With so many banks apparently eager to sell out, these days the idea of a hostile takeover bid seems almost quaint - but some experts think that is misleading.
Though hostile takeover efforts will never be numerous because of the difficulty and expense, "they will always be with us," J. Michael Shepherd, a San Francisco banking lawyer, said last week.
They are more accepted by investors than ever, he said. Indeed, bank shareholders who have grown accustomed over the past several years to high valuations are increasingly action-oriented.
Moreover, the virtually pristine caliber of loan portfolios across the banking industry in the seventh year of the current economic recovery has removed one of the primary hurdles to unsolicited merger offers.
"Asset quality is so good that a hostile bidder doesn't need the active assistance of the target," said Mr. Shepherd, a former senior deputy comptroller of the currency who is a partner in the law firm of Brobeck, Phelger & Harrison.
"Due diligence is not so critical right now. In fact, you could be 100% wrong and still not do a bad deal," he said.
At the same time, the recent wave of banking deals has shrunk the pool of potential white knights who might come to the rescue of a bank targeted by an unwanted suitor, noted Ronald H. Janis, a banking lawyer and partner in the firm of Pitney, Hardin, Kipp & Szuch.
He also suggested that a shift in the nation's economy and in earnings prospects for banks could divide banking stocks into have and have-not categories, setting the stage for hostile bids.
In particular, Mr. Janis suggested, proposals for mergers of equals by banks, with minimal premiums for shareholders, might provoke hostile activity.
The takeover climate might also be changed if the use of pooling-of- interests accounting declines. And, of course, the landscape could be reshaped in favor of more aggressive acquisitions if Congress passes banking reform legislation.
Both Mr. Shepherd and Mr. Janis spoke at the third annual Forum on Bank & Financial Institution Mergers, Acquisitions and Strategic Alliances, sponsored by American Banker and the Strategic Research Institute.
Mr. Shepherd cautioned that changed market attitudes and good credit quality have not removed several formidable stumbling blocks to hostile bids-opposition of the target bank's management and integration of operating systems.
He warned that the leadership of any hostile bidder must still have "the stomach for a long fight." Mr. Janis noted that any unsolicited bidder must expect to be sued and to spend time and money in court.
Meanwhile, recent hostile bidders have fared poorly, win or lose, he pointed out.
After its initial success, Wells Fargo & Co.'s takeover of First Interstate Bancorp. has been fraught with problems. The San Francisco banking company tallied disappointing second-quarter results that included $180 million of "operating losses" laid to the deal.
The failed attempt by H.F. Ahmanson & Co. to buy Great Western Financial Corp.-seen by many as an imitation of Wells Fargo's move-cost it $3.2 million.
The tab would have been far greater if Ahmanson's $23.1 million of bidding expenses had not been offset by $17.6 million of gains from its sale of Great Western's stock after white knight Washington Mutual Inc. closed the deal.
The clear lesson for prospective hostile bidders is to acquire as many shares of the target as possible as early as possible, Mr. Janis said. Had Ahmanson done so, it might even have made money in the bargain.
The Southern California thrift bought no shares of rival Great Western until after commencing its takeover effort. After the announcement, it bought over 2.3 million shares in the ensuing 10 days.
Mr. Janis said that a Supreme Court decision in June essentially paves the way for such early moves. In U.S. v. O'Hagan, the court ruled that stock purchases in advance of a surprise takeover bid do not constitute illegal insider trading by the bidder.
That means, he said, the acquirer is free to buy up to 5% of the target without revelation, although purchases over $15 million may trigger other disclosure requirements.
