NEW YORK -- The agreement between NationsBank Corp. and MNC Financial Inc. is one of the most complicated and
unusual of the profusion of agreements encompassing U.S. banks in recent years.
"It's a very good deal for both sides," said Alan C. Greenberg, chief executive of Bear, Stearns & Co. Inc., the New York investment bank that provided a fairness opinion for the MNC board of directors.
Outsiders had difficulty drawing the same conclusion, however, with several major investors frankly admitting they were puzzled by the myriad folds of the deal and others voicing sharply differing opinions on its merits.
In exchange for an immediate $200 million investment, NationsBank has a clear pathway to control of MNC for five years, without being exposed in the meantime to the possibility that MNC's already troubled balance sheet has undisclosed problems that could prove infectious to an acquirer.
The method used to accomplish this is the creation of a new type of stock for NationsBank, technically known as a non-voting participating preferred stock, which lacks the voting rights of most common shares as well as the most typical feature of preferred -- a dividend.
Because it lacks a vote, the new security, which is convertible into common stock, technically means NationsBank does not control MNC and therefore is not liable for MNC's obligations.
Within the agreement are numerous conditions affecting the final price NationsBank may pay and how the deal will go forward. Analysts say the many stipulations are the predictable results of an agreement reached between MNC Chairman Alfred Lerner and NationsBank Chairman Hugh L. McColl, both of whom are known as extremely tough negotiators adept at the intricacies of financial engineering.
Among the more novel aspects of the deal are the huge "kill fee" that MNC must pay NationsBank if MNC ultimately walks away from the merger. It could amount to as much as 30 percent of MNC's total equity and, according to NationsBank spokesmen, could be triggered merely by MNC's shareholders rejecting what MNC's board has approved.
A second facet of the agreement provides NationsBank with at least a hefty 20 percent annual return on its investment if another, more generous acquirer emerges.
"You could call it the ultimate lockup agreement," said Felice Gelman, an analyst at Dillon, Read & Co. Inc.
In addition to the limited risk and the strong protection for eventual control, the benefits of the deal to NationsBank include locking some major competitors from the North out of the mid-Atlantic and South. Because of interstate banking rules, those rivals would have most easily sought entry through Maryland.
On MNC's side, the clearest beneficiaries are the bondholders, who suddenly saw their exposure supported by $200 million in fresh capital. "They should be delirious with joy," said Ms. Gelman.
For MNC's shareholders, the benefits may appear less appealing -- they remain exposed to MNC's potential problems but have only limited prospects for gains if the bank does well, since it will then be acquired.
"If you were optimistic about the bank's prospects, you wouldn't vote for the deal," said Rick Bosley, a bank analyst with Advantage Trading in Chicago.
In its most recent quarter, MNC reported essentially a flat bottom line. That was in sharp contrast to the losses of recent years, but much of the gains stemmed from selling securities.