Shareholder activism appears to be on the rise again, after subsiding somewhat during the financial crisis, and hedge funds are driving most of it, according to speakers Monday at Bank Director’s Acquire or Be Acquired Conference in Phoenix.
“They want to create public discussion and increase value through an increase in stock price or sale,’’ said Bill Hickey, co-head of investment banking for the investment bank Sandler O’Neill + Partners.
Activist hedge funds’ assets have risen 11-fold from 2003 to the third quarter of 2015, to $131 billion, according to Hedge Fund Research reports. Banks are hardly immune. In fact, Sandler O’Neil analyzed acquisitions above $50 million in value for banks and thrifts traded on a major exchange since January 1, 2014, and found 61 percent of the sellers had activist shareholders involved. Recent targets have included New York-based Astoria Financial Corp., which announced a sale to New York Community Bancorp late last year shortly after Basswood Capital Management filed what’s known as a 13-D letter with the Securities and Exchange Commission, announcing the hedge fund had acquired a significant stake in the bank. Some activists have even ganged up on banks together, which was the case with Harrisburg, Pennsylvania-based Metro Bancorp; Cincinnati, Ohio-based Cheviot Financial Corp.; and Alliance Bancorp, Inc. of Pennsylvania, the speakers said.
Underperforming community banks are most likely the targets but bigger banks such as CIT and Bank of New York Mellon also have been subject to activist attacks. “In the last couple of weeks, we’ve heard more and more noise about the potential for larger organizations to be targets,’’ Hickey said. But really, almost any bank can qualify as a target. According to Hickey, traits that often attract activist investors include having a stock that trades at a discount to intrinsic value, having substantial cash or liquid assets, underperforming a peer group of banks, having inefficient operations, or even just having the potential to sell for a premium. Even private banks are subject to shareholder activism. Peter Weinstock, an attorney with Hunton & Williams LLP, said he has represented banks as small as $100 million in assets with proxy battles and family-owned banks whose shareholders do battle with the board.
While bank CEOs and boards generally despise them, activist shareholders argue that the pressure they apply to boards and management teams can lead to an increase in shareholder value and propel sluggish management teams to make improvements. Share prices often increase substantially after an activist hedge fund gets involved. Most often, activist hedge funds are looking for a sale of the bank, and if no suitable buyers appear, they go away, Hickey said. Sandler and Covington identified the major activist shareholders targeting banks right now, and they include PL Capital, Stilwell Value, Basswood Capital Management, Veteri Place Corp., Jacobs Asset Management, Clover Partners and Ancora Advisors.
Defenses against shareholder activists include tracking the bank’s performance to peers, as well as the bank’s shareholder rights practices and compensation in relation to peers, because that’s what the activists do, said Rusty Conner, an attorney with Covington & Burling. Boards should also pay close attention to shareholder advisory firms’ recommendations, especially if the bank has a significant institutional shareholder ownership. Also, Conner said it pays to beef up your communication with shareholders, and make sure you have a media relations and investor relations team ready to spring into action if your bank is targeted.
In general, banks are bit tougher for activist investors to crack, as they are heavily regulated and even gaining two seats on the board may constitute taking a controlling interest in the bank’s board, said John Dugan, an attorney with Covington. Investors who take a controlling interest potentially become subject to regulation as a bank holding company. Also, regulators have to approve a bank’s capital plan, including the payment of dividends and share buybacks, so struggling banks often are restricted in what they can do for shareholders.
Still, it pays to get your bank ready if you might be vulnerable to an attack.