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Could the Deal of the Century Come Undone?

Almost 10 years after the fact, unsuccessful bidders raise questions about NationsBank’s purchase of First Republic Bank.
By D Magazine |

IS NATIONSBANK CHAIRMAN Hugh McColl Jr. about to get kicked in the assets by some litigious Texans who claim they are the rightful heirs to the First Republic Bank legacy? If Lone Star Partners has its way in court come April 8, First Republic-may rise from the ashes.

Lone Star Partners, a Texas partnership once spearheaded by Sen. John Tower, alleges that NationsBank (aka NCNB) was downright dirty in its successful bid to buy the loan-dead First Republic from the FDIC in 1988. It may just be sour grapes, but Lone Star, an also-ran in the bidding war, claims the merger heralded as the “deal of the century” was, in fact, the steal of the century.

NationsBank says the suit is “totally frivolous,” that the partners who comprise Lone Star are as hell-bent on suing each other as they are NationsBank. Still, Lone Star has survived four years of court challenges from NationsBank and now plans to prove a plot so full of intrigue, the jury may think it’s watching a Tom Clancy movie.

Lone Star’s side of the story goes something like this: In April 1988. NationsBank, then the feisty upstart NCNB from North Carolina, formed a clandestine merger team-code name: the Calcutta Project- with the undisclosed purpose of purchasing First Republic Bank. Calcutta, says Lone Star. enlisted two Price Waterhouse accountants in Charlotte. Both were sworn to secrecy regarding the merger team’s plan to seek a pivotal IRS ruling that would gain NationsBank favorable tax treatment and enable it to boost its purchase price.

By June, Lone Star, gearing up to make its play for First Republic, hired both Bear Stearns and Price Waterhouse. Lone Starclaims it had received assurances from Price Water-house that it had no conflict of interest, particularly because NationsBank had recently dropped out of the First Republic bidding. Regarding any tax breaks a First Republic buyout might hold. Price Waterhouse advised its new client that none were available.

In late June, John O’Hara. managing partner of Lone Star, traveled to the FDIC war room in Washington, D.C., to review certain First Republic documents. Once inside, he discovered what he would later claim was a mole in his midst, a Bear Stearns employee who identified himself as Hugh McColl III, the son of NationsBank CEO Hugh McColl Jr. When questioned, McColl III assured O’Hara that he presented no security breach because his father’s bank was no longer interested in First Republic. According to Lone Star, the Price Waicrhouse officials who were also present confirmed his story. Lone Star then revealed sensitive information regarding its buyout strategy, including its plan to offer $250 million to $300 million for First Republic.

On July 29, 1988, Nation-Bank purchased First Republic for $1.3 billion. Lone Star placed fourth in the bidding. In choosing NationsBank, the FDIC said it was motivated by two favorable 1RS rulings NationsBank had obtained. Reflecting on the tax breaks, Hugh McColl Jr. would later boast to Fortune magazine, ’’I think we paid zero for First Republic.”

Lone Star Partners would later claim that Price Water-house was obliged to seek or disclose the same tax benefits on its behalf, and once in court in 1992, it alleged a grand conspiracy. NationsBank has vigorously defended its interests, telling a far different story. “It is undisputed,” says NationsBank local counsel George Lamb, “that NationsBank made its bid to the FDIC in April 1988 before Lone Star had even formed.” So how could NationsBank conspire with Price Waterhouse? “They didn’teven know Lone Star existed until after their bid was accepted.”

But what about McColl III leaking the information to his dad? “That never happened,” says Lamb. “Lone Star lost that part of its case three years ago.” What’s more, because NationsBank submitted its bid to the FDIC two months before the fateful war room meeting, use of any leaked information, says NationsBank, would be chronologically impossible. But such is the stuff of lawsuits.

Although NationsBank has grown First Republic into the largest bank inTexas, Lone Star claims it is entitled to its assets. But O’Hara’s plans to rename the bank “Republic of Texas” may be premature. If he does eke out a jury verdict, he must still battle his feuding partners and the FDIC before the Republic of Texas will rise again.

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