June 24 (Bloomberg) -- Credit Suisse AG and Deutsche Bank AG will pay $1.73 billion in cash and loans to settle a lawsuit by Huntsman Corp. over alleged interference in a failed merger.

The banks agreed to pay $316 million each in cash, Huntsman said yesterday. They will also provide $550 million each in senior debt financing to Huntsman International LLC, a subsidiary of Huntsman, to be repaid over seven years.

Huntsman claimed the banks impeded a buyout of the company and refused to fund another bid. Huntsman turned down a $25.25- a-share offer from an Access Industries Holdings LLC unit in 2007 to accept a bid of $28 a share from an Apollo Management LLP unit that was later retracted. Huntsman had sought $4.6 billion in actual damages at a Texas trial. The company had said it would also seek $8 billion in punitive damages.

“The settlement does not reflect the damages that the banks and Apollo’s action caused to the company,” said Switzerland-based investor George Bessenyei, a market analyst at Oxford Capital AG. He said the deal is a “great disappointment after seeing the strong legal arguments of Huntsman.” Bessenyei declined to disclose the number of Huntsman shares he holds.

Credit Suisse rose 10 cents to 45.60 euros in Zurich trading at 10:03 a.m. Frankfurt-based Deutsche Bank rose 74 cents to 40.94 euros in German trading. Huntsman fell 9 cents to $5.92 at New York Stock Exchange composite trading yesterday.

Cash Portion

Laurence Alexander, an analyst at Jefferies & Co., also said the cash portion of the settlement, reached in the second week of the trial in Conroe, Texas, is less than what some investors were expecting.

“The underlying terms were less attractive than what people thought they would be,” Alexander said. “The focus now shifts to the weak fundamentals of Huntsman’s business.” He rates the company’s shares “hold.”

Bruce Corwin, a spokesman for Zurich-based Credit Suisse speaking for both banks, said “it was in our best interest to resolve the litigation.” The deal includes $12 million in litigation costs.

Huntsman, the world’s biggest maker of epoxy adhesives, said in a statement that “the cash and financing will enhance our already enviable cash position to more than approximately $1.7 billion.”

Credit Suisse, Switzerland’s biggest bank by market value, and Deutsche Bank, Germany’s biggest bank, agreed to fund Apollo’s acquisition of Huntsman.

Huntsman Testimony

Huntsman Chief Executive Officer Peter Huntsman testified during the Texas trial that its directors overcame qualms about a buyout from Apollo because of “rock solid” bank commitments.

Salt Lake City-based Huntsman’s merger plans with Apollo were scuttled when the banks backed out of funding the deal amid concern the U.S. economic slump would leave the resulting company insolvent. Apollo, which paid Huntsman $1 billion to settle litigation over the failed acquisition, wasn’t a defendant in the Texas case.

Columbus, Ohio-based Hexion Specialty Chemical Inc. and Apollo, a private-equity firm run by financier Leon Black, pulled their bid in June 2008.

Huntsman’s lawyers told jurors in opening statements at the trial that the banks never intended to honor their commitment to fund the Apollo buyout and should pay as much as $4.6 billion in actual damages for causing the deal to fail.

‘Excessive Optimism’

Larry Hamermesh, a corporate law professor at Widener University Law School in Wilmington, Delaware, said the original buyout bid “was born out of excessive optimism and died out of excessive pessimism.”

“I’m not surprised the banks decided to settle,” he said. “Texas juries have returned some awfully large verdicts in the past. Companies who litigate in Texas are playing high-stakes poker in a state that doesn’t offer a lot of predictability.”

Stuart Grant, a Wilmington-based lawyer who represents investors who sue over corporate buyouts, said the failed deal was “emblematic of those that were made before the economic crunch hit and then had to close after the new economic realities presented themselves.” There were only a limited number of leveraged buyouts that “fell into the time period where the closing was” affected by the recession, Grant said.

Because of recent litigation over failed buyout bids, companies are now negotiating breakup fees that cover both the buyer and the seller, the lawyer said.

‘Holding the Bag’

“No one wants to be left holding the bag in this environment,” Grant said.

Tulane law professor Elizabeth Nowicki in New Orleans said the banks may have paid less had they settled sooner. Still, the fact they had to settle will change the landscape, she said.

“The message that this settlement sends is that banks who are willing to embroil themselves in an LBO need to be prepared to complete the deal regardless of how disadvantageous the deal might ultimately end up being,” Nowicki said. “Come hell or high water, they will need to finance the acquisition or pay a huge penalty to get out.”

Peter Huntsman agreed, dismissing in a telephone interview investor criticism of the settlement as too little given the damage to his company.

“We got well in excess of what we would’ve gotten if we won and then went through a multiyear appeal, which would’ve been both expensive and painful,” Huntsman said.

Huntsman attorney Kathy Patrick said during opening arguments on June 15 that the banks made a calculated bet the damages they faced in a lawsuit would be less than losses they would face from closing the deal.

Huntsman’s lawyers argued the banks’ losses on the deal stood at roughly $8 billion in October when they refused to fund the buyout.

If the banks wind up paying less, “they’ll have made a good bet,” Patrick told jurors.

The case is Huntsman Corp. v. Credit Suisse Securities (USA) LLC, 08-06-09258, 9th Judicial District Court of Montgomery County, Texas (Conroe).

To contact the reporter on this story: Sophia Pearson in Wilmington, Delaware, at spearson3@bloomberg.net; Laurel Brubaker Calkins in Houston at laurel@calkins.us.com; Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net.

Last Updated: June 24, 2009 04:09 EDT