Meridian Bancorp's planned $3.2 billion sale to CoreStates Financial Corp. would have been unthinkable a year ago.
In his 12 years as Meridian's chief executive, Samuel A. McCullough made no secret of his wish to keep the bank independent and was known to maintain a strong grip on his board.
But over the last year, board members said, directors battled Mr. McCullough on his compensation, the company's jet, a proposed Florida bank purchase, and whether to hire a new investment banker to review strategic options.
By August, even as Mr. McCullough was sounding out investment bankers on potential merger targets for the Reading, Pa., bank, momentum on the board was building in favor of a sale, according to investment banking sources and board members.
The turnabout by Meridian's board was just the latest example of board activism that has swept the banking industry along with merger mania.
Bank of Boston Corp.'s chief executive, Ira Stepanian, resigned his post early in the summer after a high-profile dispute with the board over his attempt to negotiate a merger-of-equals with CoreStates. And last winter, dissident shareholders in Compass Bancshares, Birmingham, Ala., unsuccessfully tried to sell the bank against the wishes of its chief executive.
"There certainly is a lot of pressure building up in the banking industry with the wave of consolidation, and there is pressure on some boards to evaluate whether (to) remain independent or be sold," said David Baris, executive director of the American Association of Bank Directors. "There is just tremendous pressure on boards to maximize shareholders returns."
Participants in Meridian's board matters, who were willing to discuss the situation only on condition of anonymity, said the split became clear this spring when George Strawbridge Jr., Meridian's largest investor and a board member, started interviewing investment bankers who he said would give a more objective view than the one provided by management.
Meridian's management had always relied on Lehman Bothers Inc. for advice, and had Goldman, Sachs & Co. on retainer for defensive purposes.
But Dechert, Price & Rhoads, Mr. Strawbridge's legal counsel, convinced the board of the need to get advice from an investment banker independent of management, according to board members and other sources.
This move started a domino effect in which directors shifted from unquestioning acceptance of Mr. McCullough's independence stand to demanding a review of his position, board members said.
For Meridian, events drew to a climax at a Sept. 26 strategy meeting when Morgan Stanley & Co., the investment banker hired by the board at Mr. Strawbridge's urging, made a compelling case for a sale of the bank, winning over nearly all the directors, the board members said.
This represented a stunning change at the bank. "McCullough had controlled this board unbelievably," said a key participant in that meeting.
In fact, the losses Meridian suffered over the years in mortgage banking, title insurance and securities services, sparked little board reaction over his 12 year tenure. "Until recently, the board has not been aggressive" in demanding management accountability, said Anthony Davis, a bank analyst with Dean Witter Reynolds Inc.
Mr. McCullough had maintained support from many members of the 23- person board throughout the last year.
One member complimented the 56-year-old executive for putting his personal feelings aside and agreeing to a sale. "I thought he handled himself beautifully. He stepped up to the plate and did what was in the best interests of shareholders."
A bank spokesman who was provided with details of this article said Mr. McCullough would not comment because the company forbids talking about boardroom deliberations.
Mr. McCullough, however, has made it clear that the decision to sell did not come easily for him. "I'm not in this organization to be beaten by somebody else, or be acquired by somebody else," he said at the news conference last week announcing the deal.
But what is clear from discussions with various board members and key participants is that the rift in the board-CEO relationship had its roots well before the the dramatic Sept. 26 meeting.
Many noted a change in attitude among board members at a meeting a full year earlier.
In September 1994, at the urging of the bank's legal counsel, Stevens & Lee, Mr. McCullough proposed changing his employment contract so that it would have been richer than his current one, board members said. The lawyers argued Mr. McCullough's long tenure justified higher pay.
But a handful of board members, including Mr. Strawbridge, resisted the change, and the compensation committee never reported the proposal out to the full board, a board member said.
In March 1995 as Meridian undertook a comprehensive cost-cutting program, the board asked Mr. McCullough to give up his corporate jet, purchased when Meridian had mortgage and title insurance operations in Washington State and Texas.
Given Meridian's current three-state service territory, some board members questioned the need for a jet. Mr. McCullough reluctantly agreed to give it up, board members said, although the company has yet to sell the plane.
It was during this time that Mr. McCullough came to the board with a proposal to buy a three-branch bank in Naples, Fla. He argued it was important to be able to sell bank products to its customers who migrate to Florida.
Some on the board, however, said they were concerned that Mr. McCullough really was interested in the bank because he had a second home in the Naples, Fla. area. Whether that is true is unclear, but the proposal was rejected, another blow to Mr. McCullough and a sign of the increasing divisions on the board.
"It was at this time he was having more difficulty and directors began opposing him," one source said.
There were at least six directors at this time who were intent on finding some alternatives to Mr. McCullough's independence stand, sources said.
Mr. Strawbridge, who owns 7.26% of the bank and did not comment for this article, had become a director when Meridian bought Delaware Trust Co. in 1988.
Through that acquisition, he had a designee on the board, Lawrence Karlson. Further challenges to management came from directors who had arrived from banks Meridian had acquired. These directors had weaker allegiances to management than others, sources said.
As the wave of bank mergers swamped the country, and particularly the Middle Atlantic states, more directors began questioning the validity of Mr. McCullough's spirited defense of going it alone.
"There was a concern that if CoreStates was acquired, or made a large acquisition, there would be nothing left for Meridian and its share price would be hurt," one board member said.
By the time Meridian held its special strategic planning session on Sept. 26, there were real questions surrounding management's ability to convince the board to remain independent.
