Katrina Undercuts Hibernia Bank Deal

According to the Associated Press, Hurricane Katrina's aftereffects include a renegotiation of the pending purchase of New Orleans-based Hibernia Bank by Capital One Financial Corp. The purchase was supposed to close today, but the closing has been postponed "until sometime in the fourth quarter." In addition, the purchase price has been cut by 9%, to $5 billion. Capital One shareholders must approve the revised deal.

Don't be surprised by further price cuts. Although the AP quotes the companies' press release to the effect that the new price was determined "after studying the damage caused by Katrina on Hibernia's facilities and Hibernia's future business prospects, 'including the significant federal and state aid and insurance proceeds expected to be received by victims of the hurricane in Louisiana,'" it's difficult for me to believe that in such a short time period the bankers could have definitively estimated the net economic effects of the damage to Hibernia's franchise caused by the storm and subsequent flooding. On the other hand, neither of the parties is a governmental entity, so I may be underestimating their financial wizardry.

As the article states, acquisition agreements customarily contain a right for the purchaser "walk away" from the deal in the event of a "material adverse change" in the financial condition of the seller. This is a classic "material adverse change" if there ever was one.

I love the comment about possible of criticism of Capital One as "heartless" for reducing the price after such a tragic event. These are BANKERS, for crying out loud! "Heartlessness" is their essence. Capital One's slogan isn't "What's in your wallet" for nothing.