CPB's takeover bid a 'calculated risk'
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| Employees and managers of City Bank gathered in front of the bank's Merchant Street headquarters on May 5 to denounce the Central Pacific Bank takeover bid. Bank President Richard Lim spoke to the crowd.
Deborah Booker • The Honolulu Advertiser |
| • | Timeline of takeover attempt |
By Andrew Gomes
Advertiser Staff Writer
In two downtown Honolulu office buildings a block apart, rival teams of attorneys have hunkered down for the past few weeks preparing for a contest of the gravest nature in business: the hostile takeover.
Known as "going nuclear" by investment bankers and merger analysts, the tactic has a history of not turning out well, especially in banking where it is rare and extremely difficult to accomplish successfully.
What the public has seen so far, since Central Pacific Financial Corp. in mid-April announced it would try to force a merger with competitor City Bank, have been relatively minor skirmishes for tactical advantage and emotional support in a battle for control of a $1.7 billion bank.
Hanging in delicate balance amid the emerging fight is customer confidence, employee moral, shareholder satisfaction and the value of the envisioned combined bank — all of which can be casualties in a hostile bid.
"It's a calculated risk," said Al De Almeida, managing director with the San Francisco office of Keefe Bruyette & Woods Inc., a New York-based investment banking firm specializing in financial institution deals.
"The bank isn't a manufacturing business," he said. "If you lose customers or drive away employees, what are you buying in the end if you're successful?"
De Almeida and other merger experts could recall only one or two banks that have pulled off successful hostile takeovers, though qualified successes, among examples dominated by failure.
Experts said bank accounting rules, conservative government regulators and the fragile nature of customer relationships have made hostile bank takeovers an acquisition plan of absolute last resort.
The first hostile bank takeover in modern U.S. history succeeded, but took more than a year and a New York state Supreme Court ruling for Bank of New York to acquire Irving Bank in 1988.
The protracted fight involved a "poison pill" defense and search by Irving for a buyer other than Bank of New York, which ultimately succeeded after an invited "white knight" buyer withdrew its bid and the court invalidated a portion of Irving's poison pill.
But cases since rarely have gone as well. Three years ago in a hostile merger between banks in New York, North Fork Bancorporation tried to takeover Dime Bancorp. The battle involved North Fork suing over the election of Dime directors, but Seattle-based Washington Mutual bought Dime instead. North Fork spent $13.5 million in its losing effort.
Record-size takeover bid
In 1995, San Francisco-based Wells Fargo & Co. launched a record-size hostile bank takeover with a $10.8 billion offer for Los Angeles-based First Interstate Bancorp.
Months later, after upping its bid to $11.6 billion and fending off a friendly competing offer from a Minneapolis bank that was paid $200 million for its attempted rescue, Wells Fargo completed the deal. But the combined bank was plagued by employee and customer defections that today serves as one of the worst examples of integrating companies.
• Hostile takeover — acquisition of a firm despite resistance by a target firm's management and board of directors. • Poison pill — provision that floods the stock market with extra shares if a would-be buyer acquires more than a certain percentage of shares, devaluing the target's stock and making it less attractive. • White knight — a party that a company chooses to merge with to fend off an unwanted corporate raider.
Analysts said the Central Pacific-City Bank fight could end in peace relatively quickly or become very expensive and drag on for as long as a year or two or more.
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Terms of engagement
A speedier end could come with either City Bank accepting a more attractive offer from Central Pacific or Central Pacific backing out.
The white-knight rescue is considered slim because of Hawai'i's remote and concentrated market dominated by two big banks, though American Savings Bank could fit the bill.
Or full-scale war could erupt with lawsuits between companies and shareholders and directors, or a minimum two-year push to elect a pro-merger majority to City Bank's 10-member board that serves staggered terms.
So far, neither side is disclosing its battle plan as leaders of both banks remain adamant about their positions since Central Pacific launched an April 16 unsolicited public bid met with wholesale rejection by City Bank a week ago.
Public relations campaign
Both banks have engaged a small army of public relations specialists, lawyers, financial analysts and merger consultants in what so far has more resembled a political campaign with sign waving, press conferences and full-page newspaper ads trying to sway public and shareholder opinion.
"It's pretty high stakes," said Mark Penny, managing director at Hempstead & Co., a New Jersey firm that advises companies in mergers and acquisitions. "You're trying to get the hearts and minds of the shareholders."
Millions of dollars can be spent in large takeover attempts, such as the hostile bid by Atlanta's SunTrust Banks for North Carolina bank Wachovia Corp., in which SunTrust lost a battle filled with lawsuits and verbal attacks.
City Bank recently reached out to local radio listeners with messages such as "You've probably heard about the hostile takeover attempt. ... You may have even heard Central Pacific's Clinton Arnoldus call it a 'win-win' for everyone. ... City Bank has rejected this hostile takeover. ... It's a lose-lose deal."
City Bank shareholders were to vote May 28 to consider selling their shares to Central Pacific, though that vote now appears derailed after Central Pacific changed its offer and requested a new meeting in late June.
Central Pacific needs more than 50 percent of the vote, but would need to acquire at least 75 percent of City Bank shares to merge the companies. A City Bank poison pill, however, would devalue everyone's shares if anyone buys more than 20 percent of the company.
To defeat the measure, Central Pacific could try to argue in court that the pill is illegal, or it could try to replace City Bank directors as a majority of the board comes up for re-election over the next two years.
Arnoldus, Central Pacific's chief executive officer, said he doesn't want to fight for City Bank, and believes a friendly merger is good for both banks.
"I was chairman and CEO of First Interstate Bank of Nevada when Wells Fargo acquired them in a hostile takeover, and I learned through that process how not to do an acquisition," he said earlier this month.
"We don't want to do this without City Bank management," Arnoldus continued, "... we want to completely understand the dynamics that have driven their bank so well over the years and look at best practices within both organizations and take the best practices from each and bring it into the combined bank."
Arnoldus also said he will not turn back in the hostile pursuit. "We have a defense for every response that they will have," he said.
Integration risks
City Bank directors two weeks ago said the acquisition is a bad idea because of integration risks, cost savings primarily derived from layoffs and an inadequate offer. The bank even estimated the combination would lead to a $16.5 million loss for the state economy and a loss of more than 200 jobs at the banks.
Analysts note that City Bank has not publicly justified to its shareholders how the bank can create an equivalent value in their stock comparable with Central Pacific's offer, which is a 51 percent premium over the value of City Bank stock the day the merger was announced.
Said merger expert Mark Penny: "If you can't tell me why I'm gonna make more money later if I don't do this deal ... I'm pretty much making a sacrifice for the benefit of everyone else."
At the same time, no buyer wants to lose face in the market by being perceived as "a greedy pig taking over a ripe target," according to Scott Keller, president of Deal Analytics, a New York financial research firm that assesses takeovers.
City Bank said it's talking to shareholders privately, but won't say much more about its strategy to remain independent.
Richard Lim, City Bank's president and chief operating officer, told employees he is quite certain a prolonged legal battle will ensue.
Keller said he's surprised neither bank has filed lawsuits in the merger fight yet. "I think both sides are trying to be as least hostile as a hostile situation can be."
Said Arnoldus: "I want to make it really clear — we do not want to go down this road. We have tried everything to do this on a friendly basis and we'll continue to try everything we can to get this done on a friendly basis. This is our only course of action left."
Timeline of takeover attempt
• Late 1999/early 2000: City Bank parent CB Bancshares Inc. informally approaches Central Pacific Bank with interest to combine companies. No formal discussions result.
• May 23, 2002: Central Pacific approaches CB with the idea of a stock-for-stock merger.
• June 10, 2002: After a CB review, an executive committee decides not to pursue stock merger.
• Feb. 26, 2003: Central Pacific begins buying hundreds of CB stock shares.
• March 13: Central Pacific, with $4.2 million in CB shares, is the 10th largest owner of its rival.
• March 17: Central Pacific investment banking agents from Bear Stearns & Co. meet CB executives and briefly discuss paying $70 in cash and stock for CB.
• March 21: Central Pacific details terms in a letter to CB.
• April 2: Management of both banks meet to clarify terms. It is their first and only face-to-face meeting, after which CB concludes further discussions would be unproductive.
• April 4: After no response from CB, Central Pacific sends its March 21 letter to CB directors.
• April 15: Central Pacific tells CB it will go public with its offer to buy CB for $21 a share in cash and 1.9 shares of Central Pacific stock. CB is given until noon the next day to respond.
• April 16: Central Pacific announces the $285 million hostile takeover. CB's biggest stockholder lauds the deal — a 51 percent premium over CB's stock price that day, $46.38.
• April 17: CB shares surge to $66.86. Central Pacific chief Clint Arnoldus sparks war of words with bigger bank rivals, claiming they are less "local."
• April 22: CB management announces hiring of financial and legal advisers to review takeover bid, but says it will not rush to judgment.
• April 23: Ronald Migita, CB's chief executive, lashes out at Arnoldus' takeover effort, saying it is "not how we do business in Hawai'i."
• April 24: CB annual shareholders meeting barely covers Central Pacific offer.
• April 28: Central Pacific requests a CB shareholder vote to allow takeover to proceed, though anti-takeover provisions in CB corporate bylaws still make a merger far from certain.
• April 30: Central Pacific says it is "very comfortable" it has at least 25 percent of CB owner support. CB shareholder sues CB, claiming directors blocking bid. CB calls lawsuit "inappropriate."
• May 1: Arnoldus expresses regret for saying his bank is more local than rivals. CB sets special shareholders meeting for May 28.
• May 4: CB announces opposition to Central Pacific offer, saying it undervalues CB, will lead to at least 200 bank layoffs, reduce customer services and hurt Hawai'i's economy.
• May 5: CB declares it will disqualify the vote of it largest shareholder, which agreed to approve the merger, because Central Pacific solicited its vote too early. Central Pacific said the vote wasn't solicited and should count.
• May 6: A top CB stockholder publicly urges other stockholders to back the merger, and criticizes CB's rejection of the deal. Both banks, for shareholder consideration, issue proxy statements detailing their positions.
Sources: CB Bancshares, Central Pacific
