A friendly rivalry in Oregon turned nasty when a tiny bank tried to acquire a neighbor through a seldom-used maneuver: the hostile takeover bid.
BEO Bancorp in rural Heppner said that after spurning an unsolicited offer from Community Bancshares Inc. in Joseph, it learned only by reading the paper that Community had applied with regulators to buy up to 100% of the company. Community claims BEO bad-mouthed it.
Whatever BEO said to rally public support for its side, it worked: the company's shareholders and customers sent hundreds of letters to the Federal Reserve Bank of San Francisco opposing Community's application. Community eventually threw in the towel.
At a time when failed banks are still plentiful and the mergers and acquisitions market is showing signs of life, the unwanted takeover advances left some observers scratching their heads.
"In today's environment, I think it's crazy," said Randy Dennis, the president of DDF Consulting in Little Rock. "I think there are probably enough people out there, enough opportunities, that you don't have to be hostile about it. I think there are enough people who would be willing to consider a marriage. I just find it amazing."
Hostile takeovers were a popular strategy in the corporate world in the 1980s. A prospective buyer unable to negotiate a deal with a company's board would go directly to shareholders in an attempt to buy enough shares to wrest control.
But even then, hostile takeover attempts were rare in the banking industry, especially among community banks, said Philip Smith, the president of Gerrish McCreary Smith in Memphis, the law firm that represented BEO in its fight to ward off the takeover attempt.
In the past two years, there have been two other notable unsuccessful hostile attempts: Porter Bancorp Inc. in Louisville tried to take over Citizens First Corp. in Bowling Green, Ky., in October. And Crescent Capital VI LLC, a private-equity firm in Bellevue, Wash., tried to take over Cowlitz Bancorp. in Longview, in January 2009. (Regulators closed Cowlitz on Friday.)
Smith estimated that only a handful of banking companies have succeeded in hostile forays over the past 15 to 20 years.
"It's still been pretty much a businessperson-to-businessperson environment of a casual approach, preliminary conversations, 'let's see if this works,' " Smith said. "If someone's not interested, it would be rare to make a hostile run."
The $366 million-asset Community's unfriendly overture came after a yearlong courtship, during which the $238 million-asset BEO repeatedly rebuffed Community's advances, said Jeff Bailey, BEO's chief executive.
After three informal attempts, Community made a formal acquisition offer in April.
The BEO board took the offer to shareholders, "and resoundingly they said, 'How dare they? We don't want to sell,'" Bailey said.
The company has 360 shareholders, none of whom owns more than 7% of the outstanding shares, and the majority still live nearby.
"Many of our shareholders have said, 'Hey, my dad helped found this bank. I'm not selling my shares for anything,'" Bailey said.
Yet Tom Moran, the CEO of Community Bancshares, said his bank encountered no such resistance when it started buying up BEO shares in early 2010.
Community quickly acquired 5% of BEO's stock, the maximum allowed before having to secure permission from the San Francisco Fed to buy more, Moran said.
Community bought some of the shares after approaching four or five large shareholders, all of whom seemed eager to liquidate their stakes, Moran said.
"We never viewed it as hostile, because … we never had any problem with gaining the ownership that we did," Moran said.
But Moran said Community felt BEO's management was "running in a different direction" than its shareholders, and wasn't surprised when the company rejected the formal acquisition offer.
On June 9, Community filed the application with the Federal Reserve to acquire more than 50%, and up to 100%, of BEO's outstanding shares.
BEO's Bailey said the company found out about the move when Community posted a required notice in the local newspaper.
"I've always considered us friendly competitors," Bailey said. "Things became less friendly as the hostile takeover went on, frankly."
Moran agreed on that point: he claimed BEO distributed "some very unprofessional materials" and spoke publicly about the deal. Community tried to keep the matter between the boards and shareholders, he said.
"Absolutely, we feel we were painted in a very poor light," Moran said. "But again, we chose to take a higher road."
Bailey said customers and shareholders sent letters to the San Francisco Fed during the comment period (the exact number of comments was not immediately available).
In the end, Moran said concerns about BEO's asset quality and potential dilution from its recent capital-raising effort scared Community off.
"Each of these things individually were something we felt could we handle, but taken collectively, we felt now would be a good time to step away from the table," Moran said. The bank withdrew its application on July 27.
Smith, the lawyer who represented BEO, said he could see how a potential buyer might not view the strategy as "hostile," but as a tactic to advance negotiations.
"I think we'll continue to see buyers trying to be creative, however you define that," he said.
Jim Wheeler, an attorney and consultant at Morris, Manning & Martin LLP in Atlanta, said there has been so few bank M&A deals that the sidelines have filled with eager players. Yet there is still much more demand than supply, "so I wouldn't be surprised if the hostile side comes into play," he said.