Publicly traded community banks and thrifts looking to go private to avoid regulatory headaches could find themselves butting heads with shareholders.
In recent months shareholders at two small banks have challenged banks' efforts to go private, arguing that prices they are offering to buy out shareholders are too low.
Industry observers expect similar battles to play out at other banks as more and more attempt to get their shareholder head count below 300. That would exempt them from having to file documents with the Securities and Exchange Commission.
John Ziegelbauer, a managing partner with Grant Thornton LLP's national financial institutions practice, said that at a recent director's conference he attended, shareholder resistance to banks' going private was among the hottest topics of discussion.
"If you're a shareholder and you see what is going on in the market, you are concerned that you are getting a fair price," Mr. Ziegelbauer said.
In the past two years about four dozen small banks and thrifts have either gone private or announced plans to do so, and if a forthcoming survey report is any indication, the pace will quicken.
In Grant Thornton's 12th annual Survey of Community Bank Executives, whose findings will be released this month, 15% of the publicly held banks surveyed said they were considering going private, against 8% in the previous survey.
A big reason banks are going private is that they want to reduce compliance costs and have fewer reporting requirements to deal with. Both have become much heavier since Congress passed the Sarbanes-Oxley Act in mid-2002.
Banks typically go private by buying back shares. But in some cases shareholders looking for the maximum return on their investment may balk, because they do not think the price being offered is the best deal.
That happened at Wells Financial Corp. of Wells, Minn., which announced in September that it was going private.
The $232 million-asset Wells said it would buy shares in a dutch auction at $29.50 to $31.50 apiece and that it would need to buy back roughly 150,000 shares to complete the transaction.
Problem was, many shareholders opted not to sell their shares - especially after Opportunity Partners LP, a hedge fund in Pleasantville, N.Y., went public in October with its offer to buy the company outright, first for $33 and then $35 a share.
The result was that Wells twice had to extend the buyback offer and even when the offer expired in December, it still only had commitments to buy back 86,000 shares - well short of the 150,000-share target it had set. That has forced the company to pursue a more costly reverse stock split to go private. It is expected to complete that transaction Feb. 21 and go private shortly afterward.
Another fight is brewing at the $223 million-asset KS Bancorp in Smithfield, N.C. Two shareholders say the $24 that KS is offering for each share is too low. Last week they registered formal complaints in SEC documents.
The pair, C. Felix Harvey and Maurice J. Koury, are urging the board to find a buyer. They also said in the SEC filing that the would vote against the proposed buyback at a special shareholder meeting on March 14, and that they would try to persuade other shareholders to vote against it.
They further said that they would seek seats on the board if the company refused to consider selling.
Curtis Carpenter, a managing director with Alex Sheshunoff Management Services Inc. in Austin, said some investors perceive going private as a step backward for the company when compared with being publicly traded.
"That seems like the wrong strategy when they read that banks' [stock] prices in 2004 were the highest ever in the industry," Mr. Carpenter said.
But shareholder perceptions of what their own companies are worth may be at odds with what the market is actually willing to pay, Mr. Carpenter said.
For example, he said, a bank in a slow-growth area may pay a dividend that beats the return on a certificate of deposit because of low interest rates. So the stock price may be good because the income is attractive to investors, but the bank may not be an attractive acquisition candidate.
Thomas P. Johnson Jr., the president and CEO of the Bank Administration Institute in Chicago, said companies' fiduciary duty to shareholders does not obligate them to chase the highest price.
Acquisitions are often a mix of cash and stock, and a board can make the case that cash in a share buyback is worth more than another company's stock, Mr. Johnson said. Also, banks must establish that the buyback price is fair and reasonable, not necessarily the highest, he said.
"That's why you pay these investment bankers unconscionable sums to give you fairness opinions on these mergers," he said, "so that you have an opinion that says, 'Based on these 25 criteria, this is a fair price.' "
