City Bank accepts $420M takeover bid

By Deborah Adamson
Advertiser Staff Writer

After a yearlong fight against a hostile takeover bid, the parent of City Bank changed course and said yesterday it has agreed to be bought by Central Pacific Financial Corp. for $420 million.

City Bank's Ronald K. Migita and Clint Arnoldus of Central Pacific Financial Corp. appeared pleased after announcing the merger of the two banks yesterday afternoon. Eugene Tanner • The Honolulu Advertiser

City Bank executives had fought Central Pacific's overtures, arguing that the buyout would limit competition and harm employees, customers and borrowers. City Bank organized sign-waving campaigns and ran advertisements opposing the deal. City Bank accused Central Pacific of aggressive business tactics not in keeping with "local style."

Asked what made City Bank change its mind, Ron Migita, president and chief executive of CB Bancshares, said the first offer of about $70 per share was "inadequate." The latest price "reflects the true value of the company."

Migita, during a news conference with Central Pacific CEO Clint Arnoldus, added, "This is just a fantastic combination that is only good for Hawai'i." CB Bancshares' board of directors are "100 percent behind this," he said.

As recently as last month, City Bank was still fighting Central Pacific's offer. But as both banks talked during the past three weeks, "our mutual comfort level ... and our trust had gotten to the point that we felt we could both proceed," Migita said.

"We met several times," said Arnoldus. "Ron was very receptive to hearing our side of things and very open minded and really was instrumental in this thing finally coming together. We can thank Ron for extending that olive branch."

The deal, which is subject to shareholder approval, is expected to close around the third quarter.

The offer that City Bank's board accepted would give its shareholders $20 in cash and 2.6752 shares of Central Pacific for each share they own.

The acquisition will create Hawai'i's fourth largest financial institution with combined assets of $4 billion with 45 branches on four islands and about 1,000 employees. It will command a 14 percent market share in deposits.

Arnoldus will keep his title at the combined company. Migita will become a nonexecutive chairman of the board, who will provide strategic guidance to management. Neal Kanda, Central Pacific's chief financial officer, will become the new president and chief operating officer while his counterpart at CB Bancshares, Dean Hirata, will assume the chief financial officer position at the new company.

Richard Lim, City Bank's president and chief operating officer, would be brought in to beef up the new company's mortgage banking business.

The merged bank will focus on serving the consumer and small to medium-sized businesses, Migita said. City Bank's strength in residential real estate would be complemented by Central Pacific's stronger focus on the commercial side.

Arnoldus said the new company will be going after market share growth, expand its offering of products and services and provide greater convenience to customers with a larger banking network.

"We're specially pleased to have reached this friendly merger agreement. What we're creating is a much stronger and much more versatile bank," he said.

Arnoldus repeated his commitment to no layoffs as a result of the merger. The company also pledged to open a new branch for any location that's closed because of overlap "subject to securing adequate locations." In addition, Central Pacific said it still plans to set aside $1 million for special community needs, which it did not immediately define.

Central Pacific shares fell by 7 percent to close at $25.15. City Bank shares rose 17 percent to $85.40.

"I was surprised they went from not liking each other to trying to do the deal," said Brett Rabatin, a banking analyst at Midwest Research in Nashville. "It's a good deal for CB Bancshares. It represents a relatively large home run for Central Pacific. Fortunately for them, it turned out friendly at the end."

Rabatin expressed reservations about how the two banks can achieve the projected cost savings without layoffs or branch closings. Central Pacific had set a goal of $19.5 million in annual savings. When companies merge, they can save money by consolidating departments — such as the two human resources departments — and laying off workers. Salaries usually represent one of the biggest portions of administrative expenses.

"It's not abundantly clear how they will get their savings," Rabatin said. But "Central Pacific historically has been highly efficient, and I'm sure they will find ways to save."

The analyst characterized the buyout offer as "fair to all parties involved," but noted that since it's a big acquisition for Central Pacific there could be some risks related to integrating the two companies. The $420 million deal is just a tad over the market value of Central Pacific itself.

Central Pacific spent $16 million in the past year pursuing City Bank, and City Bank spent about $8 million defending itself from the unwelcomed offer.

Also today, Central Pacific reported its first quarter earnings, saying it had a 7.7 percent decrease in net income to $7.9 million, or 48 cents a share. The bank said operating costs rose and margins were squeezed by the low interest rate environment. Revenue, however, rose by 2.1 percent to $26.6 million.

Central Pacific said the acquisition should "significantly" add to earnings in the first full year of combined operations.

"I'm very pleased for both companies, that they realized that one and one equals three," said Bruce Sherman, chief executive of Naples, Fla.-based Private Capital Management, which owns about 10 percent of each bank. "I'm pleased that the people who had such strong convictions against the deal were able to do the right thing for the Hawai'i economy and the right thing for shareholders. At the end of the day, cooler heads prevailed."

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