Western Independent Banker - May/June 2008 - (Page 14) mix of its stock on a fi xed exchange basis and a fi xed amount of cash. Customary collars were agreed to, which was supposed to protect the transaction if the buyer’s stock price fell. No one could have anticipated that we would be at the bottom of our collar within a month, after due diligence had been satisfactorily completed, a definitive agreement had been completely negotiated, a draft investor presentation had been completed and a draft press release was ready to go. The potential seller was a private company and wasn’t subject (as in no quoted stock price) to the downdraft in the market that had affected most publicly held bank stocks. Although none of the terms of the deal had changed, the Board of the potential seller wasn’t willing to take a lower price. The only thing that had changed was the buyer’s stock price. The potential seller should have been focused on the relative value their shareholders were receiving in the form of the pro forma ownership and the structure of the transaction. Both were favorable to the seller. Since the stock portion was based on a fi xed exchange ratio, the potential seller’s shareholders would still own the same amount of the pro forma company despite the lower valuation of the buyer’s stock. The downward movement in the buyer’s stock price was in line with the rest of their peers. We had negotiated two walk-away triggers in the collar. The first was a 15 percent double trigger, whereby the seller could walk if the buyer’s stock had declined by 15 percent and underperformed its peers by a 10 percent margin. The buyer’s stock price had declined 20 percent, but that was in line with what their peers had experienced. The second trigger was an absolute decline of 25 percent. The buyer’s stock price hadn’t blown through that trigger, but they were dangerously close and the seller didn’t want to announce a transaction that was that close to the bottom of the collar. Moreover, because 40 percent of the total consideration was in cash, the potential seller was insulated from downward movement in the buyer’s stock price. Thus since the buyer’s stock price was down 20 percent, the total value to the potential seller was only down 12 percent. In today’s environment, sellers may take solace in the certainty of cash, but I would opt for stock in the right buyer’s currency because a potential seller will share in the upside of recovering stock prices. Sell for cash when stock prices are high. When a board has reached the conclusion that it might be time to sell, directors should be making an investment decision and that is why it is not necessarily the highest price that should win the day, but which currency has the highest net present value of its future potential cash flows. Jeffrey J. Wishner is a managing director in the San Francisco office of Keefe, Bruyette & Woods (www.kbw.com). He has advised banks and thrifts for over 15 years in capital raising ef forts and M&A transactions and can be reached at (415) 591-5035 or through email at jwishner@kbw.com. Wishner will present an M&A Simulation in conjunction with the WIB/AABD Annual Bank Directors Conference in November. 14 www.wib.org Western Independent Banker http://www.istreamimaging.com http://www.kbw.com http://www.wib.org
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