Aggressive Tactics Foreseen as Industry Consolidates

It was not supposed to happen in the computer software business, but International Business Machines did it anyway this summer: making a hostile bid, and a successful one at that.

Could it happen in the banking industry, where regulatory and cultural hurdles have long limited uninvited purchases?

While observers disagree on the extent to which bank mergers and acquisitions might turn nasty, they concur that more aggressive tactics are in the offing.

"If IBM can do it, if GE can do it, if AT&T can do it, and they are all heroes for doing it, why can't a bank?" asked Charles Nathan, partner and head of the banking practice at Fried, Frank, Harris, Shriver & Jacobson, a Washington law firm known for advising on hostile acquisitions.

"Unlike the 1980s' corporate raiders, hostiles today are based on strategic decisions and not on greed," Mr. Nathan asserted.

Meanwhile, the emergence of activist shareholders has already upset the apple cart in banking. The activities of spirited investors like Michael Price of Heine Securities Corp., Short Hills, N.J., have changed the rules of what was once basically a gentlemen's sport.

In fact, several potential acquirers have approached shareholders before meeting with the target bank, investment bankers said. While they gave no examples, they said that these types of overtures could heat up the bank M&A market.

And "bear hugs" are cropping up all over the industry, these bankers say. Bear hugs are letters sent by acquirers expressing an interest in buying the target.

Either way, pressures to sell will only grow as blockbuster deals transform the landscape and raise the level of assets needed for survival in banking.

"When First Fidelity Bancorp. looked at what was likely to take place over the next five to 10 years," said chief executive Anthony P. Terracciano, it saw that it "needed a partner that had far greater capital to invest to make way for" change than the bank had available on its own. He made that observation in announcing his bank's June decision to sell to First Union Corp.

The question, said Mr. Nathan, is how many bank managements are mature enough to see the writing on the wall. Human nature being what it is, he said, there are probably few First Fidelitys around.

"As companies begin to feel a greater strategic imperative to make acquisitions, they are going to get somewhat more aggressive," said Michael Martin, co-head of the financial institutions group at CS First Boston Corp.

"And as certain managements become more frustrated with their inability to get transactions done, then you may see more frequent use of bear hugs and more aggressive tactics than you have in the past," he added.

But Mr. Martin said he would not advise clients to approach shareholders first.

"It has a high risk of backfiring," he explained. "Only if management resists and there are unhappy shareholders should a bank proceed this way."

The obstacles to hostile transactions are well-known: customer runoff during a protracted struggle, regulatory objections, the inability to perform due diligence, and general cultural resistance to these deals in banking.

But hostile deals were not supposed to work in the software industry either - because a company's employees were its capital. Yet within a week IBM toppled Lotus Development Corp.

In banking, Mr. Nathan said, the argument that the length of a takeover struggle saps the target's value is no longer valid.

Poison pills in the industrial world have made hostile deals long-drawn- out affairs there, so the duration of a hostile bid should no longer be an issue in banking, he said.

To be sure, a deep aversion remains to hostile takeovers.

Asked about his $5.4 billion deal for New Jersey's First Fidelity, First Union chief executive Edward E. Crutchfield Jr. told reporters: "We would not have undertaken this deal had Tony (Terracciano) not agreed to come with us."

To date, only one major hostile bid has been successful in banking: Bank of New York Co.'s 1988 takeover of rival Irving Bank Corp., New York.

That acquisition was completed only after more than a year of wrangling that included complicated regulatory maneuvering, a court fight over the company's defensive poison pill, Irving's futile search for a "white knight" (friendly buyer), and a hard-fought proxy contest that Bank of New York narrowly lost.

Irving finally conceded defeat after part of its poison pill defense was invalidated by an appellate court and Bank of New York sweetened its offering price a final time.

More recently, Cincinnati's Star Banc Corp. fended off an unsolicited bid from cross-town rival Fifth Third Bancorp. Memories of that event three years ago reportedly linger bitterly between the two companies.

But increasingly, companies are taking positions in other banks with an eye toward merger. North Fork Bancorp. has a position in Sunrise Bancorp, despite the latter's struggle to remain independent, and Bank of Oklahoma holds a stake in Liberty Bancorp, an in-state rival.

Mr. Crutchfield's own hometown rival in Charlotte, N.C., Hugh L. McColl Jr., chief executive of NationsBank Corp., has never been averse to ruffling a few feathers with a surprise bid.

Mr. McColl made an audacious, unsolicited takeover bid in April 1989 for venerable Citizens & Southern Corp., Atlanta. He offered $2.4 billion, better than $900 million more than the largest previous takeover offer on record.

C&S rejected the overture, and NationsBank, then called NCNB Corp., declined to pursue a hostile tender offer. Five months later, C&S joined with Sovran Financial Corp., Norfolk, Va., in a merger of equals that was widely viewed as a defensive maneuver.

But just over two years later, in July 1991, NationsBank bought C&S/Sovran Corp. in a friendly $4.3 billion transaction that ranked as the industry's largest.

Various recent reports have Mr. McColl and NationsBank again champing at the bit to do a deal, particularly as a riposte to First Union's New Jersey acquisition, which currently ranks as the largest banking merger ever.

Unsolicited bids, of course, can sometimes have precisely the opposite of their intended effect - driving the object of the unwanted attention into the arms of a competitor.

Marshall & Ilsley Corp., Milwaukee, launched an uninvited offer for hometown rival Marine Corp. in 1987. The move prompted Marine to accept a white knight offer from Banc One Corp., Columbus, Ohio.

United Missouri Bancshares Inc., Kansas City, made a surprise offer for Centerre Bancorp., St. Louis, in 1988. But Centerre ended up being bought by Boatmen's Bancshares Inc., also of St. Louis.

And Cleveland's National City Corp. made an unwelcome bid for rival Ameritrust Corp. in June 1991, after pursuing it in friendly fashion for six months. Ameritrust went with another Cleveland rival, Society Corp., which has since merged with Keycorp.

It appears that many future less-than-friendly approaches will be decided by whether shareholders, not just managers, want a deal.

Michael Price's efforts to shake up management at New York's venerable Chase Manhattan Corp. make many bank managers nervous. That's especially true after his toppling of Michigan National Corp., which sold out this year to an Australian bank.

Meanwhile, a number of California thrifts are under heavy pressure from money managers like Harry V. Keefe of Keefe Managers and Leon Cooperman of Omega Partners to consider selling. "As a number of bank investors are playing bank stocks for takeovers, the pressure to sell will increase," said one bank adviser.

What it may ultimately come to is a question whether a would-be acquirer can outbid other banks, said Robert Baer, a managing director at Bear, Stearns & Co., New York.

If a prospective buyer's stock is strong enough, he said, then it can afford to be aggressive.

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