Mutual holding companies have long been misunderstood, but they may soon get a second look from investors who had shunned them.
Because of these companies' complex structure and illiquid stock - they are part publicly and part mutually owned - they are not very popular with investors. Generally, less than 50% of mutual holding company's stock is issued to the public, and the majority of shares are retained in a mutual holding company, leaving public shareholders with little control over a company's future. 
But these fears are diminishing, and Northwest Bancorp Inc.'s deal for fellow mutual holding company Leeds Federal Bankshares Inc. may encourage more purchases of mutual holding companies, because it reinforced that these companies can acquire and be acquired and that they can command hefty premiums.
Northwest, of Warren, Pa., is to pay the Baltimore company's public shareholders $32 in cash - a premium of more than 100%, compared with the 30% to 40% premiums recently paid to banks and thrifts. Northwest in essence is paying $44 million to acquire a company with equity of about $51 million, said John Kline, an analyst at Sandler O'Neill & Partners in New York.
Observers say the Northwest-Leeds deal, announced two weeks ago, should spark investor interest in mutual holding companies. Indeed, more than 400,000 shares of Leeds stock changed hands Aug. 17, the day after the Northwest deal was announced. That's more than 40 times its daily average. Its stock more than doubled, to $31.20, that day.
V. Gerard Comizio, a managing partner at the Washington law firm Thacher, Proffitt & Wood, said: "The next time a stock goes out" for a mutual holding company, "investors may believe they will get this same kind of payout. That would create an inordinate interest totally unrelated to the actual value of stock being offered."
Observers say more investors will see that the charter is flexible - that it offers a variety of growth opportunities.
Eric Luse, a lawyer with Luse Lehman Gorman Pomerenk & Schick in Washington, said that two years ago, it was assumed that if a mutual holding company wanted to change its structure or ownership, it had to do a second-step conversion to stock form. Regulators prohibit mutual holding companies from selling to fully public companies.
But now investors are realizing that mutual holding companies can buy or be bought by mutual and mutual holding companies, even without doing a full stock conversion. "And that can be a positive," Mr. Luse said, "because it should have a favorable impact on the stock prices of all mutual holding companies."
Until recently, only a handful of deals involved mutual holding companies, mainly because of the general misunderstanding of the hybrid structure. Furthermore, a very limited number of deals can be done - there are just 150 or so mutual holding companies throughout the country and only 41 are publicly traded. Add the fact that the charter is less than 15 years old and it becomes clearer why there has been relatively little activity.
The first acquisition of a mutual holding company was the 1999 purchase by North Shore Bank in Brookfield, Wis., of Milwaukee's Marquette Savings Bank. Like other thrifts that had recently converted to stock ownership, Marquette said its sagging stock price had investors pressing management to boost performance.
Since then, several other deals have been made. Boiling Springs Bancorp acquired fellow mutual holding company Ridgewood Financial Inc., of Ridgewood, N.J., last month, and in April Danvers Bancorp Inc. of Danvers, Mass., announced an agreement to acquire Revere MHC in Revere, Mass.
Fulton Savings Bank, a mutual in Fulton, N.Y., went public last week with a bid to acquire Pathfinder Bancorp Inc., a mutual holding company in Oswego, N.Y. Pathfinder, however, has not publicly responded to the offer of $17 a share, a 40% premium to its current market price.
Observers say the trends behind this flurry include mutual holding companies' maturation, and recognition of their potential; regulators' becoming more comfortable with the charter's capabilities; and the desire to do better for shareholders.
John J. Spidi, a partner at Malizia, Spidi & Fisch PC, a Washington law firm representing thrifts, said mutual holding companies have a "a very desirable charter," and "the sky is the limit" for those looking to do deals. "Right now if you're a mutual holding company with a lot of capital, you can do a lot with your charter."
The Office of Thrift Supervision granted mutuals permission to form mutual holding companies and do stock offerings in 1991. People's Bank, Connecticut, became the first mutual holding company in 1987 with a federal charter, but the OTS did not make its first approval of a mutual holding company charter until several years later. In 1993 the agency established regulations allowing mutual holding companies to buy fully public stock companies, mutuals, and other mutual holding companies.
Mr. Comizio, a former deputy general counsel at the OTS, said that in the first five years, regulators focused on conversions. "It's only fairly recently that regulators have been presented with a number of transactions," he said.
Mr. Comizio added that he believes the OTS is taking a "case-by-case approach" to mergers among mutual holding companies. "I don't think they envision an avalanche of these transactions."
Others disagree, saying that combinations among mutual holding companies are appealing for several reasons, not the least of which is that these companies can be had at dirt-cheap prices. It's a good deal for buyers because they need to pay only for the public shares - less than 50% of stock outstanding. In short, they can buy a whole company for half the price. Sellers like the deal because acquirers tend to pay an attractive premium for the publicly held shares.
Mr. Luse, who specializes in mergers and conversions, said a relatively poor market for thrift stocks would be the real impetus behind mergers or sales of mutual holding companies.
"The weaker the market, the more of a premium a mutual or a mutual holding company can pay over market price," Mr. Luse said. In fact, several of the recent deals among mutuals and mutual holding companies involved companies that were trading near their initial-public-offering price, he said.
Roberta M. Probber, an analyst with Ryan, Beck & Co., in Livingston, N.J., said she expects more of the smaller mutual holding companies to consolidate as executives try to provide shareholders with better returns, especially those struggling to achieve a strong return on equity. "It's hard to be out there without a lot of liquidity," she said. "If you think that your earnings acceleration is coming to an end as interest rates stop declining, you may have to consider it."
Richard D. Weiss, an analyst at Janney Montgomery Scott LLC in Philadelphia, agreed. He said "people are starting to talk" about putting deals together, and will probably continue to now that regulators are getting comfortable with this type of transaction.
"The pioneers always have it hard from regulators," Mr. Weiss said, but once one deal is done, "it's easier for others to get through the process."
