M&A: Bear Hugs from Predators Seen Easy to Wriggle Out Of

Many bankers who have received bear hugs lately have found that it's not as bad as it sounds.

"Bear hug" is a term for an unsolicited letter in which the sender announces its desire to buy out the recipient.

Bear hugs are increasingly common in the rapidly consolidating banking industry. But according to J. Christopher Flowers, who co-heads the financial institutions group at Goldman, Sachs & Co., they are seldom cause for alarm.

In 19 contested situations in the banking industry since 1991, only one company that received a bear hug actually ended up selling to the bear-hug sender, he said.

Indeed, Mr. Flowers said at a conference on hostile acquisitions of depository institutions that high-pressure tactics have generally fallen flat in banking.

Speakers at the conference, which was sponsored by the Strategic Research Institute, said the strong share price of target companies as well as their bylaws have provided banks some protection from hostile approaches.

Mr. Flowers' firm is representing First Interstate Bancorp as it weighs its response to Wells Fargo & Co.'s $10.1 billion unsolicited bid, but his comments were not specific to that situation.

"There has not been a hostile tender offer in banking since 1987, when Bank of New York sent one to Irving," he said. "That is because you often need pooling treatment to do a deal, but also because a hostile tender gives the target an excellent forum to attack the currency of the acquirer."

Mr. Flowers advised that when a bank receives a bear hug, it should not respond immediately but review the alternatives.

By all accounts, the Wells Fargo bear hug is unique only for the size of its target and its public release.

For every public bear hug there are probably 30 to 40 private bear-hug letters in banking, said Kendrick Wilson, head of the financial institutions group at Lazard Freres & Co. This is a marked increase from past years, he added.

Driving the increase is a buildup in acquirers' frustrations at some banks' unwillingness to sell, he said. Bankers have always been a close- knit fraternity, but this is beginning to change, he asserted.

Already this year Banc One Corp. has sent a public bear hug to Bank of Boston Corp. First Union and NationsBank Corp. have also been "aggressive participants," Mr. Wilson said.

All speakers agreed that takeover defenses were key in the ability of a target to resist a hostile overture.

Paul Reinstein, a partner at Fried, Frank, Harris & Shriver, said that when a company does not have a prohibition against consent solicitation, it is like a godsend for a hostile suitor.

Consent solicitation allows a suitor to put a proposal before shareholders at any time, but most companies prohibit it in their bylaws. First Interstate, however, has no such prohibition. And Johnson & Johnson, for example, is using Cordis Corp.'s lack of a prohibition against consent solicitation to pressure that company to sell.

In the end, the best defense is a strong stock price, said John C. Morris, head of the financial institutions group at Smith Barney Inc.

Communications with shareholders and a strong, coherent business strategy are also essential in fighting off an attacker, he said.

So what do the experts think about Wells Fargo's chance of success?

Mr. Wilson said he had heard mixed views on Wells' chance of success, but he called its bid well timed and planned.

Others privately said they felt First Interstate was sure to sell, even if Wells Fargo's currency was a bit overvalued.

On at least one occasion, Wells Fargo did not succeed in a hostile bid. In 1989, it sent a bear-hug letter to Valley National in Arizona, said Edward Herlihy, partner at Wachtell, Lipton, Rosen & Katz.

Valley National resisted and two years later was acquired by Banc One Corp.

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