Takeover-hungry chief executives should avoid sending ultimatum letters that spell out proposed terms, a high-powered banking lawyer told financial executives last week.

Such "bear-hug" letters are far more common than most people realize, said H. Rodgin Cohen of the Sullivan & Cromwell law firm. They can be harmful to both the sending and the recipient bank, he warned.

Bear-hug letters should be used only as "a last approach," said Mr. Cohen, who spoke before the Financial Services Roundtable in Washington.

Publication of such letters could expose both banks to unfavorable publicity that could do considerable damage, he warned.

A recipient chief executive officer should "emphatically" reject such letters unless genuinely interested in the proposals, Mr. Cohen said.

"The principal cause of a bear-hug letter is a target CEO who can't say no, firmly and decisively, the first time he is approached," he said.

He also said that directors should periodically be warned that "they could be running the risk of a personal liability suit" if they depart from the script laid out by their CEOs.

In his wide-ranging speech, Mr. Cohen also advised banks to:

Avoid acquisitions that might preempt a better one.

Expect antitrust issues to become more important in acquisitions, because of the growing size of spinoffs.

Try to avoid agreeing to a merger without conducting sufficient due diligence. Failure to conduct the due diligence, he said, is "at least" as dangerous for the bank being acquired as it is for the acquirer.

Mr. Cohen described the current banking environment as a chess game, and urged that bankers look several moves ahead when deciding on acquisitions. A bank that could increase its market share to 25% from 20% by buying an available bank should consider whether that deal might preclude its buying another that would give it 35%, he said.

In regard to antitrust activity, Mr. Cohen said it is clear that regulatory agencies will allow almost any bank merger to take place but that the merged organization would be required to sell off branches and other assets to assure competition in the market.

As such mergers get bigger, finding buyers for the spun-off units becomes more difficult, because few can afford to part with the additional capital, Mr. Cohen said.

He pointed to Fleet's need to divest some $12 billion to $13 billion of assets after its acquisition of BankBoston. "You need equity equal to at least 5% of the deposits you are assuming," he said. In the case of Fleet, that would be about $650 million. Mr. Cohen asked how many potential buyers could increase their capital to that degree.

In addition, the bank buying the spinoff would have to pay a premium comparable to what the original acquirer paid.

"If due diligence in bank mergers were an animal, it might well be on the endangered species list," Mr. Cohen told the group. It used to require thousands of man-hours over one week to perform due diligence, but now it is often down to several days, he said.

Due diligence completed that quickly"may not uncover even serious problems," he warned.

The target company should pay attention to due diligence, he said, because shareholders of the selling bank are often paid with shares of the acquirer.

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