On the same day that Wells Fargo & Co. made its hostile takeover bid for First Interstate Bancorp last week, One Valley Bancshares in Charleston, W.Va., adopted a shareholder protection rights plan, or "poison pill."
The timing was merely coincidental - One Valley's plan had been under consideration for six months - but last week's drama in California likely will induce other banks to implement similar poison pills for fear of falling victim to a hostile takeover, analysts said.
"I think there's a growing belief among banks that the possibility of a hostile takeover increases all the time," said David C. Stumpf, bank analyst with Wheat First Butcher Singer in Richmond, Va. "A hostile run on someone's stock becomes more likely all the time, as evidenced on a grand scale last week."
Poison pills are measures invoked in response to a hostile acquisition bid. They are intended to make the target bank so unattractive financially as to effectively kill the deal.
Mr. Stumpf cautioned that there is scant evidence that such hostile takeovers can be successful, though an uninvited bid in the industry wakes up those that previously felt immune from such unwanted overtures.
Many banks already have some sort of poison pill in place, having implemented them in the late '80s, when they came into vogue in response to the unfriendly-takeover craze of that decade. About 1,500 bank holding companies have poison pills similar to One Valley's, according to the law firm Sullivan & Cromwell, which advised the bank.
Not one of those has been triggered, the law firm said.
"The theory is that once you have one of these, you won't need it," said Merrell S. McIlwain, general counsel for One Valley. "It's simply a safeguard against any hostile action that will dilute the stock to the point where it's just not viable for the acquirer to continue."
One Valley's plan works as follows: Effective at the end of this month, each shareholder receives one right, attached to each share of stock owned. Once an interested suitor acquires 10% or more of the company's stock, the plan goes into effect.
Each right becomes exercisable, so that it can be used to acquire $200 worth of stock at market value for only $100. This option naturally results in a massive infusion of new stock, which so dilutes the unwanted suitor's position that it becomes effectively negligible.
The interested buyer should then walk away, if he hasn't already after learning of the existence of the mechanism.
"I don't think they are intentionally taking steps, saying that they don't want to be acquired," said Kay C. Lister, bank analyst at Keefe, Bruyette & Woods in New York. "But, given the consolidation game going on, maybe their lawyers felt it was a good idea to update their situation."
