Inside the bank deal that survived after a CEO quit

It’s hard to imagine a tougher predicament than losing your leader — or, depending on which side you’re on, your negotiating counterpart — in the middle of merger talks.

That’s exactly what happened in the case of Berkshire Hills Bancorp in Boston and SI Financial Group in Willimantic, Conn., yet their deal went through.

The $12 billion-asset Berkshire announced that Michael Daly was stepping down as its CEO in November as he was engaged in exclusive negotiations with SI.

The bombshell led Rheo Brouillard, SI's president and CEO, to make a flurry of calls to Berkshire executives and directors, according to a regulatory filing last week tied to the proposed merger.

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Brouillard “asked for and received an assessment of the perceived risks surrounding … Daly’s departure and was provided confirmation of Berkshire’s indication of interest in a business combination with SI Financial,” the filing said.

While the filing did not provide any new details about Daly’s departure — published reports indicated employee discontent may have played a role — it showed that Berkshire was able to convince Brouillard and directors of his $1.6 billion-asset company that the management change would not derail the deal.

SI’s search for a buyer dated back to April of 2016, when its board asked the company’s investment bank to contact seven banks, including Berkshire. Six, including Berkshire, signed nondisclosure agreements.

However, Berkshire said it was not ready to pursue a deal because it needed to integrate First Choice Bank, which it agreed to buy in June 2016 for $112 million. That deal closed at the end of 2016.

Brouillard met with several potential buyers while Berkshire was preoccupied with First Choice.

An unnamed company proposed an all-stock acquisition in December 2016. SI and that company held exclusive negotiations that fizzled in March 2017.

Discussions “slowed pending resolution of certain due diligence matters,” the filing said. The unnamed bank also believed it would be hard to cut enough costs to make a deal work.

Another company contacted SI in July 2017 and obtained financial data. That suitor walked away two months later.

SI received an all-stock offer from a bank in January 2018 that was valued at roughly $172 million. SI’s board determined that the offer was too low, and the other company agreed to consider a higher price. In late April, the unnamed company increased its offer by 2% to about $176 million. SI discontinued discussions after deciding that the second offer was also insufficient.

Daly contacted Brouillard in Oct. 19 to revive merger talks. Another bank contacted Brouillard the same day to discuss a potential deal.

It only took Daly four days to offer SI an all-stock deal with a fixed exchange ratio valued at $174 million to $183 million. It was enough to persuade SI’s board to begin discussing whether it should agree to conduct exclusive negotiations under a nondisclosure agreement.

Daly, as disclosed in other regulatory filings, developed a reputation for playing hardball in merger talks while at Berkshire. He would typically inform a targeted bank that Berkshire would only discuss a deal if talks were exclusive.

The other bank on Nov. 1 presented SI with an all-stock offer with a value of roughly $187 million. Later that day, Berkshire revised its offer, presenting a proposal that was marginally higher than the other company’s pitch.

At a Nov. 2 meeting, SI’s board determined that Berkshire and the other company were the only potential acquirers. Of the original banks identified in April 2016 as possible buyers, one had been sold, two had announced plans to merge with each other, and the other three were not interested in a deal.

During the meeting, the board authorized exclusive negotiations with Berkshire; an agreement was signed later that day.

Berkshire’s lawyers provided SI with a draft of the merger agreement on Nov. 16.

But Daly abruptly resigned 10 days later. Brouillard quickly called Richard Marotta, who had been named Berkshire’s CEO. He also contacted an unnamed director to confirm Berkshire’s interest in a deal. Brouillard spoke with William Ryan, Berkshire’s chairman and a former CEO of TD Banknorth, on Nov. 30.

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The CEO of the other suitor tried to contact Brouillard on Nov. 27. Brouillard had SI’s investment bank inform the CEO that the company was subject to an exclusivity agreement with another institution.

Marotta and the Berkshire directors were able to assuage Brouillard. The companies on Dec. 1 extended their exclusivity agreement to Dec. 16.

Undeterred, the unnamed rival suitor sent SI an unsolicited offer on Dec. 5 valued at $193 million with up to 30% of the consideration in cash. SI decided to share the offer’s terms with Berkshire’s investment bank, without identifying the other company.

In response, Berkshire slightly increased its exchange ratio, though the company informed SI that the amount “was the most” it could offer.

Marotta, displaying the same resolve as his predecessor, indicated that Berkshire would be willing to walk away from a deal if SI allowed the exclusivity period to lapse in order to talk to the other company.

SI’s board decided during a Dec. 7 meeting that “the execution risks of an immediately actionable transaction with Berkshire were significantly less than the risks associated with a transaction” with the other company, the filing said.

On Dec. 11, the boards of Berkshire and SI unanimously approved the $180 million merger, which was announced later that day. The filing did not say why the price had dropped from six days earlier, but Berkshire's stock price fell by 2% between the day of its final offer and when the deal was announced.

The deal, which is expected to close in the second quarter, priced SI at 118% of its tangible book value.

The deal is expected to be 5% accretive to Berkshire’s 2020 earnings per share. It should take less than three years for Berkshire to earn back an expected 2.4% dilution to its tangible book value.

Berkshire plans to cut about 30% of SI’s annual operating expenses, or $12.5 million. The company expects to incur $12.9 million in pretax merger-related expenses.

Brouillard will join Berkshire’s board.

"This transaction is a natural fit and brings with it a stable, long-standing deposit base with leading market position,” Marotta said in a release announcing the acquisition. SI “is a well-established and trusted financial institution with deep client and community relationships.”

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