A WOOSTER, OHIO, THRIFT received an abrupt lesson last week in the difficulties of merger conversions.

FirstFederal Financial Services Corp. was thwarted in its attempt to acquire another Ohio thrift, First Federal Savings Bank of Dover, in a merger conversion when the target backed away.

FirstFederal's failure to obtain a definitive merger agreement with the $58 million-asset Dover thrift underscores the pitfalls of the transaction itself.

"Merger conversions are among the most difficult deals to accomplish," said David P. Downs. senior vice president at Ryan, Beck & Co.

FirstFederal, with assets of $571 million. announced in May that it had signed a letter of intent to acquire the Dover thrift. Under the terms of the preliminary agreement, Dover's depositors would have converted their ownership into roughly $6 million of FirstFederal stock.

FirstFederal would have picked up the Dover thrift and its $6.2 million of capital merely by issuing roughly $6 million of new equity. Thus FirstFederal would have bought the mutual while gaining about $12 million of new capital. The only cost to FirstFederal: About 5% dilution to shareholders.

"These are the kinds of deals we would like to do," said, Gary G. Clark, the Wooster thrift's president. "But they are relatively tough transactions to get done."

Nevertheless, 155 merger conversions have taken place since 1988, all of them involving thrifts Gary G. Clark under $1 billion of assets, according to Securities Data Co.

The majority of the deals were done in 1990, when 92 were completed. Since then, merger conversions have averaged about 12 each year, with 10 done so far this year.

Part of the recent reluctance of mutual thrifts to enter into merger conversions can be explained by the bullish market for thrift stocks in recent years.

"Thrift stocks jump considerably in price immediately after going public, and a mutual forgoes that opportunity in a merger conversion," said Mr. Downs at Ryan Beck. By converting to stock when demand is high for thrift shares, management and shareholders of mutuals are often richly rewarded.

That also helps explain why during the bearish market of 1990 -- when merger conversions peaked -- only 37 thrifts converted to stock ownership. That compares with 55 in 1991, 69 in 1992, and a record 130 during 1987, according to Capital Resources Group Inc., Washington.

Looking for a Different Target

Robert Gerber, president of First Federal Savings Bank of Dover, would not comment on why the thrift pulled out of the merger. Mr. Clark said, "I think some outside parties got in there and got them looking at some other alternatives."

In the meantime, FirstFederal is scouring a five-county area looking for other small mutual thrifts or community banks that might be willing to sell. So far it has targeted about 12, Mr. Clark said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.