By Jessica Toonkel
NEW YORK, Feb 11 (Reuters) - When FirstMerit Corp struck a
$912 million stock deal to buy Citizens Republic Bancorp last
September, it offered unusually generous terms to secure $250
million in subordinated debt financing that was critical to the
FirstMerit needed the funds to repay the U.S. government for
bailing out Citizens in 2008, so the Akron, Ohio-based financial
services company promised bond investors that it would buy back
their subordinated debt at $1.01 for every dollar if the
acquisition received no regulatory approval within nine months.
"While we fully expect regulatory approval, this was our way
of mitigating the risks of not getting approval and being left
with the capital," said Jerry Wiant, co-head of the financial
services group at RBC Capital Markets, which advised FirstMerit.
Wiant said it was the first time he had seen a U.S. bank use
this kind of financing clause.
With regulators placing the financial industry under the
microscope in the wake of the financial crisis, firms have to
become more creative to seal deals, according to bankers and
lawyers who specialize in mergers and acquisitions for banks,
insurers and other financial service providers.
They cite long delays caused by regulatory scrutiny of
recent high-profile deals, such as Capital One's $9 billion bid
for ING Direct USA, and General Electric Co's bid for MetLife
Inc's deposit-taking business.
To hedge against regulatory risk, bankers expect more
financial institutions to follow FirstMerit in looking for
creative ways to protect themselves against deal failure.
For instance, some financial services firms are discussing
inserting "holdback clauses" into M&A contracts seeking to keep
a portion of the amount they will pay for a company to cover
potential regulatory issues that might plague the target
Other institutions are asking for reverse breakup fees,
whereby the buyer agrees to pay the seller some compensation if
the deal falters.
The number of financial services deals with reverse breakup
fees jumped to 24 in 2012, from 13 in 2009, Thomson Reuters data
The size of these fees has also increased from the
traditional 3 to 5 percent of deal value, lawyers said. There
were 10 financial services deals with reverse breakup fees above
5 percent over the past two years, up from six in 2009 and 2010.
"The increase in reverse breakup fees in financial services
is directly related to greater concern about the regulatory
environment," said Rodgin Cohen, senior chairman of law firm
Sullivan & Cromwell.
The most notable example of this is IntercontinentalExchange
Inc's $8.2 billion bid for NYSE Euronext. ICE agreed to pay NYSE
a $750 million termination fee, representing more than 9 percent
of the deal value, if regulators do not approve the merger.
Just months before, NYSE's proposed merger with Deutsche
Boerse had been derailed by regulators so the exchange wanted to
make sure it was covered if that were to happen again, people
familiar with the deal said. An NYSE spokesman declined to
Regulators are under immense pressure to reduce systemic
risk in financial markets so they are looking beyond the usual
antitrust issues, such as market concentration, when reviewing
financial services deals.
Regulators are scrutinizing systems, looking for compliance
violations, and examining the soundness of combined
institutions, bankers and attorneys said.
"If the buyer has a pending significant compliance issue at
the time of announcement, or one arises before close, and the
regulators are unwilling to approve the deal because of the
issue, then the seller can be out in the cold," Cohen said.
The increased scrutiny has led to fewer deals as some firms
decide it is easier to avoid buying anything in this
environment. Financial services M&A volume in 2012 was down
nearly 20 percent from 2007, Thomson Reuters data shows.
But faced with a weak economy, high regulatory compliance
costs and low interest rates, banks are finding that doing deals
may be the only way to expand profits. Bankers and lawyers said
deal terms that are historically rare in financial services M&A
are likely to become more common in the months ahead.
One banker said he recently worked on a transaction for
which the regulators required that the buyer and seller
integrate their systems at close of deal. "The whole way you
deal with closing and regulatory risk has changed," the banker
Reverse breakup fees had been rare in finance industry deals
until recently, bankers say. Such high fees were more common in
non-finance M&A deals for which antitrust issues are major
In 2011, for instance, Google Inc's $12.5 billion
acquisition of Motorola Mobility Holdings had a 20 percent
reverse breakup fee, and AT&T Inc's failed $39 billion bid for
T-Mobile USA had a 10.8 percent fee.
But now, it's not just the big financial services deals that
require reverse breakup fees. BankUnited Inc agreed to a $5
million reverse breakup fee, or 7 percent, when it struck a $72
million agreement in 2011 to buy Herald National Bank.
"Everyone is just nervous about everything because they
don't know what the regulators are going to do or what new
legislation might come down," a person familiar with that deal
(Additional reporting by John McCrank)
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