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To hedge against bad surprises in a seller's portfolio, some buyers are making part of the payout contingent on the performance of certain loans or batches of them. If things go well, the practice can help the seller, too.
September 22 -
Capital One negotiated a crucial concession in its agreement to buy HSBC's cards business, while First Niagara did not in a big branch deal with the same seller. Investors, skittish about the markets, have punished First Niagara.
August 22 -
Look closely at the structure of the First PacTrust deal for Beach Business Bank to see how deal negotiators are hedging against stock volatility. Expect to see more creative pacts like this one.
August 31
Tower Bancorp Inc. would have a harder time backing out of its sale to Susquehanna Bancshares Inc. if Susquehanna's share price remains depressed, according to an amendment to the deal disclosed Monday.
The change tightens the terms under which Tower, of Harrisburg, Pa., may call off the $340 million sale without having to pay a $13.5 million termination fee.
It is the latest example of how the
"The recent extreme volatility in the stock markets highlighted the need for the amendment," Susquehanna and Tower noted in an 8-K filed with the Securities and Exchange Commission. The change, approved by the boards of both banks, is designed "to avoid the unintended consequences that could occur … in the context of a volatile market."
Under the initial terms, Tower could walk away provided two conditions were met.
In the first, during the three weeks prior to the closing date, Susquehanna's shares must trade an average of 20% lower than their price before the merger was announced. That has not changed.
The amendment deals with the second condition: Susquehanna's shares had to fall 20% or more against the Nasdaq Bank Index during the six months or more between the announcement date and the closing date. Now Susquehanna's shares only have to do worse than the index during the three weeks prior to the deal closing.
That change may benefit Susquehanna because it has to compete with the Nasdaq over a shorter period of time. Narrowing the window also means it could be forgiven for the steep slide in its shares immediately after it announced the deal.
Susquehanna still has the right to raise its offer should Tower decide to walk.
Experts say the amendment is in Tower's interest, too, because it wants to avoid jeopardizing the transaction. Though the walk-away right is optional, Tower's board might have a fiduciary duty to use it. If Tower exercised it and Susquehanna does not decide to issue more shares to Tower shareholders, the deal could fall through.
The deal is expected to close in the first quarter.
Investors have been selling off shares in banks that announce acquisitions. Since the deal was announced, Susquehanna's shares have fallen about 30%, to $5.65 on Tuesday. The Nasdaq Bank Index was down about 18% over the same period, to 1,426.63.
Susquehanna, with $15 billion assets and 240 branches, agreed to pay $28 per share for the 49-branch Tower. The purchase price includes $88 million in cash and the rest is in stock.
So-called "double trigger" termination clauses have become increasingly common in deals where stock is changing hands.
They protect selling shareholders from getting less money should the buyer's stock depreciate in value, while giving the buyer some control over how many extra shares it may have to issue should its shares decline.
Another Susquehanna deal underscores the need for the amendment.
Susquehanna announced the change in conjunction with the closing of its $270 million purchase of Abington Bancorp Inc. of Jenkintown, Pa. That deal, announced in January, had a similar double-trigger amendment as the Tower transaction. Abington would have had the right to walk away had Susquehanna's shares fallen another 5% against the Nasdaq Bank Index from the end of January to the end of September.
