Takeover Defense: Anticipate, Move Fast
Plotkin, Ben A., American Banker
Small publicly traded community banks that want to remain independent must weather a nearly perfect storm of circumstances that are driving consolidation.
New Sarbanes-Oxley regulatory burdens, low interest rates, compressed margins, market saturation, and takeover prices 40% to 50% higher than market values are causing once reluctant sellers to reconsider. At the same time, potential buyers have the strong stock currencies and desire for growth that make acquisitions attractive again.
Professional activists seeking to maximize short-term shareholder value and larger banks looking to strengthen local market penetration are typically considered the biggest threats to the independence of a community bank or thrift. In fact, however, the biggest threat is disappointed and alienated shareholders.
Performance and management issues aside, the likeliest takeover targets have a highly concentrated shareholder base - a few individuals plus, perhaps, some institutions, including hedge funds and arbitrageurs.
The combination of consistent underperformance or undervaluation, short-term-oriented institutional shareholders, and individual investors who believe senior management or directors are self-interested or unresponsive makes for high takeover risk. And banks with capitalizations of less than $50 million and in concentrated markets with few sellers have additional reasons to expect an unsolicited approach.
Though most community banks seem dedicated to shareholder interests, many fail to take the steps necessary to reduce their vulnerability or strengthen their ability to withstand a takeover attempt. Too many directors would rather dodge bullets than make changes that would reduce the odds of an unsolicited tender offer or a proxy battle initiated by an activist shareholder.
Those steps are neither complex nor particularly innovative. In fact, they mirror some of the industry's best practices, which include:
* Run a numbers-driven business. Proactive shareholder communications programs and structural takeover defense mechanisms - staggered board tenures, supermajority vote requirements, and poison-pill plans - often prove to be of limited value if financial performance is poor or marginal.
Any business in which key metrics such as return on equity, earnings growth, and capital management are unhealthy is always a takeover target. With increased emphasis on corporate governance, bank directors now have a mandate to hold senior managers accountable for financial performance and to take appropriate steps if they do not measure up.
* Be visible and responsive to shareholders. Regardless of financial performance, large and small shareholders want to know that managers and directors have a focused and well-reasoned strategic plan, and that all activity is driven and measured by that plan.
Investors need to believe that their best interests are an ongoing priority. Managers who have not earned credibility and influence with investors, analysts, market makers, and other key constituents are unlikely to get their support in the heat of a takeover battle.
* Expect and prepare for ownership challenges. …