Code Name: Bison

Many employees first heard the news on drive-time radio, the morning of March 16, 2004, sandwiched between the weather report and debate over that controversial new Mel Gibson movie, The Passion of the Christ. Others caught wind only when they arrived at the office. Community First Bankshares, a 17-year-old bank holding company based in Fargo, North Dakota, had been soldu00e2u20ac”to a French company, no less.

At employee forums later that morning, Mark Anderson, Community First’s CEO since 2000, fielded questions about the company’s $1.2 billion cash sale to BancWest Corp., a Honolulu-based subsidiary of the French giant, BNP Paribas. Some workers were curious, others angry. Their lives had changed in what seemed to be a moment’s noticeu00e2u20ac”many for the worst. In Fargo alone, some 250 of 650 jobs were slated for elimination.

“I’d be lying if I said there weren’t some employees who took the news very poorly. They were saying, ‘My life is ruined!’ or ‘How can you do this to me?’ … We had to send some people home,” Anderson recalls.

What those employees and other observers didn’t know was how much time and effort Community First’s 11 directors had invested in the decision. An unusually experienced group, the board was chaired by a former insurance president and included entrepreneurs, a business professor, a former big-bank CEO and a retired securities lawyer, among others.

Over a tense six weeks prior to the announcement, board members agonized over pricing, coached their CEO through negotiations, battled suspicions about their investment bankers and fretted over the fates of employees and communitiesu00e2u20ac”all under a spy-like veil of secrecy.

In the end, the board unanimouslyu00e2u20ac”if a bit reluctantlyu00e2u20ac”approved the $32.25 per-share deal, reckoning it could be years, if ever, before Community First’s stock got to that level on its own. “The prospect of the merger wasn’t pleasant from an emotional standpoint. Being on the board had been a very satisfying experience, and I really felt I would be losing something personally,” says Patrick Delaney, a retired securities law partner at Lindquist & Vennum in Minneapolis and a director since Community First’s founding in 1987.

But the price, a 15% premium over where the shares had been trading, was valued at 16.5 times trailing earnings and a whopping 4.5 times tangible book valueu00e2u20ac”one of the highest such multiples on record. “Over the course of the negotiations,” Delaney says, “a conviction developed among the directors that this was the best thing we could do for the shareholders.”

This wasn’t Community First’s first flirtation with a sale, or even its first encounter with BancWest. The company was founded in 1987 by some former executives of the old First Bank System Inc. (now U.S. Bancorp), with a strategy rooted in acquiring small community banks in the Midwest and Rockies, and introducing big-bank lending limits and product offerings. The company rode the industry’s 1990s M&A boom, acquiring some 40 different banks and 50 insurance agencies as it grew into a $5.5 billion-asset banking company with 155 branches in 12 states.

Times began to change in 1999. Deal flow slowed and asking prices rose, meaning growth would become tougher to come by. And the sheer volume of stock deals in previous years had diluted Community First’s share base. Then Chairman and CEO Donald Mengedoth also was getting more involved with the American Bankers Association, and was kicking around leaving. (He eventually became ABA president and is now chairman of Millennium Bancorp in Edwards, Colorado).

Late that year, Mengedoth “came to the board and said he had had some discussions [about an acquisition] with BancWest, and it might not be a bad idea to think about the idea,” Delaney recalls. The chairman brought in Morgan Stanley & Co., the big investment bank, to help weigh strategic options and contacted six big financial institutions that seemed good fits for the company’s geography, including the likes of Wells Fargo & Co. and Zions Bancorp, to gauge their interest.

Despite serious discussions, no deal materialized. Nevertheless, simply considering the idea was an important mental exercise for a board that, until that point, had done little but purchase.

Over the next few years, Community First’s management focused internally, cutting expenses, buying back stock, and working to boost revenues via de novo expansion and insurance sales. Such moves didn’t have much effect on the bottom line: net income fell 5% in 2003, to $75 million, while EPS declined two cents, to $1.95; prospects for 2004 didn’t look much better. Even so, at an October 2003 meeting, the board formally reaffirmed its independence. “The company was not for sale,” says John Flittie, Community First’s nonexecutive chairman and a former president of ReliaStar Financial Corp., a Minneapolis insurer that has since been acquired by ING Groep, the Dutch financial services company.

That changed a few months later, in January 2004, when Anderson, a gregarious, hard-charging 45-year-old, received a cryptic phone call from two Morgan Stanley bankers, William Weiant and Greg Kennedy. “We have a company that wants to acquire Community First,” they told the CEO, refusing to reveal the proposed buyer’s identity. “I said, ‘Just how serious do you think this party is?’” Anderson recalls. Weiant’s response: “Have we ever called and said this before? This is a very serious, very legitimate potential partner.”

Two days later, the investment bankers met with Anderson, COO Ronald Strand, and CFO Craig Weiss in Fargo. Their presentation on the dealu00e2u20ac”code-named “Project Bison”u00e2u20ac”included outlines of the M&A environment, the operating environment, and Community First’s performance projections. That was followed by a valuation analysis and then, finally, the long-awaited identity of the suitor. “The first thing you want to know is if it’s a serious buyer,” Anderson says.

BancWest was indeed a serious buyer. It seemed the company’s French owner wanted to take advantage of good exchange rates and beef up its western U.S. franchise. CEO Donald McGrath saw the acquisition of Community First as a way to achieve those objectives and was prepared, he said, to pay a nice premium for it (a novelty in what had been a very slow M&A market).

While no price was given, the investment bankers indicated they expected a strong bid. Later that evening, Anderson called Flittie at his Arizona home and described what he had just heard. As he spoke, Flittie recalls thinking, “There goes my next six months.” To Anderson he said: “We have to be very thorough, because this is the time of ultimate risk for a board.”

“Your first response on something like this is very important,” Flittie says now. “If it’s, ‘The company isn’t for sale,’ and then the suitor decides to go public with the offer, you could have some unhappy shareholders and get sued.”

Flittie told Anderson to set up a meeting with McGrath. He also said not to tell anyone inside Community Firstu00e2u20ac”aside from the other two executivesu00e2u20ac”about the discussions. “You don’t want to disrupt the organization and distract employees with an early disclosure that might not be totally legitimate,” explains Darrell Knudson, a former CEO of Fourth Financial Corp. and one of a handful of directors told about BancWest’s interest at the time. Adds Delaney, the retired lawyer: “The fiduciary issue for the board is, if news of a potential deal leaks to the market, it could require a premature announcement.” That could either lead the bidder to abandon the bid, or put the company in playu00e2u20ac”neither a good scenario.

The next day, Flittie hired Doug Long, a partner with the Minneapolis law firm Faegre & Benson, as special counsel to the board. “During negotiations, management and the board have different interests,” explains Delaney. “You want someone involved whose sole concern is to tell the board how to behave and represent its interests.”
The board actually held a regularly scheduled meeting a few days later, but Flittie opted not to tell directors because so little was known. “We don’t want to talk about a hypothetical transaction, because nothing else will get done,” he told Anderson.

Around the same time, Anderson scheduled a meeting of managements with BancWest in Minneapolis for Feb. 13. “Had [the BancWest team] flown their corporate jet into Fargo, someone at the jet center would have known,” and word could have leaked out, he says.

Community First’s three managers had to concoct stories to explain their coincidental absences that dayu00e2u20ac”difficult, because an executive assistant maintained schedules for all three. Strand, the COO, let it be known he would be visiting his daughter in Minneapolis; Weiss took the day off to attend to family business, while Anderson said he “needed to meet with an investment banker”u00e2u20ac”not exactly a lie.

“It was awkward. You pride yourself on being open and honest with employees,” Anderson explains. “But every company in this position has to go through a little deception, and [Flittie] was adamant. When the chairman of the board says don’t tell anybody, that means don’t tell anybody.”

Weiss and Anderson rose early the morning of the 13th, and began their drive to Minneapolis. For most of the four-hour journey, they speculated over the cell phone with Strand on what had become a primary obsession: the price. The right offer, they knew, and their lives would change forever; if it was too low, life would go on as it had for the company. “We spent the whole trip speculating about what might happen,” Anderson recalls.

The previous week, Anderson had talked price with Flittie. Several valuation analyses employed by Morgan Stanley had pegged the price “above $30, and probably above $32, per share,” Anderson recalls. Still, no one could know for sure. “I said to John, ‘If it’s $28 to $30 per share, I don’t think we’d want to accept it,’ and he agreed, ‘But if it’s $32 to $35 [per share], I don’t know how the board could say no,’” Anderson recalls. That implied a “no-man’s land” price in the middleu00e2u20ac”$30 to $32u00e2u20ac”where it was difficult to predict how the board might, or should, respond.

In a small conference room at Le Meridien Hotel in downtown Minneapolis, the two sides spent two hours in a cautious give-and-take about strategies, geographies, and fit. McGrath liked Community First’s fee-income business, especially an insurance agency franchise that BancWest lacked. He also spent a lot of time “selling BancWest.”
As an active acquirer himself, Anderson understood the process. “The buyer’s orientation is to learn a couple more pieces of information and put your best foot forward,” he says. Anderson’s team, meanwhile, felt a blend of “curiosity and trepidation.” The conversation was progressing smoothly enough, “but in the back of our minds, we all were wondering, ‘Are you really interested? And at what level?’”

The answer came when McGrath asked Anderson to join him in a room next door for a “CEO-to-CEO” talk. “When you get a CEO-to-CEO discussion,” Anderson explains, “you know it will be serious.” McGrath wasted little time. “He said, ‘Mark, I’m a no-nonsense guy. We’ve done a lot of research on Community First, and we’re very interested in a partnership,’” Anderson recalls. “And he said, ‘I can tell you right now that we’re looking at a price of around $32 per share.’”

The CEOs rejoined the others a short while later, and the meeting quickly adjourned. As soon as the BancWest team left, Strand and Weiss asked what had happened. “They’re very interested in acquiring us, and [McGrath] threw out a number of $32 per share,” Anderson remembers telling them. “And both of them said, ‘The board has to look at this.’ There was a joint realization that this probably was going to happen.”

In the car headed back to Fargo, Anderson called to tell Flittie to begin letting the rest of the board know and to name a special committee to oversee the process. “We’ve got to orchestrate a clear strategy and make sure we’re protecting the interests of everyoneu00e2u20ac”shareholders, directors, and employees,” Flittie told Anderson.

The CEO made several other calls that night, including one to Knudson. The two agreed the price might be too good to ignore. They then ticked through a list of directors, guessing how each would react. Some, such as Harvey Wollman, a farmer and former South Dakota governor, might resist a sale for fear of community impact, they thought. “We wanted to be aware and anticipate the concerns of individual directors,” Anderson says.

Three days later, on Feb. 16, the board was briefed in a special telephonic meeting that also included Morgan Stanley, Long, and Steve Johnson, outside general counsel and a partner with Lindquist & Vennum. Flittie opened the meeting with an overview of the proposed deal, then introduced Long, who talked about the board’s fiduciary responsibilities: Insider transactions were prohibited from here on out, and while other stakeholdersu00e2u20ac”employees, customers, and communitiesu00e2u20ac”were important, shareholders’ interests should reign supreme.

Long also talked with directors about the value of discretion. “Every time the board got together, we started with a lengthy lecture about secrecy,” Flittie recalls. “If word got out that the company might be sold, it could cause all sorts of problems for the company and the board.” And then he walked them through “a hypothetical process to make sure they understood what needed to occur,” Anderson recalls.

After the lawyers, Anderson replayed in detail everything that had occurred to that point. Morgan Stanley wrapped up the meeting, giving its perspectives. Although some directors were eager to explore the board’s feeling on an offer, no voteu00e2u20ac”not even a straw pollu00e2u20ac”was taken. “We were setting the table and making sure everyone understood the process,” Anderson says.

The meeting closed with the board approving the formation of a five-member “strategy committee” of directors with M&A experience to actively assess the deal and advise Anderson. In addition to Flittie, Knudson, and Delaney, the committee would include Rahn Porter, CEO of a financial consulting firm called RPSS Enterprises and former executive vice president of corporate finance at U.S. West, (now Qwest), the Baby Bell, and Marilyn Seymann, CEO of M One, a bank consulting firm. “When you’re involved in something fast moving, and you have directors all over the map, having a special committee allows you to be more nimble,” Flittie explains.

Three nights later, on a snowy Sunday, Anderson was walking his dog when his cell phone rang. It was McGrath, confirming that he had talked with BNP and that they “were interested in moving forward at $32 per-share.” It was official.

The board and attorneys had spent time coaching Anderson on how he should respond: “Be very guarded, and don’t give him any indication of whether we think this is a good or bad deal.” And that’s what he did, telling McGrath merely that he’d discuss the offer with his board. Having Anderson, and not Flittie, as the point person for the negotiations “gave us some wiggle room,” the chairman explains. “Mark could say, ‘I’m not authorized by the board to talk about that,’ or ‘I have to talk with the board,’ and it bought us more time to consider what came next.”

In another telephonic board meeting the next night, most of the discussion centered on the price. A key question: “How long would it be before our shareholders could expect to see [a share price of] $32?” Knudson recalls. The query set off a wide-ranging review of the company’s operations and earnings expectations, as well as economic and interest rate outlooks. “Could we do better ourselves? Did we even need to sell?” Delaney remembers thinking.

Given the company’s recent makeover, some directors initially thought $32 wasn’t enough. “At first, I was hoping we could get $35 per share. Later, I thought we could ram it up to $33,” Delaney recalls. Others were more sanguine. At $28 per share, Community First’s stock already was trading at a premium to similar-sized banking companiesu00e2u20ac”something Knudson attributed to analysts’ beliefs that a buyer could emerge. Without that belief, he thought, the price might be more like $24. “If the market finds out there’s no prospect for a takeover, the share price is probably going to drop to that level,” he remembers thinking.

The investment bankers were adamant: Take the offer and run. Directors say Weiant and Kennedy argued the premium being offered was healthy when compared to Community First’s projected performance and the present market. “The board shouldn’t get too greedy,” Anderson recalls them saying.

Some of the board members appear to have bought this argument. Delaney says he “never suspected Morgan Stanley of any deception,” but thought the investment bankers were overly worried about jeopardizing the transaction with demands for a higher bid. “I thought there was an unseemly rush by them to get the deal done,” adds Flittie. “They were saying, ‘Take the $32.’ But several of the directors said, ‘Hold on here. Nobody ever puts their first offer on the table.’”

The debate reflected a common issue in the deal-making dance. Boards often are suspicious about the motives of their primary helpers, the investment bankers, because they get paid when a deal closes. “It’s the role and responsibility of the board to ask those questions,” Anderson says.

Community First’s board went so far as to obtain a written statement from Morgan Stanley detailing its relationship with BNP in Europe. “I have no way of knowing if it was accurate or not, but according to what they put on the paper, there was no conflict of interest,” Flittie says. Even so, some worried that investment bank might feed information to the BancWest side through its French back channel. “I’d be stupid to assume that might not happen,” Flittie says. “And sometimes it can be useful sending a message through back channels. We wanted them to know they weren’t dealing with some guys who had fallen off a sugar beet truck in Fargo.”

Ultimately, the board ignored Morgan Stanley’s advice, concluding that “we wouldn’t be acting in shareholders’ best interests if we just took the $32,” Flittie says. Anderson’s instructions this time: Tell McGrath the board is taking the offer seriously, but wants more money. Think of the conversation as “playing poker,” they told the CEO. “Don’t give them a hard number, but indicate that if they were north of $33, it would probably move the process along.”
On the phone later that day, an uncomfortable Anderson told McGrath “the board likes the basic idea, but I’m not sure it will approve your current offer.” The BancWest CEO pressed for more specifics, and when Anderson balked, he said: “C’mon Mark. You were involved in that conversation. Give me some idea. Are we talking 25 cents? 50 cents? A buck? Two bucks?” Anderson recalls. “I said, ‘If I was to hypothesize without telling you a number, my sense is that [if it were] north of $33, the board would give it good consideration. But I didn’t say that, OK?’”

It took only a day for McGrath to respond. He told Anderson he had talked with his bosses in Paris, “and I’ll tell you right now, $33 per share isn’t in the cards. So if that’s what you need, let’s part company now,” Anderson recalls. “However, as a show of good faith to get this done, we’ll add 25 cents to the offer. After that, it’s a dry well.”
When the strategy committee convened by phone later that day, the mood was resolute. The pot had been sweetened to $32.25 per shareu00e2u20ac”not as much as they’d hoped, but still an attractive figure. Directors discussed pressing for more, but this time decided calling McGrath’s bluff wouldn’t be wise.

The next morning, Feb. 24, Anderson called McGrath to say that, subject to the full board’s approval, the price was right. The deal was on. Almost immediately, the lawyers began negotiating a draft merger agreement. And on March 2u00e2u20ac”less than three weeks after Anderson had first talked with McGrath about a possible dealu00e2u20ac”a formal “confidentiality and standstill agreement” was inked, barring BancWest from trading in Community First’s stock or disclosing any of the information it would see in due diligence.

Scheduling the due diligence proved tricky. To this point, only four people other than the boardu00e2u20ac”the three original executives and Community First’s in-house counsel who sat in on the board meetingsu00e2u20ac”knew of the deal. The number was about to rise to about 10, as the heads of credit, human resources, technology, investments, and insurance sales were brought in. Each was warned of the dangers of insider trading and sworn to secrecy.
To keep other employees in the dark, misdirection was required. The bean counters needed to review more than 400 credit files housed in local bank branches. To get them, managers were told that a “securities transaction”u00e2u20ac”implied to be a capital raising ventureu00e2u20ac”was in the works.

BancWest had to be careful as well, given Fargo’s small size and closeness. Its 30-person team arrived “on about 15 different flights scattered over three days,” Anderson recalls, and the site of the due diligenceu00e2u20ac”an entire conference room floor at the Fargo Radissonu00e2u20ac”was rented under the name “American Call Centers.”

Despite the subterfuge, some employees began to suspect something was up. There were a lot of closed-door meetings and unexplained absences. Several noticed Anderson’s caru00e2u20ac”a flashy Infiniti FX45 with an easily spotted designer plate that read “CFBX,” Community First’s ticker symbolu00e2u20ac”parked at the hotel, and wondered why. “In retrospect, I should have rented a car,” he says. Many thought Community First was preparing for a big purchase itself.

While that was going on, McGrath and Flittie met near the chairman’s home in Scottsdale. Flittie wanted to address some of the “social issues”u00e2u20ac”particularly the fate of some senior executives. Directors wanted to set the table for the next stages in those executives’ careers, but also didn’t want BancWest to get ahead of itself. Already, “they were trying to win some of the hearts and minds over to their side,” with promises of jobs before the deal was completed. “I let him know I didn’t like how they were communicating new roles to our employees,” Flittie recalls.

Beyond that, Flittie says he still wasn’t comfortable “dealing with the French,” and “wanted to look [McGrath] in the eyeu00e2u20ac”measure his desire and how much he could be trustedu00e2u20ac”and be absolutely sure they were serious about the deal.

“If you start putting something like this together, and it goes public, and then falls apart … Well, you’re already pregnant. It puts you in play.” Like Anderson, he was ultimately swayed by McGrath’s straight-shooting style. “He said he was getting pressure from Paris to increase the footprint in the western U.S. … It was a pretty convincing story.”
Due diligence wrapped up March 7 with no surprises. That was a relief, because oftentimes, a deal can be scuttled, or a price reduced, if the buyer discovers credit issues, lawsuits, or other negative factors during the process. Some loose ends remained, including the exact wording of the merger agreement. While the lawyers and investment bankers worked through those issues, Anderson’s team began prepping for a formal announcement, and the fallout that was bound to occur.

On March 8, top investor relations and public relations executives were let in on the secret. “They needed time to prepare the communications process,” Anderson explains. “You have shareholders, communities, employees who all are going to be affected.” Two days before the formal announcement, division presidents got the news. And a day before, market and branch managers were told. “We wanted the senior-most person in each location to know, so they could explain to employees what was happening,” Anderson says.

On March 15, Community First’s board met via phone for the last time to approve the deal. The mood was somber, but resolute; the final vote unanimous in favor of the transaction. The meeting took less than an hour.

The transaction was announced at 12:01 a.m. Fargo time on March 16, to coincide with the opening of the European markets. Anderson stayed on as CEO until Halloween night, when the deal closed. He and Weiss were offered jobs with BancWest in California, but passed. (Strand retired.) Today, they’re running a new Fargo-based company, BlackRidge Financial Inc. The firm recently raised $25 million, and Anderson hopes to duplicate Community First’s old strategy, buying small banks in the upper Midwest and growing them with big-bank products and lending limits.

As for the board members, they don’t see each other much anymore, but take pride in having done their jobs well under pressure. “All of us were surprised that we all of a sudden were faced with this decision. But we had good leadership and good counsel, and we followed a good, disciplined process,” Delaney says. “You only sell a company once, and we wanted to make sure we did things right.” By all accounts, they did. |BD|

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