North Fork`s Fight for Dime

It`s been described as one of the most bizarre and acrimonious takeover battles in recent banking history; a complex chess match of shifting strategies, puzzling alliances, and “tin parachutes.” Egos and ambitious personal agendas played outsized roles on both sides. Yet as costly and high-profile as the struggle has been, the principals claim not to have even discussed the matter on the phone. This fight was characterized by a flurry of name calling, proxies, press releases, and lawsuits. North Fork Bancorp.`s hostile $1.9 billion stock-and-cash bid for Manhattan-based Dime Bancorp Inc., launched in March, was rooted in the same notions that have fueled much of the industry`s consolidationu00e2u20ac”an undervalued stock and uncertain business plan, presenting the chance for an opportunistic suitor to build its franchise. The offer was spurred by Dime`s 1999 agreement to merge with Hudson United Bancorporationu00e2u20ac”a deal which North Fork, owner of nearly 700,000 shares of Dime, viewed as highly dilutive. Over time, the story has transcended the world of mere M&A, becoming in many people`s eyes a cautionary tale of corporate governance. While the merits of North Fork`s proposalu00e2u20ac”and the estimated $10 million in shareholder money it spent pursuing a bid that was ultimately pulledu00e2u20ac”are subject to debate, most of the questions center around the Dime board`s role, or perceived lack of it, in the events of the past year. Dime directors rejected what some analysts say was an attractive North Fork bid one day after it was announced, and observers say there is little indication that it was seriously considered. The board consistently supported CEO Lawrence Toal`s assertion that Long Island-based North Fork was the wrong buyer offering the wrong price at the wrong time. Dime, with $25.3 billion in assets, is much larger than North Fork at $16 billion. Those directors have been subsequently berated by investors, many of whom charge that the board breached its fiduciary responsibility, both in not negotiating with North Fork, and in subsequent moves that seemed to reduce shareholder voices to a whisper while preserving their own positions. In July, five directors were turned out by shareholders ostensibly in a “withhold authority” vote, yet they retain their seats today. “It`s been a travesty of corporate governance,” says Jeffrey Gendell, portfolio manager for Tontine Partners, an institutional investor that has owned about 1 million Dime shares for nine years. “What we`ve learned here is that boards can stomp all over shareholder rights. They can sit on bona fide offers and ignore them; they can get away with anything if they want to.” Dime officials did not return calls for this story. But Toal has said throughout that Dime`s board, which includes attorneys, accountants, business leaders, and a former bank superintendent, has played its role well, upholding its fiduciary responsibilities in rejecting a bid that was never good enough to merit the attention some investors demanded. Legal and corporate governance experts say that a board has a right to not negotiate on unsolicited offers. No matter how it`s sliced, observers say the eight-month tussle carries some poignant lessons for bank directors who must guide their institutions at a time of investor frustration with lagging share prices and the opening of what could be a new, more vicious round of consolidation.While investors such as Gendell have played the role of agitators often in recent years, shareholder angst over Dime appears to have gone beyond a handful of activists. In votes on the Hudson merger, and later on the withhold authority action against five Dime directors, fully 70% of the shares represented were opposed to the management position. If investors are more willing to revolt against bank boards, it`s understandable. After several years of soaring valuations, the bank and thrift universe has been stuck in the doldrums. Through September, the Standard & Poor`s index of 30 large bank stocks was down fractionally for the year. Much of this is beyond the control of any board. Higher interest rates have slashed spreads on the asset side, even as competition from mutual funds and brokerages continues to sap low-cost deposits. To many bankers, acquisitions look like the best way to escape the morass. “There`s a saying in this market that the only way to grow deposits is to either pay ridiculous CD rates or acquire someone,” says Sal DiMartino, a thrift analyst for Advest Inc. These days, that`s easier said than done. Over the past decade, consolidation has cut the number of banks by a third. Many of those deals were accretive, at least on paper, fueling the big run-up in bank stocks of the mid- and late-90s. But now most of the weakest targets have been eliminated. At the same time, the currency of acquirers isn`t what it used to be. One consequence, analysts say, is that hostile takeover attempts, once a rarity among banks, are likely to become more prevalent. Another is that negotiated deals are receiving closer investor scrutinyu00e2u20ac”even from traditionally passive shareholders who, empowered by information from the Web and other media, seem less willing to allow boards to make the big decisions unilaterally.When they arise, hostile situations can be muddied even more if the managements don`t get alongu00e2u20ac”something that was clearly the case here. Although Dime and North Fork discussed merging in 1998, the negotiations broke down over competing philosophies and who would run the companyu00e2u20ac”Toal or North Fork CEO John Kanas. Observers say that, despite protestations on both sides, the experience fostered hard feelings that linger to this day. Some implications of operating in this new environment seem clear. More than ever, directors must be knowledgeable about their institution`s operations and business plans. They must not be afraid to challenge management on the fine points of potential deals. They also must be able to justify to shareholders in clear terms the reasoning behind an acquisitionu00e2u20ac”or their opposition to oneu00e2u20ac”or risk bearing their wrath. Dime`s board presented a unified opposition to North Fork`s bid from the day it was announcedu00e2u20ac”and in the long-term, it`s stance may very well pay off: As this story went to press, share prices had risen by nearly 80% from the day North Fork made its offer. But the board has been sued twice, and it spent much of the summer being castigated by shareholders in the press and at public forums for lacking both diligence and financial exposure in the institution they oversee. Some investors assert that the combination of two strong franchises in the New York metropolitan area would make a formidable earnings machine. Others say that opening negotiations with North Fork would have encouraged other bidders with deeper pockets to make bids of their own. Many of the details of the Dime board`s deliberations are unknown, so it`s impossible to draw specific conclusions about its behavior. But the reaction of investors and other observers to North Fork`s controversial bid raises some broader thorny questions about the role of a board when tackling an unanticipated institution-changing proposition. How much board diligence is required before a negotiated deal is struck? Are directors obligated to negotiate with a hostile suitor when shareholders demand it? Or are they within their rights to reject a deal outright if the valuationsu00e2u20ac”or other, more “social” factors, such as personalities or cultureu00e2u20ac”make it appear unpalatable? If the latter is the case, how far can a board go in using procedural and legal tactics to dodge an offer? And what are the rules when shareholders become so enraged that they try to strip a board of its power? Dime`s merger with Mahwah, N.J.-based Hudsonu00e2u20ac”the ostensible trigger for the ensuing North Fork battleu00e2u20ac”was announced last September, just after North Fork had finished acquiring 690,900 shares of Dime stock at prices between $19 and $21. Kanas, who has made a habit of taking “stake-out” positions in vulnerable thrifts, characterizes the purchases as a simple investment. Toal boasted that the merger with Hudson would create a “top-tier regional bank,” with $32 billion in assets and branches in four states. More significantly, it would give Dime the look and feel of a bank while diluting the impact of a struggling national mortgage operation. “Very simply, this is the right transaction at the right time,” said Toal at the time, who would be the new company`s CEO until retirement in 2002. Kanas thought differently, calling the deal “a horrible surprise; an ill-conceived deal built on the egosu00e2u20ac”and for the benefitu00e2u20ac”of Dime management and directors with zero benefit for shareholders.” Many investors and analysts agreed with the assessment. Kevin Timmons, an analyst with First Albany Corp., says that the merger would have generated about 40% earnings-per-share accretion for Hudson shareholders, but it was only a break-even proposition for Dime`s. “It was clear that the financial benefits were going almost wholly to the shareholders of Hudson, not Dime,” he says. Timmons calls Toal`s rationaleu00e2u20ac”that Dime would get better treatment from shareholders because banks trade at higher price-to-earnings ratiosu00e2u20ac””a real leap of theory. I don`t think that by acquiring a bank you suddenly get a bank multiple, but that was how they justified it.” Investors clearly didn`t buy it. The company`s share price plummeted to as low as $115u00c2u00bc16 by late February, from around $20 the day the deal was announced. “If you`re a director entering a merger, then you`d better be well prepared to defend why you`re doing it,” Timmons says. “If you`re doing a deal where the other side is getting most of the tangible benefits, and you`re betting on a soft issueu00e2u20ac”in this case, `banks get a higher P/E than thrifts`u00e2u20ac”you may face a lot of resistance from shareholders.” In Melville, Kanas seethed. Over five months, North Fork`s paper losses on the Dime investment mounted to more than $6 million. By February, he began prepping his own board for a bid, while seeking to line up financing. After considering a loan or private investment, Kanas cut an unconventional deal with FleetBoston Financial Corp. CEO Terrance Murray: Fleet would invest $250 million and get 7% of the combined company if a deal was completed. North Fork also would sell Fleet 17 Dime branches with about $2 billion in deposits. In exchange, Fleet would agree not to make an offer for Dime or Hudson United until the end of 2001. “The theory was that we eliminated a potential competitor who could easily outbid us and got capital for a little cushion of security,” Kanas says. North Fork also got help from Fleet in analyzing Dime`s mortgage operations. Irv Cherashore, a North Fork director and co-owner of the Winchester Group, a New York money management firm, recalls being called to North Fork`s offices on a wintry Sunday morning to discuss a potential bid. Kanas presented various scenariosu00e2u20ac””what`s the best thing that could happen, and worst”- while encouraging the board to raise questions and offer advice. “Our board needed to understand the implications of what we were about to do,” Kanas recalls. There was a debate about strategies and pricing, and some questioned spending millions on an effort with only an outside chance of success. But the directors, who have come to respect Kanas`s instincts, ultimately backed the offer. “From day one, John always held out the possibility that we could spend a lot of time and money and come up empty,” Cherashore recalls. “The odds were never much better than 50/50. But the stakes were pretty damn high, so it was worth it.” In making his bid, Kanas sought to go over the Dime board`s head to shareholders with a tender offer that, on the day it was announced, represented a 41% premium to the implied value of the Hudson deal: 0.9302 shares of North Fork stock and $2, or about $17, for each Dime share. In a sharply worded release a day later, Toal announced that Dime`s board had unanimously rejected the offer as a “1980s-style hostile bust-up attempt” that was dilutive and inadequate for Dime shareholders. As proof, Dime offered earnings-per-share projections of $2.66 for a standalone Dime, and $2.67 for Dime-Hudson, versus only $2.26 for a Dime-North Fork combination. Its assessment was backed by opinions from financial advisers Credit Suisse First Boston and Merrill Lynch & Co. A merger, Toal said, would be a “step backward” for the thrift.But many Dime shareholders seemed to like the idea, and Kanas got a quick boost from Institutional Shareholder Services, which came out in support of the North Fork offer and questioned the Dime board`s fiduciary oversight. The ISS report noted that, in striking the Hudson deal, directors hadn`t contacted other potential bidders to gauge interestu00e2u20ac”something that could have impacted the pricing. “In this context, the arrival of a substantially higher bid than implied by the Hudson transaction … should compel the board and shareholders to consider whether there are superior alternatives.” The report also stated that, while Toal asserted that North Fork`s bid was given full consideration, he also “told us that the company is not for sale at this time.” Dime`s board rejected the recommendation, saying that ISS had “not realized the innumerable risks inherent in North Fork`s proposal.” Dime`s directors resisted all attempts by Kanas to get them to the negotiating table. Were the Dime directors justified in their stance? No objective observer can answer with any certainty, and opinions on the matter vary. “What`s upsetting is that it appeared from the beginning that Dime`s board gave little consideration to what looked like a very legitimate offer,” Timmons says. He, like many of the analysts and investors interviewed for this story, suspects that Dime`s board was focused on retaining independence. “While the outsiders` view may be incorrect, when you reject out of hand as inadequate an offer that is 40% higher than what you`ve got on the table, it makes the board look like it`s not fulfilling its fiduciary responsibilities.”But DiMartino notes that, while North Fork`s offer looked better for shareholders at the time than the Hudson deal, it was priced at only 7.5 times Dime`s earnings, a level that many observers would agree was below what a big thrift franchise in the nation`s largest market should fetch. Indeed, North Fork had recently completed deals for two other large New York thriftsu00e2u20ac”Reliance Bancorp and JSB Financial, Inc.u00e2u20ac”paying an average of 17.8 times earnings. “If you`re Dime`s board, why would you even consider selling at such a ridiculously low price?” DiMartino asks. “They were offering to pay next to nothing for one of the country`s largest thrifts, seeking to take advantage of a low point in industry valuations. “It`s easy to understand how the Dime directors, seeing what North Fork had just paid for the other deals it closed on, could dismiss it as not even being a serious offer,” he concludes.Paul Lapides, director of the corporate governance center in the Michael J. Coles College of Business at Georgia`s Kennesaw State University, notes that directors have duties of loyalty and care, and are expected to “give thoughtful consideration, deliberate for a reasonable amount of time, and get the opinions of nondirector experts” when confronted with an offer. But the law also gives directors tremendous latitude in their decision making. They are protected by the business judgment rule, which says, in essence, that they`re expected to conduct themselves as reasonable persons would in managing their own affairs. Michael Shepherd, a San Francisco-based banking law partner with Brobeck, Phelger & Harrison, says the key to gaining the protections of the business judgment rule is being able to demonstrate that “you`ve made a decision on an informed basis, after due inquiry, and that you`ve done it based on what you reasonably believe to be in the best interest of the institution. With an unsolicited offer, that could mean analyzing its own business and strategic plansu00e2u20ac”and how an offer stacks up to valuations periodically provided by financial advisorsu00e2u20ac”to make quick decisions. “If you know your parameters,” Shepherd says, “you could make that decision instantly.” Charles Elson, chairman of the corporate governance center at the University of Delaware, goes a step further, saying that once a board is elected, it has “total authority” to make decisions on whether or not to negotiate with a suitor. Still, boards should use tht power wisely.”Legally, you have the authority to say `No, the company is not for sale,`” he says. “As a practical matter, though, if your shareholders are demanding negotiations and you don`t do it, the board may not last long.” Elson compares the dynamics of the board/shareholder relationship to a political democracy. As long as directors are in office, they are empowered to do what they believe is in the best interest of the company. “But if in the end, shareholders disagree with youu00e2u20ac”if you can`t communicate the case that what you`re doing is best for the companyu00e2u20ac”then you`ll face the music of not being re-elected.” The democracy notion runs deep in corporate governance circles. While more than one Dime investor has decried the directors` handling of North Fork`s offer and vocally supported Kanas`s efforts to force the board to negotiate, most didn`t actually tender their shares to North Fork. “If [North Fork] had gotten the votes, it would have been a done deal,” says one attorney familiar with the situation. Why? Privately some investors agree with DiMartino that North Fork`s bid was too low. Rather, they viewed it as a useful vehicle for squelching the Hudson agreement, which it eventually did. Even some North Fork backers concede that there wasn`t muchu00e2u20ac”beyond trying to shame Dime`s board into negotiatingu00e2u20ac”that they could legally do. “They didn`t do anything illegal, at least not that you can prove. It was all a matter of opinion,” Cherashore says. “If a majority of shareholders had sided with North Fork and turned over their stock, it would have played out differently. But the investors wanted a higher price. Period, the end.” Thwarted in his efforts to negotiate with Dime, Kanas hasn`t gone quietly into the night. He has repeated publicly that he would boost his offer if given the chance to negotiate and characterizes Dime`s board as being too beholden to Toal at the expense of shareholders. He blames it, in part, on the fact that Dime`s board doesn`t own many shares. According to the 1999 proxy, directors and senior executives as a group owned 1.77% of the company. “I can understand them not wanting take our offer. But no one can understand how they could refuse to even listen to it,” Kanas says today. “They`ve basically stood up in the middle of the room, put their fingers in their ears, and said, `Don`t say that to me; I don`t want to hear it.`”Through the spring and summer, the two sides punched and counterpunched, each winning small victories. In late March, proxy solicitor D.F. King & Co. revealed that Dime shareholders had rejected the Hudson merger. Dime responded by delaying the shareholder vote on the merger six weeks, to May 17. But in late April, it terminated the merger deal, agreeing to pay Hudson at least $15 million in breakup fees. For its part, Dime proved successful in using a variety of procedural tactics to hold North Fork at bay. In May, the company reported that it was negotiating with two rival suitors. But at about the same time, directors approved a so-called “tin parachute” severance package that would pay employees as much as $43 millionu00e2u20ac”and senior executives $8 millionu00e2u20ac”if Dime was sold. The timing of the two events, within a week of each other, raised questions about the company`s intentions. Those familiar with the controversy also say that Dime`s investment bankers were approached by at least two potential suitors who were interested in making a bid. In both cases, those sources say, Dime refused to meet with them. In the end, no white knight emerged. Dime also used several legal and regulatory challenges to break up the alliance with Fleet. Although North Fork officials claim no connection, in late May, North Fork released Fleet from its agreement, leaving Fleet free to bid on Dime itselfu00e2u20ac”something it never did. Meanwhile, North Fork, increasingly frustrated with Dime`s refusal to negotiate, began soliciting shareholders to withhold authority for five Dime director nominees, including Toal, to send a “clear and unequivocal message” to the board that investors wanted “good-faith negotiations” on a buyoutu00e2u20ac”by either North Fork or someone else. With no white knight in sight and the clock ticking before the vote on withholding authority, Dime officials announced on July 6 that Warburg Pincus Equity Partners LP was investing $238 million for a package of stock and warrants worth as much as 22% of the company. Dime would use the investment to commence a Dutch auction tender purchase of 13.6 million shares. Warburg got a seat on the board, while Anthony Terracciano, a well-regarded Warburg ally known for leading turnarounds at First Fidelity Bancorp and Mellon Financial Corp., would be the company`s new chairman. The battered Toal remained as CEO. At the same time, Dime amended some of its takeover defenses, providing an immediate exception for certain qualifying tender offers in the near term, and eliminating them entirely in 2002. Dime had fairness opinions on the deal from two investment banks. But investors immediately slammed it as another desperate bid to remain independent. While Warburg`s shares were valued at about $12.50, and some warrants were priced around $5, the tender offer was priced between $16 and $18. “It`s disgraceful,” Arthur Stainman, a partner at First Manhattan Co., which owns 4% of Dime`s shares, told reporters. “I think the directors should resign.” A few days later, ISS and Proxy Monitor both recommended that investors vote to withhold authority from Dime`s director nominees. “We believe that the board deserves the reminder of its obligation to shareholders that a withhold vote would convey,” ISS said. Legal observers say that, like the decision to reject North Fork`s offer, the validity of Dime`s tin parachute and the Warburg investment are not clear. Boards today employ all kinds of procedural tactics to “protect their authority” when they`re in conflict with shareholders, Elson says. According to Delaware law, a board`s defensive moves have to be “reasonable” in light of the threat to the company. What is reasonable and what isn`t is subject to interpretation and can vary from case to case. In placing shares with Warburg, for instance, it could be argued that Dime “took a potential premium away from shareholders and caused them to suffer dilution,” says one attorney familiar with the case. “It was clearly a defensive measure to get shares into hands that they thought were friendly and vote against the deal.” But it would be up to a jury or judge to decide if the moves were legitimately defending the rights of shareholders. While the law gives boards tremendous leeway in making such defensive moves, directors also must realize that shareholders will vote them out in the end if they`re unhappy with the board`s tactics, Elson says. At a raucous July 14 annual meeting, shareholder angst was evident. According to official tallies, 70% of the 79.1 million votes represented support withholding authorityu00e2u20ac”a mandate that Elson cannot recall seeing at any time before. “The fact that 70% would withhold authority is a disaster for a board,” he says. “It says that shareholders are completely and utterly dissatisfied with you, but that they didn`t have time to organize a rival slate.” About 20 shareholders, many irate over the board`s refusal to negotiate with North Fork and the Warburg investment, lambasted directors. Toal and Terracciano fielded the assault, calmly defending the thrift`s strategy. And they managed to seat the five directors to three-year terms on constitutional grounds. Afterwards, Toal told reporters of the shareholder vote: “I don`t think it`s particularly relevant to anything we`re doing.” The same day, North Fork filed suit in Delaware court challenging the seating of the directors. A few weeks later, it announced a rival slate of five director candidates for Dime`s board, and demanded that Dime call a special election. “It is imperative that Dime shareholders be given the opportunity to decide who should fill the seats occupied by … directors who have been divested of any legitimate claim of directorial power,” Kanas said.The battle clearly has left everyone involved embittered and tired. Long-time investors, initially intrigued by the possibilities of a North Fork/Dime combination, are now disgusted. “It`s been a stupid chapter in history,” Gendell says. On September 28, the Fed officially approved North Fork`s bid but said it would have to be completed within six months. Although he could have asked for an extension, Kanas dropped his tender offer the next day, choosing instead to commence a big share buyback. On November 8, North Fork received good news of the outcome of the Delaware court decision on the Dime director election. Vice Chancellor Stephen Lamb held that the 70% withhold authority vote was valid and that the seats of Dime directors expiring in 2000 and 2001 shall be filled. Kanas will undoubtedly present a rival slate at Dime`s next annual meeting. For now, Kanas takes consolation in having broken up the Hudson deal. “We said at the beginning that win, lose, or draw, that deal should have been turned down, and it was,” he says. “We saved shareholders a lot of money, and we redeemed the value of the stock.” As for the broader battle, however, Kanas concedes, “It`s been a little embarrassing to even be related to this story.” Meanwhile, Dime, which canceled its Dutch auction because share prices were above the level it was offering, has announced job reductions and a restructuring of its securities portfolio aimed at boosting profitability. Its future, however, is uncertain. Most observers predict that the company will be sold within two yearsu00e2u20ac”if not to North Fork, which could make another run in the future, then to someone else. The directors who approved this summer`s moves may not be around to see it. While Dime`s board may not have done anything illegal, Elson notes that there`s a “huge difference between what`s legal and what`s practically acceptable. “You can construct a very good argument that you are meeting your fiduciary duties and you probably believe it,” he says. “But as a practical matter, if the majority of shareholders disagree with your judgment, you won`t survive the next election.” |BD|

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