City Bank defense paying off
By John Duchemin
Advertiser Staff Writer
After two months of fighting for its life, hostile merger target CB Bancshares has managed to fend off every major attack by would-be buyer Central Pacific Financial Corp., and has lately been counterattacking with some success.
Since late May, CB Bancshares, the parent of City Bank headed by CEO Ron Migita, has won a key shareholder vote to reject the merger, thwarted a Central Pacific-led shareholder boycott of that vote, and beat back Central Pacific's attempt to force a revote.
Central Pacific, which wants to buy its banking rival for $270 million in cash and stock, has been forced to backpedal. The bank had hoped to use a favorable vote to show CB Bancshares stockholders support its offer. Instead, it has little to show for weeks of effort.
Central Pacific officials, led by CEO Clint Arnoldus, acknowledge their initial strategies didn't work. The would-be buyer now says that it's conceding the vote, and that it must find another way to bring CB Bancshares to the table — such as sweetening the offer, engaging in an all-out litigation assault, or even waiting until next year's annual meeting to vote in new CB Bancshares directors.
The most likely near-term step, however, is to focus on getting the deal approved by government regulators — which is by no means certain — and open an "exchange offer," in which CB Bancshares stockholders could tender their shares for eventual sale to Central Pacific.
"We do believe they (CB Bancshares) have taken advantage of tactical issues in the past," said Alison Ressler, a partner in Mainland law firm Sullivan & Cromwell, which has taken over as Central Pacific's chief legal counsel. "But we would like to look forward from here."
Still, the failure of Central Pacific to win in court, to mount a successful boycott and to secure a new vote causes some observers to criticize the bank's strategic decision-making and also wonder whether the merger can be pulled off. Scott Keller, president of New York merger-watching firm Deal Analytics, says Central Pacific's attack has featured one blunder after another.
"The campaign they've waged has bordered on amateurish," said Keller, whose firm provides merger analysis for stock traders. "They've made a bunch of tactical and legal mistakes, a bunch of misreadings. They've been put back on their heels and are now playing catch-up."
Keller said CB Bancshares has been masterful in its use of defensive tactics, and that its legal team "has been one step ahead of Central Pacific" for weeks. CB Bancshares would not comment.
Central Pacific started strong, announcing the hostile deal on April 16 and catching CB Bancshares officials off-guard. While Central Pacific blitzed the media, pitched Wall Street analysts and secured the support of some of CB Bancshares' largest institutional investors, CB Bancshares officials were silent for days after the merger, issuing only tersely worded press releases saying they were considering the offer.
Central Pacific, backed by financial adviser Bear Stearns & Co. and several Los Angeles-based lawyers and public relations advisers, soon claimed the support of more than one-quarter of CB Bancshares shareholders and demanded a special meeting to force a vote on the takeover offer.
The target bank, however, quickly regained its balance and began to counterpunch. CB Bancshares hired Skadden Arps, one of the nation's foremost merger & acquisition law firms, as its legal counsel, and banking industry consultants Sandler O'Neill to offer financial advice. After two weeks of relative silence, the bank on May 4 began an anti-takeover media campaign, formally rejecting the deal and staging an anti-merger rally in the street outside its office tower on Merchant Street.
CB Bancshares soon began throwing technical and legal barriers in Central Pacific's way. When Central Pacific demanded the shareholder vote, CB Bancshares chose May 28, almost the earliest possible date — which not only put pressure on Central Pacific to notify CB Bancshares shareholders of the upcoming meeting, but gave the buyer as little time as possible to secure support from CB Bancshares' investors.
In another maneuver, CB Bancshares also told Central Pacific that neither its shares — Central Pacific owns more than 2 percent of CB Bancshares stock — nor those of CB Bancshares' largest shareholder TON Finance, which had signed voting control of its shares over to Central Pacific, would be included in the May 28 vote.
Central Pacific cried foul. It complained that CB Bancshares hadn't provided enough time to mail voting material to shareholders, and sought a state court injunction to change the vote to a later date. Central Pacific, backed by about 25 percent of CB Bancshares shareholders, requested a June 26 vote instead. But state Circuit Court Judge Victoria Marks ruled in CB Bancshares' favor, and the meeting proceeded.
Central Pacific then attempted to persuade its supporters to boycott the vote, hoping to deny a 50 percent quorum to CB. That move backfired, as a bare 50.4 percent of eligible CB shareholders cast ballots. The target bank's successful move to deny voting rights to TON Finance proved crucial: If TON, the bank's single largest shareholder, had been counted as a no-vote, the final tally would have been well below quorum levels.
As it happened, less than 30 percent of CB Bancshares' 3.9 million shares voted to reject the merger, but CB Bancshares was still able to claim victory.
CB Bancshares followed up that win by squashing Central Pacific's request for a second vote on June 26. Not only would that vote be an unnecessary repeat, CB Bancshares lawyers argued, but Central Pacific had inadvertently triggered the CB Bancshares "poison pill" — a defense that kicks in when a would-be buyer gains control of more than 20 percent of CB Bancshares' shares. CB Bancshares claimed the poison pill was triggered when Central Pacific gained voting support from the 25 percent of CB shareholders who demanded the later vote.
Central Pacific officials grudgingly admitted that they may have triggered the poison pill. Last week, they announced they would no longer seek the June 26 meeting.
Central Pacific lawyers say the bank's next step is to get state and federal government approval — another arena where they face a stiff challenge.
Deal Analytics' Keller said banking regulators would be loath to approve a merger if the target bank was still fighting. CB Bancshares responded to Central Pacific's application to the Federal Reserve Board with a 50-plus-page memo denouncing the deal as inadequately financed and anti-competitive. It has also filed opposition to Central Pacific's state approval requests.
Central Pacific said it remains convinced that regulatory approval is the best move in the current circumstances. Ressler said that government approval would remove a major obstacle. At that point, the bank would likely proceed with an exchange offer.
