Lawsuits likely over floundering bank merger

Phil Levine

Tuesday, March 14, 2000 | 11 a.m.

Corporate tensions are rising and threats of lawsuits loom as hopes for the successful merger between Salt Lake City rivals Zions Bancorporation and First Security Corp. begin to dim.

In an unusual move Friday, investment banker Goldman, Sachs & Co. advised Zions -- parent to Nevada State Bank -- to disregard previous advice to proceed with the merger.

As a result of the Goldman announcement, Zions postponed its shareholder meeting from March 22 to March 31 to permit shareholders time to consider new information.

Responding to that action, First Security Chief Executive Officer Spencer Eccles on Monday issued a tersely-worded statement saying "we believe Zions is obligated to honor its commitments under our merger agreement and take all appropriate steps to consummate the transaction."

Zion's-owned Nevada State Bank recently acquired Reno-based Pioneer Citizens Bank, and has 58 Nevada branches. First Security has 22 offices in Nevada.

Industry experts say the likelihood of lawsuits now depends heavily on bank attorneys' views of the transaction.

"As far as lawsuits go, it all rests on how the attorneys view the materiality of the deal's clauses," said Vincent Piazza, analyst with New York-based Standard & Poors. "In these types of deals, there's what's known as the material adverse change (MAC) clause.

"That clause allows shareholders the right to file lawsuits for recourse if there's a material change to the deal. So far, Zions' management has said there's been no MAC involved."

Joe Morford, analyst with San Francisco-based Dain Rauscher Wessels, said lawsuits could result no matter what the outcome of the merger.

"Either way, there's the potential for litigation," he said. "First Security management could argue that Zions didn't make every effort to convince shareholders to approve the deal. Zions, for its part, could be sued by its own shareholders for not protecting their interests."

Allan Sklar, partner with Las Vegas-based law firm Sklar Warren Conway Williams & Rosenfeld LLP, agreed the end of the deal could trigger "a flurry of lawsuits."

"It's relatively unusual for MACs to trigger lawsuits, however when large deals (such as this one) fall apart this late it's not unusual for shareholders to launch lawsuits. If this deal falls through, it certainly wouldn't surprise me if you saw a number of suits."

Sklar said experience shows that individual shareholders are more likely than institutional shareholders to file class-action suits.

In the original June 1999 deal, Zions agreed to an exchange ratio of .442 per share of its stock for each First Security share. However, since that time, shares in both banks have tumbled spurred by two major events.

The merger hit its first stumbling block in late December when the Security Exchange Commission ordered Zions to restate its earnings because of accounting methods used in buying other banks during the previous three years.

Then in early March, both banks' stocks took a beating when First Security revealed its first-quarter earnings would be off as much as 27 percent.

In the wake of that announcement, share values plummeted, and a deal once valued at $5.9 billion was transformed into a $3.3 billion merger.

Analysts believe those changes prompted Goldman to revoke its previous endorsement of the deal.

Further complicating matters are previously-announced divestiture agreements worked out by the banks.

In early December, the U.S. Justice Department order both banks to divest a total of 68 branches in Utah and Idaho; Nevada branches were unaffected by the order.

"The fact they've already begun divesting their holdings in Utah and Idaho shows how late we are in the process," said Piazza.

Wall Street appears to be waiting for the banks' next moves. First Security shares were down slightly to just over $11 today, while Zions shares were off 50 cents to $37.50.

Almost half of Zions' shareholders are institutional investors, and they've made their displeasure with the deal well known, said Piazza.

"At this point, the deal could still go through, but it's really up to the majority of (Zions') shareholders," he said.

Morford said despite the pitfalls the merger could still prove beneficial to both banks.

"This (merger) still provides both banks an opportunity to improve profitability," he said. "There's certainly some good synergies to be found in the deal."

Despite the tense atmosphere, virtually all parties concur the future of the merger should be decided by March 31.

First Security spokeswoman Jenny Schumann said her bank remains "committed to completing the merger as planned (by that deadline.)"

Analysts agree that by sunset on March 31, it should be abundantly clear whether the long-awaited merger takes place.

"March 31 really is the last day for this agreement as it stands," said Morford.

Adds Piazza: "That's (March 31) really the cutoff point. At this point, it's really all up to the shareholders to decide what to do."

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