Details of the sale of BISYS Group of Roseland, N.J., to bank holding company Citigroup of New York for a total of $1.47 billion are intriguing.

For one, Robert Casale, BISYS chairman and interim chief executive officer and president, was quick to note that the firm's investment bankers fielded 26 initial offers of interest from parties "split evenly between potential strategic and financial buyers." The firm's management made nine presentations to potential acquirers and received four letters of intent between February and April. Early in April, it entered into an exclusive negotiation with Citigroup.

Also of particular note is a unilateral prenuptial agreement of $36 million that would be payable by either firm if the deal doesn't close.

So-called "breakup fees" are common in acquisitions, especially in the financial services sector. According to Andrew Sloane, assistant manager, mergers and acquisitions at SNL Financial of Charlottesville, Va., nearly 80% of the mergers of firms since 2004 had termination agreements imbedded.

"Break-up fees used in public deals compensate the buyer in the event that someone else comes along and interlopes on your deal," explained Bruce Raphael, a Boston-based partner with the law firm of Edwards Angell Palmer & Dodge. Once a merger deal is struck and publicly announced, others may show up at the doorstep of the acquiree hoping to offer a sweeter deal, he noted.

"The public company's directors have an obligation to get the best deal for shareholders, so they bake in this backdoor break-up fee." If a subsequent party offers a better deal, the termination fee compensates the original high bidder for the acquiree leaving that firm at the altar to elope with the newcomer. In this case, if a better offer were to come along, BISYS would have to pay Citigroup $36 million plus up to $3 million in expenses.

What is less common is a two-way break-up fee such as the one BISYS and Citi have inked, said Raphael who reviewed the language of the agreement. If Citi were to breach its acquisition agreement with BISYS, it then would be obligated to pay BISYS the $36 million.

Break-up fees typically run from 2% to 3-1/2% of the purchase price, with acquirers usually imbedding a higher termination fee for companies that have been shopped around, designed to scare off other buyers, Raphael said. According to a BISYS spokeswoman, the $36 million figure represents 2-1/2% of the sale price.

The BISYS sale, which was announced on May 2, nine months after the firm announced it had hired Bear Stearns to explore strategic alternatives, includes a splitting of the company's operating units and a subsequent sale. While Citigroup is purchasing the entire firm, it will only retain the group's shrinking, troubled mutual fund servicing unit and its much stronger alternative servicing unit, which predominantly handles back office functions for hedge funds.

Citi will sell the remaining portions, BISYS' life insurance servicing and its retirement services business, to private equity firm J.C. Flowers, of New York, the firm owned by former Goldman Sachs investment banker J. Christopher Flowers, upon closing of the deal.

Seeing the firm divided to conquer a sale "is not a surprising situation, and BISYS was acquired for roughly what we would have suggested," said David Koning, equity analyst with R.W. Baird in Milwaukee. The complexity of finding a second buyer could have been the reason this deal took so long, he added.

Citigroup's net acquisition cost will be $800 million. It will fold the mutual fund and alternative investments units into its global transaction services division, which now provides cash management, securities custody and clearing services. This division, along with the firm's securities and banking unit, falls under Citi's broader markets and banking line of business. The deal allows Citi to scale up its operations capabilities. According to a spokeswoman, Citi's global transaction services unit represents 6% of the company's overall net revenue and is one of its fastest-growing businesses.

BISYS' flourishing alternative investments unit had been considered the firm's prized jewel. It significantly boosted its presence in the hedge fund servicing arena with its July 2002 purchase of Bermuda-based outsourcer Hemisphere for $130 million.

In contrast, its mutual fund servicing business saw profitability dive, a serious defection of customers and near-term growth prospects evaporate. The unit's travails trace back to a recent Securities and Exchange Commission settlement and monetary fine related to previous marketing arrangements the firm had with 27 mutual fund groups in which BISYS agreed to rebate the cost of certain expenses. In its regulatory settlement, BISYS neither admitted nor denied the charges.

Flowers Sowing Seeds?

For its part, J.C. Flowers, known for its recent participation in the consortium that bought student loan provider Sallie Mae, will pay about $670 million to acquire the two BISYS businesses. BISYS' insurance services group will be folded into Crump, Flowers' existing commercial insurance business, which it originally acquired in September 2005 from a subsidiary of Marsh & McLennan of New York.

The purchase of BISYS' retirement services unit could signal Flowers' intent to enter and grow a retirement recordkeeping business, which right now is "very much a scale game," said Scott Schubert, managing director at Putnam Lovell NBF Securities in New York. With a growing recordkeeping platform, the next logical step could be to acquire an asset management firm. "I wouldn't be surprised to see Flowers add a money-making component such as an asset management company," Schubert added.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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