Follow Up: Defending Their Turf

Judging by its recent performance, it might be hard to believe that Dime Bancorp spent most of the past year embroiled in a bitter takeover battle with crosstown rival North Fork Bancorp. And that`s just the way CEO Lawrence Toal wants it to be.The $25.7 billion Manhattan thrift generated record annual operating earnings of $273.7 million in 2000, while share prices spiked as high as $30 in January, from a low just 11 months earlier of $115u00c2u00bc16u00e2u20ac”all proof, Toal asserts, that Dime`s efforts to become more like a commercial bank are paying dividends.The numbers also appear to vindicate the resistance that Toal and his board mounted against North Fork`s $1.9 billion hostile bid. Indeed, while North Fork shares closed on Jan. 24 at $24, up a healthy 52% over their closing price on March 3, 2000, the last trading day before the company`s bid for Dime was launched, Dime`s shares stood at $275u00c2u00bc8, a 113% rise during the same time period.That said, questions remain about the Dime directors` handling of the tussle. As a story in last quarter`s Bank Director noted, some shareholders and analysts have openly criticized the board for not giving North Fork`s offer greater consideration. They`ve also questioned the use of several controversial procedural tactics, including a “tin parachute” severance package that would pay employees as much as $43 million if the thrift was sold, and the sale of a large block of equity to keep its rival at bay. The battle was rooted in Dime`s ill-fated merger agreement with Mahwah, New Jersey-based Hudson United Bancorp. announced in September 1999. Investors didn`t like the deal, driving Dime`s share price down some 40% in the ensuing months.Last March, Melville, New York-based North Fork, owner of nearly 700,000 Dime shares, launched a tender offer that, at the time, represented a 41% premium to the implied value of the Hudson deal. North Fork CEO John Kanas lambasted the proposed merger as “an ill-conceived deal built on the egosu00e2u20ac” and for the benefitu00e2u20ac”of Dime management and directors with zero benefit for shareholders.” Toal, who had 18 months earlier discussed a possible merger with Kanas, immediately rejected the offer, calling North Fork the “wrong buyer” offering the “wrong price” at the “wrong time” and setting off a months-long battle. Before it was finished, the Hudson deal was off and Dime had a new chairman, Anthony Terracciano, and a new majority shareholder, Warburg Pincus Equity Partners LP, which invested $238 million for stock and warrants worth as much as 22% of the company. Perhaps worse, 70% of the shareholder votes cast at last July`s annual meeting supported withholding authority from the directorsu00e2u20ac”an apparent vote of no confidence that Charles Elson, director of the corporate governance center at the University of Delaware, called “a disaster for the board.” Dime seated the five directors up for election anyway. But in November, a Delaware court ruled that those directorsu00e2u20ac”Toal includedu00e2u20ac”were not elected. Dime is appealing the ruling, but if it stands, those seats, along with six others, will be on the ballot later this year. Significantly, however, shareholders never did tender enough shares to facilitate a North Fork takeoveru00e2u20ac”Kanas dropped his tender offer in Septemberu00e2u20ac”and Dime has retained its independence. Last fall, in large part due to the pressure applied by the hostile overture, Dime instituted a tough cost-cutting program that aims to slash $50 million in annual expenses from the rolls. Now Toal is chanting the mantra of performance, performance, performance to anyone who will listen, and investors are paying heed. On a late-January afternoon, an upbeat Toalu00e2u20ac”fresh off a shining performance at a Salomon Smith Barney investor conference at New York`s Plaza Hotel a day earlieru00e2u20ac”talked with Bank Director about the lessons he and his board have learned from the North Fork battle and where Dime goes from here. What follows is an edited transcript of that conversation.

Bank Director: Your stock has taken off since the North Fork offer died. What do you attribute that to?

Lawrence Toal:

Well, there`s never a single factor. But certainly one of the important things that we`re communicating to our shareholders is performance. The feedback I`m getting from our investors is that they like the strategy, they like the execution of the strategy, and they have confidence in the management team. And, of course, they`re very happy about the performance of the stock.

Dime`s stock was suffering when North Fork launched its tender offer. Do lower valuations leave an institution more vulnerable to a hostile action? And how does a board need to prepare to handle an unsolicited offer?

Hostile offers are quite rare, in general, and particularly in the banking industry. There are two primary reasons for that: They`re very difficult to do, and they have a low probability of success. It`s also much more difficult to integrate two companies brought together in a hostile deal. Quite frankly, the battle is a little bit easier if it`s a lowball offer, which North Fork`s was. This offer was 14% dilutive to Dime shareholders at a price-to-earnings ratio of 7.5%. It was not an attractive offer.I would say the primary defense, therefore, is performance. The bank needs to be performing soundly and consistently, as was the case here.And then I think that, as a normal part of contingency planning, you need to have a well-thought-out and -developed plan to respond to such situations. Your board needs to be informed and familiar with the strategy and details of the businesses. And it`s important to have a team of internal and external resourcesu00e2u20ac”including lawyers and investment bankersu00e2u20ac”ready to respond to any situation that might arise. That`s just smart preparation for any bank.

As the battle wore on, you made some controversial moves, such as the severance parachute and the Warburg Pincus equity play. Some touchy social-issue terms, such as “ego” and “entrenchment,” seemed to dominate the public discussion. Do you think those things confused shareholders during your battle?

With any hostile offer, there are a lot of claims and counterclaims, and part of the methodology by the hostile bidder is really to create confusion in the minds of the shareholders. Words like “ego” and “entrenchment” are provocative, but they`re often a function of a public-relations regime more than anything else. Those terms make for good copy and good sound bites, but what`s really important as far as we`re concerned is focusing on the performance of the bank and the creation of sustained shareholder value.

So do you think that shareholders can get confused by all the noise?

It`s always a challenge to communicate when there`s noise around. Shareholders are hearing competing things. So I think it`s incumbent upon us, as an institution, to talk about the deal at hand and not get sidetracked by some of these terms that get tossed around. The key determinants are really price and risk. The Dime shareholders determined through their actions that the North Fork offer, as they took into account that risk, was inadequate. That`s the important point. So it`s necessary to communicate clearly, and it`s necessary to reemphasize your own performance and strategy and to tell your story. That`s exactly what we did.

Did you feel in the heat of the battle that your message was getting out effectively?

Yes, I did. And I think we got through to our shareholder base. Witness the fact that only 18% of the shareholders at any time during the whole six-month period actually tendered their shares to North Fork. The other important thing is that, when you have the noise of a hostile offer it`s very, very important to retain people. So you`re communicating not only with the shareholders, you`re also communicating to your employees. One of the reasons we put in the so-called “tin parachute” severance package was really to ensure that the staff felt comfortable and reassured, because our first priority is to keep performing, keep putting points up on the board, and you need good people to do that. Actually, the tin parachute, which is a technique that is often used, was very effective in this instance. It cost us nothing, but it was very important to reassure the staff. The fact that we were able to continue to perform for all four quarters of last year, despite a difficult interest rate environment, and despite a hostile offer, is something I`m very proud of. We were not diverted from our principal strategy and from our objective of creating shareholder value.

North Fork owned nearly 700,000 shares of your stock prior to launching its bid. When another bank takes a position in your stock, is that in any way a signal that trouble may lie ahead?

Not necessarily. I`d say that it`s fairly common for banks to make investments in other banks. Many banks do that. If someone takes a large position, in the 5% range or so, that may be a cause for some interest. But for instance, North Fork owned about a half-percent of our shares. Something like that is fairly normal.

Can you talk a little about the deliberation process the board went through in considering the North Fork offer, and specifically clarify why you thought that North Fork was the “wrong buyer” at the “wrong time?”

Let me say that the board was very careful and very deliberate in its consideration of this offer. And in the course of considering the offer by North Forku00e2u20ac”a bank that we knew quite a bit about, by the way, because we had had merger discussions with them some 18 months prioru00e2u20ac”the board looked at, and valued the opinions of, two of the top firms on Wall Street (Credit Suisse First Boston and Merrill Lynch & Co.) to assist in its deliberations of fairness, and in fact received unfairness opinions from each of those institutions. This was an offer that was well below any comparable deals in the marketplace, and it really attempted to opportunistically take advantage of a low point in our stock that came as we approached the consummation of a merger with Hudson. So we looked at price, which our financial advisers confirmed to us that they believed was inadequate. We looked at comparable transactions. North Fork`s offer, at seven times P/E, compared poorly with the average at the time of about 23.8 times current earnings for similar transactions. And it was 14% dilutive to our shareholders on the day it was offered, even though it was a premium over market. We also looked at the integration risk. We are seven times larger than any other acquisition that North Fork has made, and three times larger than all of the acquisitions North Fork had made up to that point. So there was great integration risk, as we viewed it. And a hostile offer really exacerbates that integration risk, because there`s more difficulty retaining staff. We also looked at currency risk. That was very important to our shareholders, because they would wind up with that currency [North Fork stock], and we had questions about North Fork`s ability to meet its stated projections. And in fact, North Fork has now missed three consecutive quarters on its earnings consensus.

The shareholders supported the break-up of the Hudson deal, but they didn`t tender enough shares to North Fork. Then they withheld authority from the five directors who were up for re-election at the annual meeting. Corporate governance gurus are having a field day with this event as a case study for shareholder rights. In your opinion, when is it appropriate to be in conflict with a majority of shareholders?

Well, it`s really pretty much a legal issue. And so my answer is based, in part, on what our lawyers have said. But a board has a fiduciary duty to do what it believes is in the best interests of the company and its shareholders. And it`s required to make a decision after “careful and disinterested consideration” of all relevant factors. So in my opinion, a board is abdicating its responsibility if it simply polls its shareholders on each decision and abides by that vote.

Meaning, as some observers assert, that you would have chaos if you allowed shareholders to micromanage a company`s affairs?

Well, certainly from the board`s point of view, fiduciary responsibility goes deeper than simply polling the shareholders. That doesn`t mean the views of the shareholders are not important. And what I think is important is a demonstration of what the Dime shareholders really wanted. As I mentioned, Dime shareholders voted with only 18% accepting the tender offer. So they did let us know what they thought.

How do you interpret the Delaware court ruling on the withhold authority vote, which invalidated last summer`s seating of the five directors?

Well, that`s a case that`s on appeal, so I don`t want to, in particular, comment on it. I can just tell you that the lawsuit itself, or the outcome of that lawsuit, doesn`t change the kind of things we do. We`re going to continue to pursue our strategy. Our obligation is to perform to the best of our ability. So in that sense, the lawsuit does not impact that in any way.

If the ruling stands, you`ll have 11 directors up for election at the next annual meeting. Does that leave you in any way feeling vulnerable?

I don`t think it really does. Based on the conversations we`re having with shareholders, they`re very happy with the performance. And at the end of the day, it`s performance that really counts. So we know what we have to do. We have to continue to perform. We`re comfortable doing that. We`ve demonstrated that our strategy works, because we`ve been implementing it for the past four years and have had consistently increasing quarterly earnings per share.

If you were a North Fork shareholder, how would you be feeling right now?

Well, first of all, I`m not a North Fork shareholder, just for the record. And we`re not worried about what North Fork shareholders do, or what they`re thinking, or how they should be feeling. But I do worry about the Dime shareholders and what they`re thinking and what their objectives are. If I were a North Fork shareholder, I guess I`d have some concerns about why a bank used its shareholders` money to launch a hostile bid which had a low probability of success. And I`d also be concerned about the fact that the bank has missed three quarters in a row of the consensus estimates.

What does the future hold for Dime? Are you confident that your resistance to the North Fork offer will be further vindicated?

Certainly when you look at where we are, versus where we were at the time of the offer, and the relative values of the two companies, we have outperformed the banking index and we`ve outperformed North Fork. We`re selling at a premiumu00e2u20ac”a significant premiumu00e2u20ac”over the offer North Fork made. I think that`s a good vindication of the fact that the board conducted a very thorough investigation of the offer and made the right decision

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