Keycorp's "bear hug" takeover offer for Evergreen Bancorp illustrates the mounting frustration of acquirers in finding willing targets.

Albany, N.Y.-based Keycorp administered the bear hug -- an unsolicited letter to Evergreen's directors that outlined a takeover proposal -- on June 22.

Evergreen, in nearby Glens Falls, N.Y., lost money last year and stopped paying shareholders a dividend this year.

Keycorp increased the pressure on Evergreen by issuing a press release on the proposal. The offer was to expire tonight but was extended at Evergreen's request to expire at midnight July 16.

"We felt there was a fairly good chance that any offer we conveyed would not be made known to shareholders," said Lee Irving, Keycorp treasurer, in explaining why his bank announced the offer.

Bear hugs are common in banking -- maybe a dozen letters circulate at any given time, according to lawyers and investment bankers. And they are expected to increase as buyers become increasingly frustrated by recalcitrant targets.

An Unexpected Letter

A bear hug is an unsolicited letter to a target's board of directors. Unlike a formal offer, which requires disclosure through a filing with the Securities and Exchange Commission, the letter usually contains only a vague outline of the terms. If the offer is ignored or refused, the suitor then must decide whether to proceed with a full-blown hostile takeover effort -- a very difficult process.

Bank of New York Co. launched its successful hostile takeover of Irving Bank Corp. with a bear hug. The strategy was part of NationsBank Corp.'s unsuccessful bid for Citizens & Southern Corp., which then merged with Sovran Financial Corp. NationsBank eventually acquired the merged bank using less aggressive tactics.

Into the Arms of Another

In some cases, bear hugs have driven the targets to sign deals with other buyers.

In Cleveland, National City Corp. said it put Ameritrust Corp. in play by going public with an offer made to the directors. Society Corp. eventually won the bidding for Ameritrust. Sunwest Financial Services, later bought by Boatmen's Bancshares, reportedly received a letter from Norwest Corp. Norwest declined to comment.

In other cases, targets have been able to fend off their suitors.

First Interstate Bancorp unsuccessfully tried a bear hug on BankAmerica Corp. when the latter was at its financial nadir. And last year, Star Banc Corp. in Cincinnati shimmied out of Fifth Third Bancorp's bear hug.

Most bear hugs are kept quiet. The potential acquirer wants to avoid embarrassment if a deal does not happen.

In addition, the takeover target often has solid legal ground for not disclosing an offer.

"If there is a corporate reason not to make a disclosure, you aren't obligated to tell the world about the transactions," said H. Rodgin Cohen, an attorney for Sullivan & Cromwell in New York.

Directors can argue that the offer does not require disclosure because it depends on completion of due diligence and other factors. Or they can say that they cannot review an offer in the glare of publicity.

Sometimes, directors must disclose that an offer was made.

For example, the National Association of Securities Dealers required Rochester Community Savings Bank in New York to issue a notice that it received an offer from an undisclosed suitor. The Securities Association had noticed a run-up in Rochester's stock price.

Rise in Tactic Expected

Bankers and other merger-and-acquisition specialists believe the instances of bear hugs will grow.

It's the old supply-and-demand equation, analysts said. Many of the good acquisition targets have been snapped up. Those left are demanding premium prices, thus making it more difficult to negotiate mergers.

This has frustrated some buyers into taking the more aggressive step of initiating mergers through bear hugs.

"Too many managements just want to keep their jobs and have a Cadillac limousine and a country-club membership," said Harry Keefe, a New York money manager.

"They make decisions about the future of their banks that reflect their own well-being and not necessarily that of their own shareholders," he said.

Mr. Keefe added that he knows two banks that could be sold tomorrow, except their managements want to hang on for another couple of years.

Forcing the Issue

The reluctance to sell leaves acquirers with few options other then to try to force the issue.

"You have a deal which in the opinion of the buyer ought to be financially attractive to the seller's shareholders," said J. Christopher Flowers, head of bank M&A at Goldman, Sachs & Co.

"But the buyers believe management is obstructing the transaction, so they try to circumvent the management and maybe the board of directors," he said. Some big acquirers, including Banc One Corp. and First Union Corp., said bear hugs aren't their style.

But plenty of other banks use them.

Keycorp regularly sends takeover letters. Barnett Banks Inc. has tried a couple, a spokesman confirmed. Marshall & Ilsley Corp. tried one on a Milwaukee rival, Marine Corp. Marine fled into the arms of Banc One.

One-Third Succeed

Bear hugs succeed only about a third of the time, according to Mr. Flowers. In most cases, the takeover target either ignores the offer or finds another bidder.

"Management and directors have no legal duty to meet with, discuss, or negotiate with a potential acquirer, or even accept a bid that offers shareholders a substantial premium," said Edward Herlihy, an lawyer with Wachtell, Lipton, Rosen & Katz.

For a bear hug to succeed, said Goldman Sachs' Mr. Flowers. it helps if the target has unhappy shareholders or a board that lacks confidence in management.

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