H.F. Ahmanson & Co. went for the kill Monday, sharply increasing its bid for Great Western Financial Corp.
Ahmanson, the nation's largest thrift company, raised its offer by about 15%, to $6.6 billion-well above the $6.4 billion offered by Washington Mutual Inc.
The move could be Ahmanson's best and last hope to break up Washington Mutual's friendly agreement with Great Western and to force the company to the negotiating table, observers said. Ahmanson set off the contest with a hostile bid Feb. 17.
"We hope the Great Western board will recognize its fiduciary responsibility, sit down with us immediately, and get on with this acquisition," said Charles R. Rinehart, chief executive officer of Ahmanson, in a Monday morning conference call with analysts and investors.
Great Western issued a statement saying that its board would review the revised proposal from Ahmanson. Washington Mutual did not return phone calls Monday.
The move by Irwindale, Calif.-based Ahmanson opened the latest round in a battle that ultimately could change the character of the thrift industry and reshuffle the West Coast's consumer banking market. Washington Mutual, based in Seattle, is the nation's second-largest thrift company, and Great Western, based in Chatsworth, Calif., is third-largest.
Though Washington Mutual could return with a still higher offer, some observers said that was unlikely. A higher offer, they said, could well dilute earnings in the first year after the deal-something the company has promised to avoid.
"The concern now of some investors is how high are these companies going to go," said Thomas O'Donnell, an analyst at Smith Barney. "High is not good at this point, but I don't think that Washington Mutual is going to say, 'Thanks, good to know you,' and walk away."
In addition to hiking its bid, Ahmanson raised its estimated annual cost savings by $50 million, to $454 million, and added $50 million of expected revenue enhancement-something only Washington Mutual had done before. The additional revenue would come from net interest income in consumer and business lending, as well as additional fee income, according to Ahmanson officials.
The revisions were based on information that Great Western released in various regulatory filings during the past week, Mr. Rinehart said.
"I can tell you one thing on this question about escalating bids," Mr. Rinehart said in an interview. "We will never make a bid that is based on assumptions on the level that Washington Mutual has assumed."
Ahmanson's stock price dropped 50 cents a share Monday, to $39.75. Washington Mutual's ended the day at $51.125, up 75 cents, while Great Western's shares were down 25 cents, to $45.25.
At the close of trading, Ahmanson's new offer was valued at $47.70 for each Great Western share, compared with Washington Mutual's $46.01 per- share offer.
Ahmanson said its latest bid would still add to its earnings-by at least 1% in 1997, at least 9% in 1998, and at least 22% in 1999 on a cash basis.
The estimates from the initial offer were 5% in 1997, 15% in 1998, and 26% in 1999, also on a cash basis.
Observers said what makes Ahmanson's new offer particularly attractive, for both Great Western and Ahmanson shareholders, is that it is tied to a floating exchange ratio that moves inversely with Ahmanson's stock price.
When Ahmanson's stock is trading between $41.67 and $45.45, for example, the exchange ratio will fluctuate so that the deal price remains fixed at $50 for each Great Western share.
That would require the exchange ratio to move between 1.10 and 1.20 times Ahmanson's shares for each Great Western share. The ratio in Ahmanson's initial Feb. 17 bid was pegged at 1.05.
If Ahmanson's shares should stay below $41.67, the exchange ratio would go no higher than 1.20. And if the shares should climb above $45.45, the ratio would go no lower than 1.10.
"That was intelligent on their part," said a Wall Street observer who requested anonymity. "If their stock behaves as it did before (and moves down as after the initial bid), they won't have to pay as much in the end."
The exchange ratio ultimately will be fixed based the average price of Ahmanson's shares for the 20 days before a ruling from the Office of Thrift Supervision, the federal regulator that must approve the merger.
Ahmanson filed its application with the regulator on Feb. 24; Washington Mutual has not yet filed. Ahmanson is also in the midst of soliciting shareholder support for its proposal, a process called a consent solicitation, which it estimates should be completed by the end of March.
