Since Wells Fargo & Co. launched its hostile offer for First Interstate Bancorp last October, a wave of small-to-midsize banks have implemented shareholder rights plans.
At least 10 banks and thrifts have announced the plans, known as "poison pills" because they make it harder for a would-be acquirer to devour a target. And more are expected to follow as industry watchers predict a new age of aggressiveness among banks.
"Hostile mergers used to be the exception in the banking industry, but with the advent of interstate banking, regulatory changes, and the disappearance of the thrift industry, consolidation is a fact," said Patrick McGurn, general counsel and director of corporate governance issues for the Investor Responsibility Research Center in Washington.
"As a result, banks are trying to protect themselves and adopting poison pills."
Poison pills are designed to thwart hostile investors or companies from grabbing large stakes in the target companies. Commonly, if an investor buys more than a predetermined share of a company - often between 10% and 20% - the poison pill would entitle current shareholders to buy shares at a 50% discount.
Buying the entire company thus becomes prohibitively expensive, because other shareholders could buy the shares for half the price.
Poison pills are not a surefire defense against hostile activity. First Interstate had a poison pill, but Wells Fargo threatened, both through lawsuits and a proxy vote, to replace the bank's board in order to undo the plan.
Under intense pressure from shareholders, First Interstate never let the battle get that far, and agreed to merge with Wells Fargo.
Most of the top banks have poison pills. In fact, 58% of banks in the Standard & Poor's index have pills, compared to 63% for the overall S&P 500, according to Mr. McGurn's organization, which tracks corporate governance indicators.
Among smaller banks poison pills are less common, but consolidation is still a pressing concern.
"Many of these companies may be six months into a three year strategy, and need some time, so they implement a pill," said Robert Bonelli, fund manager for Ernst & Co.
The need to buy time was a consideration at First Commerce Corp., Louisiana's largest native bank.
The bank adopted a pill late last month because of the "ongoing consolidation taking place and the recent emergence of transactions which could be considered hostile," said Ian Arnoff, the company's chief executive.
Faced with potentially weaker earnings this year, the bank likely wanted to dissuade unwanted suitors, analysts said.
Other similar-size institutions that have adopted poison pills or lowered the threshold at which their poison pills become active include One Valley Bancorp of West Virginia, that state's largest bank, and Cal Fed Bancorp.
"Banks that have adopted a strategy of remaining independent will adopt more poison pills," said Jonathan D. Joseph, a lawyer with Pillsbury Madison & Sutro in San Francisco.
Midsize banks that have not adopted pills yet include Bancorp Hawaii, Hibernia Corp., Trustmark Corp., and Regions Financial Corp.
Some companies rushing to adopt pills may be overreacting to the possibility of a hostile bid, said Adam Hitt, an investment banker with Alex. Brown & Sons Inc.
"The impact of the Wells transaction among smaller banks is more psychological than practical," he said. Although large banks need to seriously consider their defense strategies, Mr. Hitt said midsize and community banks are too small for an aggressor to justify the costs of a hostile transaction.
The smaller the bank, the more retail and local the investor makeup, he added. Larger banks with institutional investor bases are more prone to hostile acquisitions, he said.
Still, most investment bankers are reporting an uptick in aggressive activity in the past year. Bear hug letters, which relay the desires of one company to acquire another, are more common.
Even Mr. Hitt conceded there are some smaller steps all banks should take. Terms of directors should be staggered so that the entire board is not up for reelection annually, he said.
First Interstate did not have a staggered-term board, and this proved a key defect in its defense.
