capital-1-16-17.pngMerger and acquisition activity in the banking industry was relatively busy in the first half of 2016 and then generally slowed down in the second half of the year. While it will be interesting to see how the run-up in stock prices after the election of Donald Trump as president and a possible rollback of bank regulation will impact the general M&A environment, we anticipate that it will remain a consolidating industry and that there will be plenty of activity in the next few years.

Potential acquirers should continue to be mindful of their capital levels and how that may affect their ability to conduct a transaction. If an acquirer anticipates that it will need additional capital to successfully complete a transaction, a key question is when to raise the capital. There are three primary alternatives.

Before Entering Specific Transaction Discussions
In many situations, a potential acquirer may wish to raise capital early in the process, even before a candidate has been identified. While this may make the company look like a more viable strategic partner to sellers due to its capital strength, it does raise some risks because the company may not know how much capital it will ultimately need and it may raise too much or too little. If it raises too much, it may be unable to deploy all of the newly raised capital in an efficient manner, particularly if it does not close an acquisition within a reasonable timeframe. These risks may make it more difficult to raise capital on the most desirable terms, as potential investors may factor this uncertainty into pricing.

After Execution of an Agreement
In some circumstances, an acquirer will raise capital after it enters into a merger agreement. At that time, the acquirer can provide disclosure to potential investors regarding the transaction, the merger agreement and pro forma financial information, which will likely have already been made public and reflected in the acquirer’s stock price. The capital raising transaction can be structured so that it closes only after the acquirer is highly confident that the transaction will be consummated (in other words, closing conditions have been or will soon be satisfied) and when there is more certainty that all of the capital raised will be put to its intended use—which is to support the transaction. However, there may be some disadvantages, including the acquirer not being viewed early in the process as a strong candidate in a competitive bidding situation if it needs to raise capital to consummate the deal. Additionally, the target may not agree to a financing contingency in the agreement and the situation may weaken the acquirer’s negotiating position on other issues.

While Negotiating and Immediately Prior to Executing the Merger Agreement
We have also seen acquirers raise capital during the final stages of negotiating the merger agreement. In these cases, a representative of the acquirer approaches a limited number of potential investors and asks them to “wall cross,” meaning they will enter into confidentiality agreements before learning about the acquirer and the potential transaction. Investors are then given a limited period of time to evaluate the disclosure materials, which may consist of the near-final merger agreement and pro forma information regarding the post-merger acquirer. If successful, the execution of the merger agreement and the capital raised are announced at the same time.

This scenario can be very complicated and careful coordination is key. If the acquirer is a public company, most sophisticated investors will require a short period between agreeing to confidentiality and the announcement of the transaction, as the investor will be precluded from trading during any time it has material, nonpublic information, such as the pendency of a transaction. Additionally, the seller may need to be involved and kept informed about the process and the negotiations for the capital. A public company may be able to structure this transaction as a public offering if it has a shelf registration statement on file with the Securities Exchange Commission, giving it better execution and pricing. If done as a private placement, investors may demand registration rights and the pricing may not be maximized.

Given these complexities and the pros and cons that should be considered, we strongly recommend that an acquirer consult with its financial advisor and legal counsel well in advance of the process to help ensure that the company can successfully execute both the capital raise and the strategic transaction.


Robert Fleetwood


Rob Fleetwood is a partner at Barack Ferrazzano Kirschbaum & Nagelberg LLP.  Mr. Fleetwood concentrates his practice on advising financial institutions on strategic, securities and general corporate matters.  He regularly represents financial institutions on public and private securities offerings, recapitalizations, mergers and acquisitions and contract negotiations.  Additionally, he works closely with clients on their continued compliance with federal and state securities laws, including reporting under the Securities Exchange Act and with corporate governance.


Mr. Fleetwood is an adjunct professor in banking law at the Northwestern University Pritzker School of Law.  He was an adjunct professor of securities law in the graduate program in financial services law at the Chicago Kent College of Law for 5 years.  Mr. Fleetwood is also a frequent speaker in the financial institutions and securities law areas to trade associations and professionals.