Posted on: Sunday, December 14, 2003
Banks mired in merger bid
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By Deborah Adamson
Advertiser Staff Writer
Last spring, when City Bank CEO Ron Migita was told he had a call from the New York investment banking firm of Bear Stearns, he thought it was just another Wall Streeter hustling for business in the Islands.
What he heard instead was Central Pacific Bank's intention to make a tender offer to merge with City Bank. Not only was the call a surprise, it elicited strong emotions about the way he was approached.
"The local way is we would talk," he said. "You don't send a third party."
But what really galled Migita was the disclosure — by Central Pacific to the press — of a confidential memo dated Jan. 5, 2000, outlining an inquiry by City Bank about the idea of a three-party merger that would include Central Pacific.
"Trust is extremely important. Integrity is extremely important," he said. "I would never breach a confidential discussion to the press. I wouldn't do it."
For his part, Central Pacific CEO Clint Arnoldus believes his bank has been misunderstood: "We're pretty nice people."
Battle of the banks
A clash of cultures, flurry of lawsuits and public relations war for public sentiment have marked the unsolicited offer by Central Pacific Financial, the parent of Central Pacific, for CB Bancshares, the parent of City Bank.
It's only the second hostile takeover bid in the state's history, said Williamson Chang, a University of Hawai'i law professor who helped revise the state's corporations code.
Last week, the state Division of Financial Institutions wrapped up an unprecedented public hearing on the merger, spurred by public interest.
After listening to roughly 200 testimonies, Commissioner Nick Griffin said he has until Feb. 18 to decide whether to put his stamp of approval on the takeover attempt.
Last month, the U.S. Department of Justice decided not to object to the merger. In a letter to the Federal Reserve Board of Governors, it said that "we have reviewed these proposed transactions and do not conclude that any would have a significantly adverse effect on competition."
The Federal Reserve still has to sign off on the deal and the state attorney general's office also has to give the deal a green light, Griffin said. Lastly, the merger needs approval from shareholders of both companies.
Emotion vs. dollars
While the takeover battle has been emotional and tumultuous, the outcome will be decided dispassionately based on regulations and laws.
One critical question is whether City Bank and Central Pacific board members executed their fiduciary responsibility to their shareholders. Have they acted in a way that would benefit the owners of their companies?
If not, "they can open themselves up to substantial liability," said Jourdi de Werd, managing director of investment bank Greif & Co. in Los Angeles and an occasional lecturer on investment banking at the University of Southern California.
The issue is particularly relevant, coming at a time when corporate governance issues are in the spotlight with the fall of Enron and the enactment of the federal Sarbanes-Oxley Act. The act seeks to ensure that boards of directors are sufficiently independent and don't act in a self-dealing manner.
In addition, de Werd said another risk of the attempted takeover is that disgruntled institutional investors could decide they can't trust the company boards and subsequently sell their typically substantial holdings — leading to a hammering of the share price.
So even if City Bank successfully fends off the insistent overtures of Central Pacific, it could still end up shooting itself in the foot, de Werd said.
City Bank believes it is worth far more than the roughly $70 a share in stock and cash offered by Central Pacific and thus it acted in the best interest of shareholders to reject the deal.
Central Pacific believes the deal is fair and the combined banks would add market share, strengthen both institutions and position the new entity for long-term expansion — which would be to the benefit of its shareholders.
Weighing the offer
In April, Central Pacific offered to pay $21 in cash and 1.8956 in Central Pacific common shares for every CB Bancshares share — or a 70 percent stock and 30 percent cash offer.
Later, it sweetened the deal to $22.27 a share in cash and 1.6005 Central Pacific shares — a 65 percent stock and 35 percent cash combination — after adjusting for a stock dividend. On Friday, the deal was valued at around $300 million.
City Bank has rejected both tender offers as inadequate.
"I firmly believe with all my heart that we have fulfilled our fiduciary responsibility when we rejected their proposal," Migita said.
When the takeover offer of $70 a share was announced, CB Bancshares had closed at $46.38 a share. Thus, the offer would have amounted to a 51 percent premium to City Bank's shareholders.
SNL Financial, a mergers and acquisition research group in Charlottesville, Va., said the original tender offer amounted to nearly 200 percent of book value or 21.64 times earnings of the four quarters ended March 31, the latest quarter before the merger was announced.
In comparison, a look at 19 U.S. mergers among banks and thrifts with assets of $1 billion to $5 billion since Jan. 1 yielded an average 213 percent of book or a median 19.74 times such earnings. The higher the number, the higher the price offered by the buyer.
So does the rejection of the offers mean that City Bank's board did not execute its fiduciary responsibility to shareholders? Not necessarily.
Since the offer is substantially in stock, City Bank could argue that shareholders can't count on the offer being a solid $70 a share because one can't predict the direction of Central Pacific's share price, de Werd said.
Moreover, City Bank has hired investment banker Sandler O'Neill to evaluate the deal and found it to be lacking, said Dean Hirata, City Bank's chief financial officer.
But the more cash Central Pacific offers, the harder it would be for City Bank to reject it and stay committed to enhancing shareholder value.
If Central Pacific offers $70 a share in cash, City Bank will find it much tougher to turn down the deal, de Werd said. But City Bank attorney Lex Smith is confident it won't happen: "They don't have enough money."
Many obstacles
Indeed, the path to victory seems steep for Central Pacific, legal experts said.
First, it has to overcome City Bank's anti-takeover provisions. One is a "poison pill" defense that essentially increases the number of its shares in the market if someone acquires 15 percent or more of ownership.
Central Pacific currently owns 2.3 percent of City Bank. It needs more shares to gain clout in City Bank and have the ability to put in its own slate of directors that would vote for the merger.
A strategy to overcome the poison pill is to sue over its validity or provisions, de Werd said. Central Pacific has done just that.
More difficult for Central Pacific is to get over the "staggered board" policy of City Bank, legal experts said.
Of the 10 directors at City Bank, about a third of their seats come up for election once every three years. For 2004, three seats would come up. There's another three in 2005 and four in 2006. To gain a majority on the board, Central Pacific would have to wait until 2005 to elect its own directors — a costly and lengthy proposition.
"That's a lifetime, potentially," said Fred White, a law partner at Skadden Arps, which represents City Bank.
State statute also helps protect City Bank, a state-chartered institution. The Hawai'i control share acquisitions statute essentially requires approval by 50 percent of disinterested shareholders if an entity acquires more than 10 percent of a local company. It has various levels of triggers, which would call for shareholder approval in each instance. The effect is to slow down a forcible acquisition of a local firm.
Then there's public sentiment, which seems to favor City Bank based on the turnout at the public hearings. Griffin has to consider the merger's impact on the community, competition and consumers in making his decision.
What else can Central Pacific do? It could appeal to shareholders to pressure City Bank's board to take the offer, de Werd said. It also could increase the cash portion of the offer to make it harder for the target company's board to turn it down without risking a flood of shareholder lawsuits.
At shareholder meetings, Central Pacific could have a proxy fight. Since the majority of shareholders don't attend meetings, a major shareholder can ask other shareholders for the right to vote their shares. The board of directors can do the same. This is a proxy fight.
Central Pacific spokeswoman Ann Takiguchi declined to comment on the bank's strategies.
Shares could drop
If Central Pacific doesn't succeed in its quest, that doesn't mean troubles are over for City Bank, de Werd said. At present, its stock is trading off the merger offer — it closed at $64.50 on Friday. A failed deal could see the stock back to the low 40s level, he said.
Also, shareholders angry at losing out on any perceived windfall could sue. There's already one such lawsuit and more could come.
But White isn't concerned: "We do not fear shareholder lawsuits."
Arnoldus firmly believes that his offer is "competitive" and said it's "puzzling" why City Bank's board turned it down.
When he moved to Hawai'i two years ago, he found "a recovering economy, a good place to do business, a nice place to live," the CEO said. "Corporate governance issues should also be important."
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
