The banking industry is undergoing a massive consolidation.

During the last half of 1991, for example, banking companies holding over 7% of the industry's total assets were sold or merged.

In most cases the mergers or acquisitions were consensual. Increasingly, though, banks are finding themselves presented with unsolicited offers that are difficult to refuse.

When a proposal is made to acquire a public company, the target's board of directors is subjected to tremendous pressures. Resisting those pressures takes a strong, united board with confidence in the company's management and prospects.

At first blush, the easiest and least controversial path seems to be to hire an investment banker, solicit competing bids, and sell out to the highest bidder.

I believe this is really too bad. If that response became the norm, it would lead to far more consolidation in the banking industry than ought to occur.

I have worked with a number of companies that have received unsolicited overtures, so I know firsthand the traumas the companies experience, particularly if an offer becomes a matter of public record.

The target company's stock jumps in price, as speculators begin to dominate the trading.

Articles abound in which it is simply assumed that the company is in play, and that its falling into someone's grasp is only a matter of time.

Analysts, whose credentials and objectively are often suspect, are quoted as wondering how the board could possibly justify not selling out.

To Shop or Not to Shop

Investment bankers from around the country start calling top managers and board members. The message is always the same: The company is in play and will be unable to cope without an investment banker.

It amazed me how many people assume that a board of directors of a target company is obliged to "shop" an offer in order to fulfill its fiduciary responsibilities.

These people seem not to realize that shopping the proposal would have the effect of putting the company in play and letting the suitor determine whether the company will be sold, and when.

Of one thing we can be reasonably certain: Given the opportunity, a potential acquirer will endeavor to stack the deck in its favor.

It will make its move when its own stock is priced very high, the target's price does not reflect earnings potential, and other buyers are preoccupied or otherwise disadvantaged.

Considering the Long Term

The board of a target company must not allow itself to be stampeded. It must consider the shareholders' long-term interests, not just short-term market gains.

If the "currency" offered is stock in the acquiring company, careful consideration must also be given to the prospects for that stock.

Where state law permits, the board should also consider what is best for the community and employees. Among the issues to be addressed are how many employees would be fired and how the deal would effect the availability and pricing of banking services in the community.

The No. 1 Decision

Whether and when to sell the company is the single most important decision any board makes. It should not be made to accommodate someone else's schedule or preferences.

I have no argument with banks that decide to sell. That is the right course in many situations.

But I hope more bank boards will come to believe that they can and should make this crucial decision at a time of their own choosing and for their own company's objectives, instead of letting competitors, stock speculators, and the media dictate their fates.

Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is managing director and chief executive of the Secure Group, a Washington-based financial services consulting firm.

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