PNC buys NatCity; GM, Chrysler deal turns off investors; Brocade seeks funds to finish Foundry buyout

By Cristal Cody

New York, Oct. 24 - Companies found a mixed bag when it came to mergers and acquisitions Friday, with one bank making a buyout with a helping hand from the government and another business canceling a shareholder vote to approve a takeover.

PNC Financial Services Group Inc. announced its acquisition of competitor National City Corp. on Friday in a surprise move just three days after National City released its third quarter earnings.

Buzz continued to circulate around a possible General Motors Corp. acquisition of Chrysler LLC's operations from Cerberus Capital Management, but analysts and investors consider the deal a bad move.

Brocade Communications Systems Inc.'s acquisition of Foundry Networks Inc. was seen as gaining considerable risk on Friday after Brocade was rumored to be scouting for financing and Foundry postponed the planned shareholder vote on the deal.

In the meantime Friday, Wall Street and other markets around the globe spent the day in a major sell off that sent indexes to their lowest levels since 2003.

The Dow Jones Industrial Average fell 312.30, or 3.59%, to close at 8,378.95. The S&P 500 index declined 31.34, or 3.45%, to 876.77, and the Nasdaq Composite Index fell 51.88, or 3.23%, to 1,552.03.

Early Friday, futures contracts for the Dow and the S&P 500 fell so low in response to the overseas stock plunges that circuit breakers were triggered that froze selling until the market opened.

Government-forced bank buy

Pittsburgh-based PNC Financial Services Group announced its acquisition of competitor Cleveland, Ohio-based National City on Friday, just three days after National City posted a $729 million third quarter loss.

PNC Chairman and chief executive officer James Rohr said in a conference call Friday with investors and analysts that the acquisition came about through a "competitive bid."

"The U.S. Treasury selected us to participate in the capital purchase program," Rohr said. "This created a very compelling transaction. Under the TARP program, we're able to issue $7.7 billion of preferred stock and warrants at very attractive terms."

PNC agreed to buy National City for $5.6 billion in stock, which values National City at $2.23 a share.

The deal can be considered as good as done with the government's helping hand.

"This did not happen of the free volition of National City," said Nancy Bush, an analyst and founder of investment advisory firm NAB Research LLC. "They gave no indication three days ago when they gave the earnings that this was in the works."

Most likely, when National City asked the Treasury for funds, they agreed but only if the bank merged with another, she said.

"When there's a deal done like this, there's no upside in being optimistic," she said. "National City had been behind the curve some time in recognizing the problem."

PNC expects the transaction to close by the end of 2008, and the deal is expected to keep the company busy for some time.

"You never say never, but we don't have a bunch of extra people looking for new deals to do now," Rohr said.

National City shares fell 24.73% to close at $2.07 Friday.

PNC shares rose 3.52% to close Friday at $58.88.

Swans don't come from ducks

The buzz around a General Motors Corp. acquisition of Chrysler LLC's auto operations from Cerberus Capital Management continued Friday, but investors didn't like the gossip and sent GM stock plunging 13.44% in noon trading to $5.2799.

The stock regained some ground to close Friday down 2.46% to $5.95.

Jeff Embersits, chief investment officer with Shareholder Value Management, had a feeling a year ago that GM's stock was going to take a nosedive.

"I recommended GM as a short at $35 a year ago when it was almost $40," he said.

Both GM and Chrysler are in "serious trouble," he said.

"Marrying two ugly ducks is not going to make a swan," he said.

Chrysler said Friday it would cut 25% of its salaried and contract workers in November in response to the gloomy environment.

"I don't think now is the time for any auto company with any strength to do a deal," Embersits said. "The underlying economics are still weak and getting weaker. I don't really see a bottom in sight."

This is the type of deal GM should walk away from, with the potential of a future government bailout and a turn in the cycle, he said.

"At this point, the type of deal Chrysler would offer to GM is probably extremely punitive," Embersits said.

Last-minute jitters

Foundry Networks Inc. may be having second thoughts about its acquisition by Brocade Communications Systems Inc., with the company postponing a planned shareholder vote on Friday to seal the deal.

Foundry Networks said in a statement that "given recent developments related to the transaction" the stockholders' meeting has been delayed until Wednesday.

Foundry's stock freefell 25.65% to close Friday at $12.67.

"The stock would certainly tell you the risk is pretty high," said Erik Suppiger, an infrastructure analyst for Signal Hill Capital Group LLC.

"It's our opinion that it probably still gets done, but certainly recognize there is risk to the financing," he said. "Brocade just finished a road show for management going out to investors yesterday to raise funding to complete the deal. I presume Foundry was probably waiting for the financing to be in a more final form before they voted on it."

The acquisition was first announced in July.

Brocade shares closed Friday up 8.42% at $3.09.

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