBank's arrangement to buy Barnett Banks may be terminated only if both of these conditions are met:

The average closing price of NationsBank in the 10 days before federal approval of the merger falls below $50.65.

The number obtained by dividing the 10-day average price by $63.3125 is less than the number derived by dividing the average closing price of a bank stock index over the same 10 days and subtracting 0.15.

And even then, NationsBank has reserved the right to increase its offer and "cure" the deal, although that could dilute the value of its stock. …

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