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The Honolulu Advertiser

Posted on: Sunday, July 13, 2003

Buyout bid shakes up CB Bancshares' stock

By John Duchemin
Advertiser Staff Writer

To an outsider, the fluctuation of CB Bancshares' stock price may be a mystery. Shares of the bank, target of a hostile takeover bid by rival Central Pacific Bank, would be worth about $66 if the bid went through.

But the stock isn't selling for $66. Instead, it's hovering around $61 or $62.

Why the discount? Why would someone sell CB Bancshares stock for the current price — $62.64, as of Friday — when someone who buys it for that price would make about 8 percent if the deal goes through?

The key is the "if." With CB Bancshares fighting tooth and nail for its independence, it's hardly certain the takeover will ever transpire. And if it doesn't, CB Bancshares stock could very well sink back to the level it was trading at before Central Pacific made its offer — about $40 per share.

Given this and other risks, CB Bancshares stock has stayed at a price about 10 percent below the offer price since late April, when Central Pacific announced its plan to buy its rival. At that time, the price was driven up about 50 percent by speculators, who bought into the stock in a bet that the deal would go through.

Financial experts say these traders apply a discount to the stock based on several risks: The possibility of Central Pacific losing its bid; the relatively low trading volume of the stock, which makes it harder to buy and sell; and the fact that investors expect a profit that at least equals the interest rate.

Thus, if the deal becomes more risky — or seems to be taking longer than expected — the discount will widen. If the deal becomes certain — if, for instance, CB officials agree to the merger — the discount will shrink to a much smaller level.

The discount being applied to CB Bancshares stock is roughly equal to the discount applied to other high-stakes hostile takeovers with uncertain outcomes. Software company PeopleSoft, for instance, is trading at about 9 percent or 10 percent below the price Oracle is offering to buy the company in a hostile bid.

Stock-trading experts and the two banks disagree on the meaning of the CB Bancshares discount. Central Pacific says it's a good sign for the deal, since the stock's price has stayed elevated despite several months of bitter fights.

"We're very encouraged by what we're seeing," said Neil Morganbesser, managing director of U.S. West Coast mergers for Bear Stearns, Central Pacific's financial advisor in the hostile takeover. "We believe the market believes in this deal — shareholders continue to see the value in it."

CB Bancshares, however, says it's tough to read such sentiments into the stock price. Officials claim the bank's stock rose in part because CB Bancshares was undervalued to begin with and the increased visibility has stimulated investors' interest.

"I think the stock price reflects what people think of CB Bancshares on its own, not just the possibility of a transaction with Central Pacific," said Brian Sterling, co-head of investment banking for Sandler O'Neill, the New York-based investment firm acting as CB Bancshares' financial adviser.

Outsiders don't necessarily agree with either interpretation.

While CB stock has stayed high since the takeover bid was launched, the stock is also traded very thinly — there aren't too many shares available for purchase or sale. As a result, it's harder for someone to either buy a large block of shares, therefore pushing the price higher, or sell in large volume and push the price down. It's therefore possible prices are artificially locked, said Brad Totherow, president of Honolulu portfolio management company Cadinha & Co.