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segregated and tackled in order of importance, much of the complexity in deciding on the
optimal deal structure often melts away.
Setting the Aggregate Pool of Consideration from the Buyer’s Perspective: The
most important threshold issue is defining the aggregate purchase price and the ultimate
mix of consideration. This can be accomplished by focusing on the aggregate pool of
consideration that will be paid; thus initially separating out the question of how that
consideration will be offered to individual target shareholders.
When there is a cash and stock component to a transaction, the number of
permutations on possible purchase price formulas can grow rapidly. Perhaps the simplest
form of a part-stock, part-cash transaction is to pay each shareholder a fixed amount of
cash and a fixed number of acquiror shares, without providing an opportunity for
individual shareholders to elect a preferred form. This was the approach used in the
PNC’s 2007 acquisition of Mercantile Bankshares as well as in Bank of America’s 2005
acquisition of MBNA. This type of structure has the advantages of being easy to
communicate to the market and of assuring the buyer certainty concerning how much
cash and how many shares it will issue at closing.
More complicated pricing formulas have included:
a fixed pool of shares and/or a fixed pool of cash, with an election feature and the
per share stock and cash consideration having equivalent value as of the closing.
This has been implemented through a floating exchange ratio and a floating per
share cash amount, each determined — and equalized in value — as of closing
based on the buyer’s prevailing average stock price, with offsetting adjustments
to the proration formula such that each of the aggregate number of buyer shares
to be issued and the aggregate amount of cash to be paid remains constant (e.g.,
Capital One’s 2005 acquisition of Hibernia and 2006 acquisition of North Fork;
PNC’s 2007 acquisition of Yardville, 2005 acquisition of Riggs and its 2003
acquisition of United National; Citizen’s 2006 acquisition of Republic; Citigroup’s
2002 acquisition of Golden State);
an exchange ratio that floats to maintain a constant dollar value for the stock
component, without a collar, and a fixed value cash component (e.g., Partner
Trust Financial’s 2004 acquisition of BSB Bancorp; Regions’ 2001 acquisition of
brokerage firm Morgan Keegan);
an exchange ratio that floats to maintain a constant dollar value within a defined
collar, for the stock component, and a fixed value cash component (e.g., Allied
Irish Bank’s 1997 acquisition of Dauphin Deposit);
a fixed exchange ratio for the stock component, with the cash consideration
adjusted to equal the value of the stock component at a future valuation date,
354
optimal deal structure often melts away.
Setting the Aggregate Pool of Consideration from the Buyer’s Perspective: The
most important threshold issue is defining the aggregate purchase price and the ultimate
mix of consideration. This can be accomplished by focusing on the aggregate pool of
consideration that will be paid; thus initially separating out the question of how that
consideration will be offered to individual target shareholders.
When there is a cash and stock component to a transaction, the number of
permutations on possible purchase price formulas can grow rapidly. Perhaps the simplest
form of a part-stock, part-cash transaction is to pay each shareholder a fixed amount of
cash and a fixed number of acquiror shares, without providing an opportunity for
individual shareholders to elect a preferred form. This was the approach used in the
PNC’s 2007 acquisition of Mercantile Bankshares as well as in Bank of America’s 2005
acquisition of MBNA. This type of structure has the advantages of being easy to
communicate to the market and of assuring the buyer certainty concerning how much
cash and how many shares it will issue at closing.
More complicated pricing formulas have included:
a fixed pool of shares and/or a fixed pool of cash, with an election feature and the
per share stock and cash consideration having equivalent value as of the closing.
This has been implemented through a floating exchange ratio and a floating per
share cash amount, each determined — and equalized in value — as of closing
based on the buyer’s prevailing average stock price, with offsetting adjustments
to the proration formula such that each of the aggregate number of buyer shares
to be issued and the aggregate amount of cash to be paid remains constant (e.g.,
Capital One’s 2005 acquisition of Hibernia and 2006 acquisition of North Fork;
PNC’s 2007 acquisition of Yardville, 2005 acquisition of Riggs and its 2003
acquisition of United National; Citizen’s 2006 acquisition of Republic; Citigroup’s
2002 acquisition of Golden State);
an exchange ratio that floats to maintain a constant dollar value for the stock
component, without a collar, and a fixed value cash component (e.g., Partner
Trust Financial’s 2004 acquisition of BSB Bancorp; Regions’ 2001 acquisition of
brokerage firm Morgan Keegan);
an exchange ratio that floats to maintain a constant dollar value within a defined
collar, for the stock component, and a fixed value cash component (e.g., Allied
Irish Bank’s 1997 acquisition of Dauphin Deposit);
a fixed exchange ratio for the stock component, with the cash consideration
adjusted to equal the value of the stock component at a future valuation date,
354
