cross option

Case Study

In April 2001 First Union Corporation and Wachovia Corporation, two large commercial banking firms, announced a merger agreement under which First Union would acquire Wachovia in an exchange of stock. The price offered by First Union for Wachovia was at a relatively small premium to the premerger price, and some analysts and investors believed another bidder might emerge to make a better offer. Wachovia had previously engaged in merger discussions with SunTrust Banks, which many analysts believed was a better fit with Wachovia. To thwart another bidder, the two banks used a cross option that allowed either bank to purchase a 19.9% stake in the other. The cross option allowed First Union to purchase nearly 20% of Wachovia so that a hostile bidder would have to negotiate with First Union for a large amount of Wachovia stock. In the less likely case of a hostile offer for First Union, the bidder would be required to negotiate with Wachovia to buy a large block of First Union stock. Thus, the cross option served as a deterrent to another company interfering in the planned merger.