The consolidation of the thrift industry has hit an unexpected snag: controversy over windfalls from goodwill lawsuits.
The issue flared up in Chicago this week as investors in one thrift complained that a planned merger partner would share too much of the goodwill bounty. And analysts expect similar disputes elsewhere.
"I think it's going to become a very big issue with further acquisitions," said Campbell Chaney, an analyst at Rodman & Renshaw in San Francisco.
The controversy comes after a Supreme Court ruling that the government must compensate thrifts for rescinding favorable accounting treatment of supervisory goodwill, an intangible asset taken on by the acquirers of ailing thrifts in the 1980s.
The decision paved the way for more than 100 companies to win cash awards. As some of those companies enter merger discussions, however, investors are clashing over how to divvy up the money.
Chicago-based Hinsdale Financial Corp., which is pursuing a goodwill claim of about $48 million, plans to share the winnings with its intended merger partner, Liberty Bancorp. But some Hinsdale shareholders are furious about that.
"You are giving away a tremendous amount of Hinsdale shareholders' money to Liberty," Charles Schwab Jr., a general partner of Kensington Capital Management, said during a conference call for analysts and investors.
Indeed, the expected goodwill windfalls are the most valuable asset at some thrifts, Mr. Chaney said. In all, companies with goodwill suits are seeking more than $10 billion. Those claims are now playing out in the U.S. Court of Federal Claims.
Todd Pitsinger, a thrift analyst at Friedman Billings Ramsey & Co. in Arlington, Va., said the expected payments from the government are becoming a major negotiating point in thrift deals.
Put simply, the issue is that only one party bore the costs of the original accounting change and the lawsuit to remedy it. So how can the windfall be divided among two parties? At a minimum, this problem can require some creative dealmaking.
First Nationwide Bank's purchase of Cal Fed Bancorp, for example, includes a premium to Cal Fed shareholders for the windfall Cal Fed's goodwill claim produces, Mr. Pitsinger said. Cal Fed also spun off part of the anticipated claim to shareholders using separate securities.
A spokesman for Glendale Federal Bank, which has a potentially large claim, wouldn't comment on how Glendale would handle its goodwill award in a hypothetical merger but said the issue is a significant consideration for any thrift with pending goodwill recoveries.
"You're talking about some major sums of money," said Glendale's Ken Preston.
The Hinsdale-Liberty deal - a merger of equals that would produce a $1.3 billion-asset company called Alliance Bancorp - illustrates how thorny the issues can become. As a result of the goodwill complications, Mr. Schwab and other investors are now questioning the entire deal.
Mr. Schwab - who said Hinsdale's $48 million claim is worth about $17.70 per share - contended that Hinsdale could have gotten a better deal by being taken over.
"I've never seen a worse deal," said Dale Jacobs, who runs a private fund through New York-based Financial Investors Inc. that invests in banks and thrifts. The fund hasn't invested in Hinsdale or Liberty. "I would be very surprised if this deal is completed," he said.
Hinsdale's president and chief executive, Kenne P. Bristol, said the company considered the goodwill issue and ultimately let the markets value the deal because the amount and timing of any distribution is uncertain. Meanwhile, he said, Hinsdale wants to proceed with what it feels is a good merger - and Liberty brings an additional $10 million in capital to the table.
"The business strategy of Hinsdale Federal Bank certainly does not revolve around" goodwill, he said.