Just as the greatest fear of affluent couples is that their offspring will come back to live with them when they finish college, the greatest fear of many community bankers is the unfriendly tender offer.

Community bankers basically like their jobs. They have an important and comfortable role in their communities, and in many ways they have it all -- challenging working conditions in a community that offers a good lifestyle.

So it is easy to understand their fear of someone making a bid that is so attractive that the bank is sold out from under them -- leaving them and their staff with a doubtful future.

How can this be prevented?

The best answer I've heard came from C. Edward McConnell, managing director of McConnell, Budd & Downes Inc.

Strong Poison

"The only shark repellent that works effectively is to have a protfolio of bad loans. Then no one wants you," says Ched McConnell.

With 20 years' experience in corporate finance, most of it on Wall Street, Ched also had a few ideas for me that were more practical than this equivalent of cutting off your head to cure a toothache. But he does conclude that if an attractive unfriendly offer comes in, the CEO must take it to the board. Otherwise he is setting himself up for a lawsuit.

To be sure, few banks end up having to deal with unfriendly takeovers. The No. 1 asset of the bank goes out the door every night -- its officers and staff.

And if someone buys a community bank, and employees tell the townspeople what a mess the new owners are making of the organization or how poorly they have treated the staff, deposits will quickly follow the employees out the door.

Ripe Conditions

But when a bank's shares are so low relative to what outsiders feel the bank is worth, and the management is unresponsive to merger or acquisition talk, then the unfriendly takeover bid comes up.

What can the CEO do at such a time?

First, Ched McConnell cautions, the present management has to be realistic if it wants to head off a takeover.

"If the bank has a book of $9, the market is $12 to $13, and someone offers $18, you can't just say, this is ridiculous, the bank is worth $50 a share. You have to sustain that claim with facts.

"You can turn down anything if the basics show that you can have the earnings growth to justify the high price you have said the bank is worth," Ched concludes.

Justifying a High Price

What must you do to show this potential?

* Show that your present projections of income are based on too low a prime.

* Show how expenses are being reduced.

* Show the potential for more fee income.

* If your recent loan losses have been larger than expected in the years ahead, you can normalize them.

In sum, Ched's feeling is that you have to show, not with book value, but rather with a stream of earnings that can be capitalized to show your bank is worth a lot more.

Then you have to do something to get this value recognized by investors and market makers.

Here he cites actions that get recognition, such as stock splits, dividends, and communications that show the full story of the bank in good times and bad.

Points of Conflict

"Does local ownership of the stock avoid unfriendly takeovers," I asked.

"For a while," Ched replied. "but then someone with a large stake dies, or someone puts a bid on the table, and suddenly you realize that the board is broken into several blocs -- some wanting profits as the goal, some wanting local service, and some worrying about the number of jobs the bank provides."

That's when the fighting starts, whether the bank is largely locally owned or owned by institutional investors.

Ched does caution, as any investment banker would, that having professional advice on corporate finance is a good idea for the community bank. He says it is certainly worth the price it if it keeps your bank from being sold at too low a price.

He does have comforting words for all banks -- those that want professional advisers and those that do not, though he says that most buyers of banks are becoming more aggressive in identifying and bidding for undervalued banks.

Virtually always the process does not go as far as a lawsuit. And a further deterrent to the unfriendly bid is that usually the group that puts a bank into play does not end up buying it.

But Ched's basic point is clear: If your bank is not meeting its potential in earnings and stock valuation, someone is very likely to come around licking his. And as long as we have lawyers in the nation, your response has to be far more active than pretending nothing has happened.

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