The Decision To Sell

If you wanted fireworks, this promised to be the place. Indeed, most of the folks in Cohoes, New York thought the November 30 annual meeting of Cohoes Bancorp was certain to be the nastiest corporate event in town history. “I expected a real donnybrook,” says Michael Crotty, a local business leader and one of the thrift`s outside directors. There was ample reason to expect the worst. Since announcing a planned $87 million merger of equals with nearby Hudson River Bancorp in April, the Cohoes board had been at the vortex of a particularly brutal proxy fight. Before it was finished, the tumult engulfed a dozen banks, three proxy solicitors, and uncounted numbers of investment banks, law firms, and shareholders. Along the way, the directors had been sued for alleged breaches of fiduciary responsibility and found their judgment and diligence questioned publicly by investors and analysts. In August, they watched in disbelief as a raucous crowd of shareholders narrowly rejected what they believed to be a well-crafted merger with Hudson. Worse, they had seen their thrift fall squarely into the crosshairs of two hostile suitors, both of which had seized upon a moment of ostensible vulnerability to launch unsolicited takeover bids. The board had stuck together through it all, refusing to talk with those local bidders, even though the short-term payout for shareholders was far greater than what had been contemplated by the merger. But the battle had become much more pitched than anyone had expected, and now the board itself was in those same crosshairs. Prior to the November meeting, one of the hostile suitors, Trustco Bank Corp. of nearby Schenectady, New York, had proposed its own slate to oppose the company`s four directo#r nomineesu00e2u20ac”a bid that, given the intensity of feelings swirling around the thrift, seemed to have about even odds of winning. So it was with a palpable sense of relief that the thrift`s shareholders and directors gathered at the Cohoes Community Center for what turned out to be a most civil occasion. Aside from a few questions about taxes and valuations, the most daunting query posed to the board concerned the lack of refreshments. But no one was complaining. Under the gun to satisfy shareholders and hold its suitors at bay, Cohoes had announced six days earlier that it had agreed to be acquired by, not merge with, Hudson. The $158 million cash deal was similar in many respects to the proposed merger that had launched the thrift board`s ordeal seven months earlier, except that it provided a far bigger short-term payout for investors. The costs included the company`s identity, its CEO`s job, and any potential long-term accretion for shareholders. A few days later, Trustco withdrew its rival slate of nominees, claiming satisfaction with the board`s action, but also vowing to keep close tabs on the new company, and, perhaps, return in the future.

Observers say the monthslong battle of Cohoesu00e2u20ac”colored as it was with heavy doses of shareholder activism, multiple bids, and proxy fightsu00e2u20ac”illustrates the Darwinian struggle that is certain to become more commonplace as industry consolidation reaches a new, more vicious era. Cohoes converted to public ownership in January 1999, and immediately directors were facing the question that haunts many banks and thrifts in an age dominated by heightened competition, aggressive institutional shareholders, and merger activity: Acquire or be acquired? “Right after going public, we confronted the issue: Do we seek to expand and become acquirers? Or do we just sit around and wait for the world to come and buy us out?” says Cohoes CEO Harry Robinson. “The whole premise of everything we`ve done since then is that you have to do one or the otheru00e2u20ac”you have to grow in some way, or your franchise will slowly be whittled away to nothing.” Cohoes` board took a few initial stabs at playing the acquirer, but was thwarted. In the end, it tried the next best thing: a merger of equals with a friendly institution. But even that couldn`t get by a shareholder base that virtually overnight was populated by large institutions smelling blood. “This was a board that tried to pick its acquirer without talking to other [potential buyers],” says Thomas Long, executive vice president for proxy solicitor D.F. King & Co. “In today`s environment, that`s a mistake, because … the first person you talk with isn`t always the one who can pay the most for the asset.” Adds Kevin Timmons, an analyst with First Albany Corp.: “The lesson for directors here is that if they pursue their own friendly deal, and they can`t convince shareholders to approve it, then [they`re] essentially left open to hostile action. And when that happens, the results usually aren`t pretty.” For the Cohoes directors, the ordeal has been both troubling and educational. By their own admission, they were unprepared for the scrutiny and backbiting that accompanied the thrift`s short-lived foray into the realms of public ownership and M&A. With the apparent end to their time in the hot seat, they now say they are pleased with the results, if a bit saddened that their 150-year-old institution will be no more. They`ve learned plenty about the power of big institutional investors to, in the words of one board member, “hijack the process.” They`ve also gained a greater appreciation for the importance of good advice, effective shareholder communications, and remaining unified in the face of opposition. But the directors also assert that they upheld their fiduciary responsibilities, and say there`s nothing they would have done differently. While the results appear to bear out that sense of satisfaction, most observers give the board only passing marks and say there`s plenty for directors of other financial institutions to glean from the Cohoes board`s experience during its protracted battle against hostile suitors. As in other parts of the country, banks and thrifts in upstate New York are struggling for growth.

They`re losing deposits to mutual funds, brokerages, and other financial institutions, sometimes at alarming rates, and are seeing increased margin pressure on the loans they do make. Matters are made worse by a slowing economy. “The area`s not booming. They haven`t had much growth in earning assets and you can only squeeze costs so much,” explains Claus Hirsch, an analyst for Corinthian Partners, a New York money manager. “So how are they going to grow? There`s really no other way but to buy someone.” In the past two years, even as the M&A market for banks in general has slowed nationally, several local banks and thrifts have fallen victim to consolidation, reducing the number of potential acquisition targets even as many banks hunger to expand. Cohoes` board and management had been watching the industry`s evolution, and their own fragmented market, warily. A decidedly traditional thrift operation, with 60% of its loan portfolio in one-to-four-family real estate loans and another 30% in multifamily and commercial real estate, the company has a strong local following. Indeed, one of its most popular programs is an old-style thrift throwback “school banking club” that attracts deposits from nearly 30,000 area students. After long deliberation, the directors determined that the capital afforded by going public was the best way to assure long-term survival. Even before the conversion was completed, Cohoes struck a deal to acquire Schenectady Federal Savings & Loan, a small, four-branch outfit about 15 miles northwest of its own hometown. The transaction, however, was squelched before it got off the ground, after regulators concluded that falling valuations made it too risky to approve, and Cohoes was forced to pay a $2 million breakup fee. Undaunted, the thrift continued to troll the waters for a good partner. Keefe, Bruyette & Woods, underwriter of the IPO, kept its eyes open, while CEO Robinson, a long-time player in the region, plied his local contacts. One of those was Carl Florio, CEO of Hudson River, a $1.2 billion thrift based in Hudson, New York. Hudson had converted to public ownership only a few months before Cohoes did, and, somewhat ironically, had wound up purchasing Schenectady Federal. More important, the men who ran the two companies were friends. They were active in Community Bankers of New York, a thrift trade group, and ran into each other regularly around town.

Slowly, over the course of nearly a year, the friendly banter began to take the shape of a deal. Michael Crotty, a director since 1986 and president of Capitol Equipment Co. in Mechanicville, New York, recalls Robinson briefing Cohoes directors at a bankers convention in Palm Springs, California, late in 1999. “It was imminent,” he remembers. “It was a beautiful strategic and geographic fit. Everyone was very excited about itu00e2u20ac”on both sides.” In late April, Cohoes and Hudson River announced a merger that would create a $1.9 billion institution with 38 branches and deposit shares of more than 5% in three counties. In a conference call, Robinson said the combined company would be a dominant player in the area, with a strong platform from which to pursue both retail and commercial lending growth. True to its tag, the deal boasted many equalities. The resulting 12-member board would include six directors from each sideu00e2u20ac”a balance that would remain intact for six years following the merger. Robinson would serve as chairman and CEO for the first three years, while Floriou00e2u20ac”president during the initial stageu00e2u20ac”would become CEO after three years. Other top management positions would be split similarly between the two sides. But some shareholders were less than impressed.

The terms called for Cohoes investors to receive 1.185 shares of Hudson stock for each share of Cohoes, or about $11u00e2u20ac”a modest 12.5% premium over Cohoes` share price on the announce date. To seal the dealu00e2u20ac”and discourage outside suitors from seeking to break up the dealu00e2u20ac”the two companies exchanged so-called “lock-up” stock options, allowing them to purchase up to 19.9% of each other`s common stock at discounted prices. Timmons says, in theory, the merger could have been good. Both institutions were overcapitalized, he notes, and the lack of physical overlap between the franchisesu00e2u20ac”they operated in neighboring marketsu00e2u20ac”provided the potential for sales growth and back-office consolidation. But Timmons also believes the deal was doomed for several reasons. To start with, the projected cost savingsu00e2u20ac”$3.6 millionu00e2u20ac”were too small to excite investors. (The partners later raised their cost savings estimates to $5.5 million.) Some also criticized the pay packages for senior managers and directors. Under the deal, Robinson would receive a six-year contract with an annual salary of $460,000, 45,816 stock options, and 71,188 shares. Florio, likewise, would get $460,000 a year, with a $3 million payout if he was not named CEO by the third anniversary of the merger. Cohoes directors would get 7,490 stock options and 9,083 shares of restricted stock each, and annual board fees of $31,500. Most notably, according to Scott Valentin, an analyst for Friedman, Billings & Ramsey, the deal valued Cohoes at just 73% of book value, and would have given Cohoes shareholders a 38% interest in the combined institution. “Most of the benefit [from the merger] seemed to be going to Hudson`s shareholders, at the expense of Cohoes investors,” Timmons says. Florio concedes the deal was a good one for Hudson shareholders, and could be viewed as less favorable for Cohoes`. “We were paying less than $1 for $1 of book value,” he says. But he also argues that analysts and investors failed to take into account more than $2 million in “negative goodwill” that the pricing would allow the new company to amortize into earnings over the next 15 years. “The value going forward,” he says, “wasn`t in the exchange ratio. It was the synergies that the two companies would have. There was accretion for everybody.” Perhaps understandably, a pair of rival banks found the deal less to their liking. On June 8, about six weeks after the merger was announced, Trustco approached both Cohoes and Hudson with simultaneous stock-based buyout offers that it clearly believed were too good to ignore, offering $122 million, or about $16 a share, for Cohoes, and $250 million, roughly $14 per share, for Hudson. “They [Cohoes and Hudson River] had put together a deal that didn`t seem fair to Cohoes shareholders,” says William Terry, a Trustco vice president. “We saw an opportunity to build our franchise at a price that would have been much fairer to those shareholders.” Two weeks later, another suitor, Ambanc Holdings Co., the Amsterdam, New York-based holding company for Mohawk Community Bank, bid $15.25 per share in cash for Cohoes. Ambanc`s bid was rooted in some of the same considerationsu00e2u20ac”with an added irony. Cohoes was negotiating to buy Ambanc when the final deal was struck with Hudson. After announcing the merger, Robinson and Crotty both say, Ambanc acted like a jilted lover. “We were told by their representative that unless we agreed to buy them immediately, and with a significant increase in the price we had been discussing, they would do everything in their power to see that our merger was not completed,” Robinson says. Ambanc CEO John Lisicki did not respond to numerous messages seeking comment, but D.F. King`s Long, who represented Ambanc in the proxy battle, says he never heard those sentiments. For Cohoes, the Trustco offer was particularly unnerving. A commercial bank, $2.4 billion Trustco boasts one of the industry`s top efficiency ratios, and under CEO Robert McCormick, has earned a reputation as an efficient cost cutter. Robinson says he considered the possibility that Trustco might enter the fray when the merger with Hudson was announced. Florio takes that a step further: “The very first night we met with legal counsel, we spent a good hour talking specifically about Trustco,” he recalls. It made sense. Trustco, as the largest locally owned institution, had the most to lose from the increased competition that a bigger thrift could provide. Moreover, Florio concedes that the pricing left the door open to a challenge. “If it were me and two local banks were going to merge at a price I thought I could beatu00e2u20ac”I certainly would pay book valueu00e2u20ac”I would have been interested, too,” he says. But Crotty says most of the outside directors were caught off guard. “It was never considered by any of us.” Opinions on the emerging situation ran the gamut. John Pritchard, executive director of the Independent Bankers Association of New York, openly backed Trustco`s offer, calling Cohoes and Hudson “mediocre” organizations. “As an investor, you must be suspect of average companies pairing,” he told reporters. Analysts like Timmons took a more even-handed approach. The conflict, he noted, reflected two starkly different possibilities for shareholders: The Cohoes/Hudson transaction could create a strong competitor and see valuations soar with time; the bids by Trustco and Ambanc, on the other hand, would provide better short-term payouts. Robinson, backed by his directors, rejected both offers without negotiating.

Robinson says Trustco`s stock, which trades at nearly four times book value, is overvalued and illiquid. He also says selling at a time of depressed bank valuations would be a mistake. “The numbers they talked about were a joke,” Crotty says. “We weren`t going to let them steal the bank.” Florio says he talked with Trustco but never formally brought their proposals to Hudson`s board. The bids “were done purely to stop our deal from happening,” he asserts. “And they thought that if they could create enough confusion, they might just steal the bank.” Terry calls such speculation “nonsense,” and says Trustco was truly interested in buying both thrifts at a fair price. Those close to the situation suggest that personalities, too, played a role in the decisions. It was clear that neither Robinson nor Florio liked Trustco`s McCormick, according to Ram Kumar, an analyst for Institutional Shareholder Services (ISS), which twice issued recommendations opposed to the Cohoes board`s stances. One observer says it would be hard to blame Robinson. McCormick “is much more shrewd and aggressive than the thrift guys, and you could tell by his demeanor that he was on a mission and would do whatever it took to achieve his objective,” he says. “You couldn`t blame a small bank for not wanting to be paired with him.” This is where questions about the Cohoes board`s performance arise. When social issues risk poisoning a potentially lucrative deal, Kumar says, independent directors must step in and take the reins from management. He believes that an independent committee, comprised completely of outside directors, should have been established to assess offers objectively. “Outside directors need to be willing to assert themselves into the process, or even take the lead, if it looks like management has conflicts that might keep it from being totally objective in evaluating the best way to maximize shareholder value,” Kumar explains. “Most directors are keeping their eyes on shareholder value,” states Ron Janis, attorney with Pitney Hardin, Kipp and Szuch. “The board has to make an educated decision about whether the value will go up over time. It doesn`t have to do with how much the board gets, or how much the CEOs are going to get. It has to do with their vision.” Robinson maintains his board was committed to getting the best deal for shareholders. “You have a fiduciary responsibility to get the most that you reasonably can for your shareholders,” he says. “If you feel that you have a better business plan that would deliver more value … than what is being offered, you have a fiduciary responsibility to turn that offer down.” The thrifts` refusal to negotiate raised the ire of not only Trustco and Ambanc, but also some of the institutional investors that had jumped into the stock after the battle began. Some analysts began openly questioning where the directors` loyalties lay. “When a company receives two separate offers, each [at] a significant premium over the value of the pending transaction, there exists a strong obligation to explore what may be a promising market for the company,” Kumar wrote in a report. He called it “unsupportable … to reject multiple superior bids in knee-jerk fashion or out of rigid allegiance to the previously negotiated deal.” But Janis explains that mergers of equals are a complicated beast. Basically, he says, you have “contracted away your ability to look at competing offers until the shareholders take a vote.” Moreover, he says, “directors have no obligation to take the company out for the highest bid, when they have chosen a strategic alternative. If the board has decided that the transaction is a good one, there is no breach of its fiduciary duty.” But practically speaking, says Janis, if someone comes along with a higher case bid, then “you`re not going to make the vote.” By July, Trustco turned up the heat, launching hostile tender offers to shareholders of both Cohoes and Hudson, making the same offers to shareholders it had earlier proposed to the boards. Ambanc followed suit on its Cohoes bid, but raised the cash offer to $16.50 per share. Trustco also launched a public relations offensive that, with hindsight, Cohoes directors admit they underestimated. In a full-page letter in local newspapers, McCormick portrayed Trustco`s efforts as a good-faith effort to preserve local ownership in a community barraged by out-of-market acquirers. Trustco was motivated by “a bedrock belief that this area needs a strong, locally owned and managed bank,” McCormick`s letter stated. “Banks headquartered in distant cities do not, indeed cannot, put our interests first. We can, and do.” To further their causes, both Trustco and Ambanc began rallying shareholders to vote against the pending merger. In the weeks that followed, shareholdersu00e2u20ac”many of them local depositors who had cashed in on the conversionu00e2u20ac”were bombarded by proxy solicitors representing the various interests. In the run-up to the merger vote, Trustco spent $35,000 plus expenses on Georgeson Shareholder Communications` proxy expertise. Ambanc paid $20,000 to D.F. King, while Cohoes and Hudson paid $75,000 and expenses to Regan & Associates. Cohoes shareholders received no less than seven color-coded proxy forms, and a deluge of phone calls. As one anonymous shareholder told the Times Union in Albany: “There are phone calls urging me to send in the white proxy, or to send in the green and gold proxy.

One call, even, from a Trustco vice president. “I have never before,” she said, “felt so loved by so many people.” Members of Cohoes` 11-member boardu00e2u20ac”a collection of Realtors, funeral directors, accountants, and local business leadersu00e2u20ac”felt the heat, too. As they went about their daily business, local shareholders would pepper them with questions. “We were all getting pressure from friends who were stockholders,” Crotty recalls. “They were confused. They were saying, `What`s Trustco saying here? Why aren`t you talking with them?` “We`d say that we didn`t feel Trustco`s offer was legitimate,” he adds. “And if they wanted to discuss the numbers, you could show them. We had a very valuable property here. Why give it away?” The vote, scheduled initially for July, was delayed until August 17. That day, some 300 shareholders packed the Cohoes Community Center to decide the company`s fate. Directors entered the hall confident the merger would be approved. But at a short board meeting beforehand, they were told the odds of losing looked better than 50-50. “We didn`t have any idea it was going as poorly as it was until right before the meeting,” Crotty recalls. Glumly, the directors filed in to face investors. Some institutional holdersu00e2u20ac”they controlled about 25% of the shares nowu00e2u20ac”argued in favor of scuttling the merger and selling out. McCormick and Lisicki both made presentations. McCormick began his remarks by addressing “future Trustco shareholders”u00e2u20ac”a statement that incensed some Cohoes directorsu00e2u20ac”and ended with a vow to win his battle. Local shareholders had tough questions of their own: Why not consider the Trustco offer? Why were Robinson and Florio set to receive such big compensation packages? “I was frankly surprised at the sophistication of the questions,” Long says. “These people had read the materials, done their homework, and came prepared. They were concerned about their investments.” In the end, while Hudson shareholders, meeting 40 miles south, approved the merger, only 47.5% of Cohoes shares supported the deal.

Robinson blames big-money investors and the two rival banks for “confusing the issue for shareholders.” But Long, who has witnessed many proxy battles, thinks the shareholders knew what they were doing. “Normally in these situations, if you have a good story to tellu00e2u20ac”even if there`s a better bid out thereu00e2u20ac”you can make a case to your local shareholders and they`ll stick with you,” Long says. “What happened here was that those local shareholders, to some degree, abandoned management. They lost their confidence in the management team.” Trustco`s Terry agrees. “Shareholders analyzed the work done by management and the directors and … weren`t satisfied. They spoke up, and it`s heartwarming to see that.” It was, in retrospect, the low point for Cohoes` board. They met the following Sunday to decide, in Robinson`s words, whether to “circle the wagons or sell.” The conclusion wasn`t hard to reach. “We realized that the local shopowner on Main Street didn`t own the bank anymore, and we had to own up to it,” Crotty says. “The message of that meeting was: Sell the bank. It was disappointing. But this is a businessu00e2u20ac”it`s about big portfolio managers making moneyu00e2u20ac”and to ignore it would have been wrong.” As a first step, the company announced it would begin repurchasing up to 10% of its shares. Trustco and Ambanc left their tender offers hanging. But while Trustco officials publicly asserted that now was the time for Cohoes to “sit down and negotiate” with them, that clearly wasn`t going to happen. The Cohoes board had adopted a new stance: open the door to all comers in pursuit of the best price.

KBW was once again enlisted to help in the process. The investment bank began soliciting bids from other banks. Most, unsurprisingly, were familiar with the situation, and many opted to participate. With each, Cohoes demanded that a confidentiality agreement be signed. Within weeks, 10 banks were perusing Cohoes` books. Although the names haven`t been made public, those close to the negotiations say the bidders included Charter One Financial Inc. of Cleveland, M&T Bank Corp. from Buffalo, and Banknorth Group of Portland, Maine, all of which have entered the region in recent years. Trustco and Ambanc kept their tender offers in place. But the Cohoes directors had effectively seized control of the process. The two hostile suitors were invited to participate in the bidding, but with a twist: not only would they need to ensure confidentiality; they`d also need to agree that if negotiations broke down, they would not pursue any further hostile actionsu00e2u20ac”a so-called “standstill agreement.” Both companies balked. “If you assume that we were serious about acquiring the bank, then it wouldn`t be smart to sign some standstill agreement that would preclude us from finishing what we started,” Trustco`s Terry says. Given the recent history, the two institutions “had every right to be leery” of a process that would allow Cohoes to tell them to drop their efforts, Kumar adds. “It was looking an awful lot like Cohoes didn`t want to sell to them under any circumstances.” Instead, the suitors changed their tactics. On October 2, Trustco boosted its tender bids for both companies, offering $18 in stock and cash for Cohoes, and $17 for Hudson. A short while later, both Trustco and Ambanc launched separate efforts to seat four directors on the Cohoes board at the company`s November meeting. Trustco argued that its proxy battle was highly warranted. Its latest bid was 84% greater than what the since-aborted merger agreement offered, yet the Cohoes board hadn`t even negotiated, aside from the standstill offer. “Eventually someone in our position has to bring enough pressure on the board to look at things in a businesslike way,” Trustco`s Terry says. “One way to do that is by putting some friendly folks on the board.” ISS backed Trustco`s slate. “The failure of the incumbent directors to step forward and play their proper, productive role in the sale of the company is clear evidence of the need for change,” Kumar wrote. At about the same time, Ambancu00e2u20ac”owner of about 4% of Cohoes outstanding sharesu00e2u20ac”dropped both its proxy battle and tender offer in early November. “Because we fully expect that the Trustco nominees will act in the best interests of all shareholders, we are withdrawing our nominees and … intend to vote for Trustco`s,” Lisicki said in a statement. The Cohoes directors insist they were confident of their ability to win the proxy contest. But privately, they also say the uncertainty created more pressure to strike a deal, preferably before the meeting. Still, most observers were surprisedu00e2u20ac”pleasantly sou00e2u20ac”when a second deal with Hudson was announced on November 24. The cash transaction valued Cohoes shares at $19.50. Trustco quickly withdrew both its director slate and tender offer, and took out another newspaper advertisementu00e2u20ac”this one congratulating its “fellow Cohoes shareholders.” Robinson, however, sounded simply resigned. “Shareholders told us at that August meeting that they wanted a sale. They wanted a higher dollar figure, and they didn`t want any swapping of stock. So that`s what we gave them,” he shrugs. “In the short term, the terms [of the latter deal] look better. But if you look at the long term … The jury will be out until some point in the future. We think we`ve got a very good business plan, and those investors will not see any accretion unless they buy stock [in Hudson].” Looking back, the principals say the battle for Cohoes offers some valuable lessons about the responsibilities of directors in a contentious takeover battle. Hudson`s Florio stresses the importance of staying the course on what you know to be right. “Make decisions based on facts and the advice of your consultants,” he says, “and don`t worry about what other people say.” Trustco`s Terry says it`s a sign of the times that investors took an active interest in the board`s decision. “This board was called to account by shareholders who thought [it wasn`t] paying attention to shareholder value.” To Crotty, it was clear that the board`s constituency and responsibilities expanded as the battle raged. “We had stockholders all over the country and we had to look out for their interests,” he explains. “A lot of people were calling those [investors] `barbarians at the gate.` But they`re just business people trying to make a profit. Once you get involved in something like this, your responsibilities change.” He adds that the value of good advisors in such situations cannot be overstated. In the last days, KBW put together booklets on each offer, filled with hard numbers that acted as road maps to understanding the pros and cons. “You need to pay the money to get good help,” Crotty says. As for Robinson, he`ll serve on the new Hudson board, but will no longer have an operational position. He, too, recommends that banks faced with an institution-changing decision seek outside advice. “Once you`ve gone through something like this, it`s easy to look back and say, `I wish I would have known this or that beforehand,` ” he explains. “Are there little decisions that we would do over? Sure. When you lose by 2% of the vote [on the merger proposal], you can look at every small decision,” Robinson adds. “But we got an excellent price for the bank, and that`s what`s really important. In the end you always want to go out a winner, and I think we`ve done that.

Join OUr Community

Bank Director’s annual Bank Services Membership Program combines Bank Director’s extensive online library of director training materials, conferences, our quarterly publication, and access to FinXTech Connect.

Become a Member

Our commitment to those leaders who believe a strong board makes a strong bank never wavers.