Thrust Meets Parry in Detroit-Area Takeover Battle: Michigan National Eludes Comerica by Selling Stake to Friend, Adopting Shareholder Rights Plan
DETROIT -- Until recently, Michigan National Corp. appeared vulnerable to unfriendly takeover efforts by rival Comerica Inc. But after a series of moves, including two antitakeover measures, the road to a Comerica merger began to look more steep and narrow.
Michigan National is the third largest bank holding company in the state, with almost $7 billion in assets. The Bloomfield Hills-based company agreed to sell 14.9% of its common stock, or about two million shares, to friendly buyers and adopted a shareholder rights plan that seeks to make itself too expensive for Comerica.
"We have made a very clear statement to Comerica and any other hostile takeover artists that we are not for sale," said Robert J. Mylod, who was appointed chairman of Michigan National in January, in a telephone interview.
The $9.6 billion-asset Comerica, the state's second largest bank holding company, said that in response to Michigan National's latest moves it withdrew its offer and would go back to the drawing board for a new proposal. However, Comerica said it would also ask the Federal Reserve Board to continue reviewing its application to merge with Michigan National.
Comerica chairman Donald R. Mandich lambasted Michigan National's use of a so-called "poison pill," saying that it unprecedented in banking history. At a board meeting, the said that Michigan National has "now resorted to extreme measures that are widely discredited in the financial and business community."
The measures are designed in part to derail Comerica's plans. The transaction involves the sale of 4.9% in common stock, or 657,000 newly issued shares, to Marine Midland Banks Inc., Buffalo, N.Y., for about $20 million, and the sale of another 9.9%, or 1.3 million mewly issued shares, to the new Michigan National Employee Stock Ownership Plan.
The result is that as much as 35% of Michigan National's outstanding stock of 13.2 million shares -- which includes the two million new shares -- will be in the hands of current and former employees, and another 4.9% will be held by the friendly Marine Midland. Before the transaction, employee trusts held 28%.
The Marine Midland agreement also includes warrants to allow it to buy 10% of Michigan National's stock when interstate banking is permitted, but not more than 15% of Michigan National's shares until 1992.
On the surface, Michigan National's stock sale would make any bid for control much more difficult. To achieve the full benefits of consolidating the two organizations, Comerica would need to acquire 100% of the stock.
The other defensive move may prove even more effective in deterring unwanted takeovers. Michigan National also adopted what Mr. Mylod called a "sleeping pill" to insure that it has a few years to improve its earnings performance and increase its stock value to take advantage of emerging interstate banking.
The shareholder rights plan gives Michigan National shareholders three options to insure that they receive $45 a share -- 15% above the highest price that Comerica's application said that it could afford, which was $39 a share. The options include rights to buy one-tenth of a share of a new preferred share and to buy any acquirer's stock at a discounted price.
The agreement comes into play if a company acquires 20% of Michigan National's stock or makes a tender offer for 30%.
In addition, if a company acquires a majority of Michigan National's stock, shareholders have a right to buy the preferred stock at a discount.
Mr. Mandich said that Comerica's legal staff is reviewing the shareholders rights plan for a possible court challenge.
It's clear that Michigan National's latest moves may have been planned early this year. In January, Michigan National turned the voting of the shares in its employee trusts over to individual employees. At an April annual meeting, the company received approval to issue 20 million shares instead of 16 million. It also instituted several antitakeover measures, including a 75% voting requirement on such actions as eliminating directors.
The timing has taken some of the wind out of Comerica's sails. Comerica had been gaining momentum after state and federal regulators commented favorably two weeks ago on its Fed application to move ahead with a merger.
In comments to the Federal Reserve Board, the Michigan Financial Institutions Bureau commissioner heartily endorsed Comerica's merger plan, and the U.S. Comptroller of the Currency said it would allow the merger to proceed if certain conditions were met.
Comerica asked regulators in the application to consider the combination of the two big banking companies in the context of a market shared not just by commercial banks but by thrifts, out-of-state banks, and nonbank competitors. Comerica already has arranged the sale of three bank subsidiaries that might create market concentration problems if they were held on to.
Banking observers here have been betting that the Federal Reserve, which has the final say, would give its Blessing to the application. Comerica's chances for approval may or may not be better because of the fact that Martha Seger, the new Fed governor, was formerly a Comerica director and also was an economist at a firm that Comerica recently acquired -- Bank of the Commonwealth, Detroit.
A Fed decision could come as early as July 22 -- the expiration date for the Fed's 60-day evaluation period -- but is not expected until August.
Mr. Mylod isn't fazed by the regulators' positive response to the application. "The shareholders will be the final arbiter," he said.
Last January, Comerica's original stock swap offer looked a lot better than it does now. That was before takeover speculation and improved Michigan National financial performance pushed Michigan National's stock price over $31 a share.
For example, in January, the offer to exchange Michigan National's shares for .72 of Comerica's stock had a value of about $26.50 a share, above Michigan National's selling price of less than $20 a share and significantly higher than the $11.50 a share the stock was fetching in the third quarter of 1984. The transaction had a value of about $340 million in January.
Currently, the stock swap has a value of about $31 a share, based on Comerica's current selling price of $43 a share. Michigan National's stock plunged $2.75 a share, to $28.75, after Michigan National announced its defensive moves last week.
Michigan National's Mr. Mylod has characterized Comerica's stock swap offer as "insultingly low" and maintains that shareholders would never buy it because Michigan National has great untapped earnings potential. Michigan National directors have twice rejected the bid.
"In my opinion, this organization has a value that exceeds [Comerica's offer] by a significant margin," Mr. Mylod said. "Furthermore, if they were to pay what it's worth, it would create real problems on their balance sheet. That's why I don't think this merger is going to take place."
Mr. Mylod points to several recent mergers nationwide of retail banks that have produced prices of at least 1.4 times book value per share. With Michigan National's current book value at about $30 a share, that translates to something more than $40 a share -- accounting for the $45 value insured in the shareholder rights plan.
Meanwhile, Mr. Mandich said flatly that "Michigan National is not worth $45 a share" and that Comerica will reformulate its offer, possibly downward.
"We will continue to seek an acquisition of Michigan National, but at a price adjusted from what we would have proposed before directors of Michigan National devalued their own company with this action," he said.
Michigan National's recent defensive actions were only the latest in a nasty six-month takeover battle that has been marked by accusations, lawsuits, and countersuits. The fight has established new rules for the otherwise gentlemanly game of Michigan bank mergers.
The high-stakes battle has all the elements of an episode of television's "Dallas." Michigan National has charged in a suit that Comerica has teamed up with Stanford C. Stoddard, Michigan National's former chairman, in a scheme to take control of Michigan National.
Mr. Stoddard, the son of Michigan National's founder, was an autocratic, entrepreneurial-minded, and at times cantankerous banker who stretched and tested banking law to build Michigan's first statewide banking organization and its most innovative consumer banking company.
Mr. Stoddard was forced out of Michigan National a year ago amidst internal and regulatory investigations into his unauthorized use of bank resources. He agreed early this year to repay the bank $282,000 for his use of bank employees and materials for work at his two homes and at numerous Mormon churches around the state. Close associates say that Mr. Stoddard has always been a man of integrity but was never able to make the transition from running a family-owned business to presiding over a publicly traded multibank holding company.
Court documents showed that Mr. Stoddard, perhaps bitter over his dismissal, had been working with some unnamed Detroit businessmen to try to make a bid for Michigan National, but that apparently he was unable to come up with the financing. Documents also sait that Mr. Stoddard had talked with Comerica at least a dozen times to discuss selling his 6.8% interest in Michigan National.
Mr. Stoddard had also talked about receiving a directorship at Comerica after the merger and possibly buying Michigan National bank subsidiaries that would have to be divested. Comerica, at the request of the Comptroller of the Currency, has since disassociated itself from Mr. Stoddard and pledged that he would not be nominated as a director or hired as an employee in the combined company.
Battle over Pontiac State
This isn't the first time a bank merger turned into a brawl in Michigan. In the state's precedent-setting Pontiac State Bank case, what began as a friendly offer turned into an 18-month contest between Comerica, NBD Bancorp, and several investor groups for control of Pontiac State. Detroit's NBD was finally declared the victor in January 1984, but Comerica is still contesting the transaction in the courts.
Most observers were shocked that Comerica and NBD went after medium-sized Pontiac State, then the state's 14th largest bank located in the attractive suburban Detroit/Oakland County market. "What surprised me was the ferocity of the bidding competition," said Eugene W. Kuthy, commissioner of the Michigan Financial Institutions Bureau.
The Stakes are much higher for Michigan National, which, despite recent earnings problems, has been one of the most successful banking companies in the state. Since its founding in 1941, Michigan National has become the premier consumer-retail bank in the state with more than 337 offices all over Michigan, with a network of more than 650 automated teller machines, and with a credit card portfolio of more than a million cardholders.
Because of emerging interstate banking and the dramatic changes in the financial services business, Comerica's pursuit of Michigan National didn't surprise the local banking industry.
Comerica, like many banking companies nationwide, is preparing itself for interstate banking. Mr. Mandich, who heads a strong expansion-minded management team at Comerica, is considered the architect of the company's transition from the old archconservative Detroit Bank & Trust to an aggressive innovative institution.
Banks that "take an honest look at themselves and come up with strategies that are not just convenient or self-serving" will be sorted out in the next five to eight years, Mr. Mandich said in a recent interview.
In round numbers, Mr. Mandich believes that regional banks will have to be about $15 billion in asset size in order to survive.
He said that the regional banks that survive and prosper will be set apart by their ability to achieve economies of scale in their operations and by their forward-thinking management. Quite simply, that means reaching a proper size to offset rising overhead costs. Comerica believes that it can reach that level at about $12 billion.
As an indication of its strategy, Comerica was the only Michigan banking company to apply to open limited-service or nonbank banks. NBD and Manufacturers National Corp., also of Detroit, each applied only to expand their Florida trust offices to become nonbank banks.
Michigan National's Attraction
Comerica believes a merger with Michigan National makes a lot of sense. "They have some excellent strengths in areas that we don't -- for example, in the credit card business," Mr. Mandich said. "Their branch system is greatly complementary to ours, and they have a very strong position in the commercial middle market in parts of Michigan that we don't have."
Comerica is trying to beat the merger rush that doubtless will accompany regional interstate banking. Michigan still doesn't have a regional reciprocal law, although one is pending. Indiana and Ohio are the only neighboring states that have passed such legislation.
"It would be in the best interest of the region to have a Michigan-based institution with the critical mass and financial strength necessary to compete effectively in the forthcoming era of interstate banking," Mr. Mandich said.
"You can't say categorically that no one could acquire you, but I think it's harder to swallow a whale than a minnow," he said.
On the positive side for Michigan National, Comerica's unrelenting pursuit of the company for the past six months has paved the way for Mr. Mylod's efforts to reshape and fortify the bank holding company.
Ironically, Comerica's offer to merge through an exchange of stock arrived at Michigan National the same day -- January 16 -- as Mr. Mylod. Since he became chairman, Comerica's offer seemed to divert employees' attention from the unpleasantness of Mr. Mylod's mission to clean up the troubled banking company. That effort includes the kind of management reorganization and operation cutbacks that typically accompany such changes in command.
In Mr. Mylod's case, that meant tampering with the distinctive corporate culture built over a dozen years by Mr. Stoddard.
As Michigan National announced its strong antitakeover measures, secretaries in the small Bloomfield Hills headquarters wore "Nomerica" buttons. Ebullient executives then distributed white T-shirts with the same inscription.
"Michigan National has been an innovative organization in the state and in the country. That's what attracted me to it and to the chance to run my own show," Mr. Mylod said.
In view of the added pressure of Comerica's unfriendly merger proposal, he admitted: "The challenge I saw for myself turned out to be tougher than I expected."
Michigan National is a company on the rebound after two years of earnings problems, related primarily to more than $200 million in loans from the defunct Penn Square National Bank in Oklahoma City.
After he rolled up his sleeves and dug into Michigan National, Mr. Mylod found an organization that had miserable relations with regulators, haphazard financial controls, and lingering loan problems. To the company's credit, he was surprised by the fine quality of managers and struck by the company's underlying potential.
Mr. Mylod shuffled existing management and brought in four senior executives, whom he considered specialists in finance and in regulatory compliance.
After his arrival, Mr. Mylod immediately sought rapprochement with federal banking regulators, who had been viewed as adversaries under Mr. Stoddard's regime. Michigan National made enemies of regulators because of all its testing and stretching of banking regulation in order to expand services.
Mr. Mylod said better relations with regulators is critical because of Michigan National's efforts to improve the conditions at several of its 23 bank subsidiaries. Progress already had been made, he said, because two of Michigan National's 11 banks that have been monitored by regulators have been cleared and more are expected.
Michigan National's earnings are also growing at a healthy clip. Net income for the second quarter was $8.9 million, up 70% over the $5.2 million report for the same period of 1984.
And executives also are taking a hard look at Michigan National's aggressive consumer bankin operations -- it's bread-and-butter business -- to trim overhead.
"We can no longer try to be all things to all people," said Mr. Mylod.
Mr. Mylod said that before Michigan National welcomes takeover offers, he's trying to buy time to get the company back on its feet. It will only be then that Michigan National can negotiate from a position of strength, he added, to get the kind of premium that the shareholders deserve.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Thrust Meets Parry in Detroit-Area Takeover Battle: Michigan National Eludes Comerica by Selling Stake to Friend, Adopting Shareholder Rights Plan. Contributors: Not available. Magazine title: American Banker. Volume: 150. Publication date: July 24, 1985. Page number: 16+. © 2009 SourceMedia, Inc. COPYRIGHT 1985 Gale Group.
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