Does anyone have the brass to try to outbid Robert Wilmers for Hudson City?

Hostile bids for banks are rare, and the chairman and chief executive of M&T Bank (MTB) is one of the industry's elder statesmen. But the sweetheart terms Wilmers secured for Hudson City Bancorp (HCBK) have market watchers speculating about dark-horse offers.

"It is always possible for something like that to happen," says Marty Mosby, an analyst with Guggenheim Partners who covers M&T.

M&T, based in Buffalo, has agreed to pay $3.7 billion for Hudson City, a Paramus, N.J., thrift. The announced price, a paltry 80 cents on the dollar in terms of tangible book value, raised eyebrows on Wall Street. So did Hudson City Chief Executive Ronald Hermance's comment Monday that "it wasn't a competitive sales process."

Hudson City, despite its deep interest rate woes, has $44 billion of assets and is well positioned in several affluent markets. The bank M&A market is short on sizable takeover targets.

Those attributes could stir the competitive interest of two able buyers in particular, experts say: Toronto-Dominion Bank (TD) and New York Community Bancorp (NYB). They each have the financial heft and strategic incentive to make the numbers work.

Toronto-Dominion is the most credible threat to M&T, as it is a larger institution and has more valuable shares, Mosby says.

"That would be the one that could potentially come in and ripple it a little bit," he says.

However, a rival bid would be difficult. There would be deep reputational and financial risks in squaring off with Wilmers, one the industry's most respected operators. Scuttling a rival's deal after the papers are signed is a banking taboo that can spook executives at other banks you might want to buy.

Toronto-Dominion CEO W. Edmund Clark and New York Community CEO Joseph Ficalora are both old-school, serial dealmakers who project reliable images to Wall Street and Washington.

Takeover spats in banking are rare but not unprecedented. Umpqua Holdings (UMPQ) in May lost its deal in hand for American Perspective Bank of San Luis Obispo, Calif., after PacWest Bancorp (PACW) made a superior offer.

M&T is less vulnerable than Umpqua was for several reasons, experts say.

For one, this is a very large, high-stakes deal. The $120 million breakup fee that M&T would receive should Hudson City fetch a better offer is worth twice as much as the $58 million in cash that PacWest paid for American Perspective. PacWest also paid cash to scuttle Umpqua's bid, which is important.

M&T is covering $2.2 billion — or 60% — of the purchase price of Hudson City with it its own shares, which are among the most valuable in banking. They trade at an exceptionally high multiple to book, and M&T has maintained a dividend through the downturn. Hermance — a reluctant seller — was adamant about pursuing a stock-based deal that would enable shareholders to reap the financial rewards of a merger.

The deal pointedly lacks a so-called cap or collar that would allow M&T to cancel the transaction should its share price surge in value before the deal's scheduled completion in the second quarter. The deal got a bit sweeter for Hudson City shareholders when M&T's shares surged 5% Monday, the day it was announced. If M&T's stock keeps rising, the deal gets even better for them.

M&T's shared closed Wednesday at $88.52, an increase of 10 cents.

"It's a fixed exchange ratio and that is very purposely done because any benefit to our stock accrues to them, too," says Michael Pinto, vice chairman of M&T and CEO of its Mid-Atlantic division. "Our stocks will move in lockstep toward the closing. If it is a good deal, our stock goes up, as it did at announcement, and so did theirs. In that respect, it is truly a partnership."

He declined to comment on the prospect of rival bids. New York Community, Toronto-Dominion and Hudson City either declined to comment or did not return calls seeking comment.

If New York Community or Toronto-Dominion wanted to handily trump M&T's bid, each would have to come in way over the top of M&T with an all-cash, or cash-heavy, offer, according to experts.

This is because the definition of shareholder value becomes fungible in stock-based deals. The people who own the selling bank are not cashing out but swapping their interest into another institution. So it is a matter of debate whether Toronto-Dominion or New York Community would be a better partner for Hudson City than M&T, but it is hard for sellers to argue with cash.

Yet raising and spending cash present challenges to buyers. When you raise it by selling stock in a depressed market, you are diluting shareholders. When you spend cash on hand you are diluting your tangible capital, which nobody wants to do before regulators make a firm decision on exactly how much extra loss-absorbing capital banks will have to maintain.

Though Hudson City says it did not fish for a better offer, there is a strong case that this deal is a long-term financial win for its shareholders. They will own an estimated 20% stake in M&T, which intends to build out Hudson City's business banking operations while cleaning up its interest rate problems.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.