Attack Of The Killer Investors

First they stalked manufacturers, retailers, and consumer-products companies. Of late, some have been looking overseas. But now, slowly but surely, shareholder activists are training their sights on banks.

Reports of shareholder activism in the banking industry are just a trickle so far. But Michael F. Price's disclosure on Apr. 5 that he had taken a 6.1% stake in Chase Manhattan Corp., whose stock has been lagging, changed everything. Now, the mere thought of activist incursions has bank CEOs worrying about how to get their stock prices up to snuff. To further their goals, activists will likely push for mergers--whether bankers want it or not. "There will be a lot of situations involving bank mergers coming up where management and shareholders will think differently," says James K. Schmidt, manager of three funds, including the $800 million John Hancock Regional Bank Fund.

The results of several incursions already have been dramatic. One bank, Michigan National, agreed to be sold to National Australia Bank after contending with dissident shareholders including Price. And Compass Bancshares in Birmingham, Ala., became embroiled in a fierce proxy fight after the former chairman, who owned about 2% of the bank's stock, brought in a surprise bid for the bank from First Union Corp. The outcome remains uncertain, though the odds favor management. Compass CEO D. Paul Jones Jr. predicts that such battles will increase, particularly at banks with large institutional ownership.

Shareholder activists have historically gone easy on banks. High-profile investors such as Warren E. Buffett, who owns 13.3% of Wells Fargo & Co., have remained relatively quiescent. Most bank CEOs take home smaller paychecks than their big corporate counterparts, and banks tend to be more sparing with executive perks. Moreover, in the past, banks' profits tended to rise and fall in lockstep, so many investors believed bank performance was tied more to cycles than to management skill.

STRONG LURE. Yet while most bank stocks have benefited handsomely from robust profits over the past four years, a fair number have seriously underperformed. Suspecting lackluster management, or at least inattention to share value, activist investors are stepping in. "There could be a lot of dead wood out there for activists to get to work on," says G. Kenneth Heebner, manager of several CGM mutual funds.

The pending relaxation of many bank regulations is also luring activists. The expansion of interstate banking is likely to promote more mergers and other deals that will boost stock prices. "Companies that don't perform really make themselves vulnerable to this kind of activity--and more so now because there are more potential acquirers," says Francis X. Suozzo, a bank analyst at S.G. Warburg & Co.

Chase is a case in point. The venerable New York bank's stock was trading below book value when Price disclosed his stake. And Price said in his filing with the Securities & Exchange Commission that Chase should seriously consider steps to "maximize shareholder value," often code words for selling or breaking up a company. Sure enough, investment bankers quickly began calling on the bank's executives with suggestions on how Chase could boost its share price.

Chase Chief Financial Officer Arjun K. Mathrani says the bank will continue to "execute the business strategy" to get the share price up. He also hopes that disclosing more information on the profitability of the bank's various business units will help.

Maybe. But what's more certain is that the specter of big, opinionated investors is looming ever larger in bank boardrooms far beyond Chase's headquarters. Bank executives are used to regulators looking them over. But now, many are sensing that a new Big Brother is watching.


CHASE MANHATTAN CORP. Heine Securities and its president, Michael F. Price, disclosed on Apr. 5 that Heine had raised its stake to 6.1%. Price called for Chase to "seriously consider" ways to boost shareholder returns.

COMMUNITY BANK SYSTEM Shareholders sued unsuccessfully in March to block the DeWitt (N.Y.) bank's planned purchase of branches from Chase.

MICHIGAN NATIONAL CORP. After two years of agitation by Price, the bank agreed in February to be acquired by National Australia Bank.

COMPASS BANCSHARES The Birmingham (Ala.) bank's former chairman in January proposed a slate of candidates for the bank's board, who would have likely voted for it to be sold over the opposition of the current CEO.


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