Saturday, July 16, 2005

When Slow Growth Is Not an Option, Make a Full-Speed Assault

The Globe and Mail, Derek DeCloet, 16 July 2005

Bill Ryan has a little list. He keeps 10 or 15 names on it, each one a competitor he would like to conscript in TD Banknorth Inc.'s march across the northeastern United States.

A small New Jersey-based bank named Hudson United Bancorp has been on Mr. Ryan's list for years. So in March, when he ran into Hudson chief executive officer Ken Neilson at a banking conference at Boston's Langham Hotel, Mr. Ryan delivered the same message he always does: Uncle Bill Wants You!

"I thought it was a great opportunity to say, 'Geez, Ken, if you're ever thinking about combining with a company like us, I'd love to talk to you about it,'" he recalls. "I say this a thousand times a year to probably a thousand different bankers, and generally they'd say, 'Yeah, well, Bill, I'll give you a call some day.'

"[But] Ken said, 'Really, Bill, maybe we should talk more about that.' " So began a four-month campaign of persuasion that culminated in this week's $1.9-billion (U.S.) deal, Banknorth's first since Toronto-Dominion Bank bought control of it in March.

It's the kind of acquisition Mr. Ryan was thinking of when he agreed last year to have TD as Banknorth's parent -- or sugar daddy, if you prefer. What TD offers is money and a big balance sheet. What Hudson offers is a way for Mr. Ryan to break out of the geographic box his bank is in.

Banknorth had decided long ago to stay specialized and shun the fad of some regional banks to turn themselves into financial supermarkets. It's a consumer bank, period: Mr. Ryan has no ambition to branch out into investment banking or other high-profile, high-risk corporate finance work. So growth has to come state-by-state, and bank-by-bank. Banknorth has bought out 26 smaller financial institutions in the past 14 years.

The problem is that Mr. Ryan is running out of things to do in New England. It is already the No. 1 bank by deposits in its home state of Maine, No. 2 in Vermont, No. 3 in New Hampshire and No. 5 in Massachusetts, according to research by National Bank Financial. Mr. Ryan had two alternatives. He could venture south and west, or accept slower growth. For a guy who runs one of America's best-managed firms according to Forbes, option two -- standing pat -- was no option at all.

Hudson had a toehold in New York and Pennsylvania as well as a top-10 market share in Connecticut, all areas of weakness for Banknorth. But, as Mr. Ryan well knew when he chatted up his long-time acquaintance in Boston last spring, Hudson had something else: warts.

Hudson's alleged violation of bank disclosure laws had cost it dearly. It agreed to a $5-million settlement, but was prohibited from buying other banks or opening new branches by the Federal Deposit Insurance Corp. (FDIC) until its internal procedures were brought into line with tougher post-9/11 rules to prevent money laundering.

The headaches compounded some other problems. By some accounts, Hudson had not invested enough in its branches or computer systems -- the basic infrastructure that makes banks efficient. The company was no favourite of Wall Street, and after the FDIC issued its penalty in May, 2004, its stock price stagnated.

But Mr. Ryan knew Hudson was still highly profitable -- he had assigned Steve Boyle, Banknorth's chief financial officer, to track the financial reports and regulatory filings of potential targets. He sensed that the market's negative view might underestimate Hudson's profit potential if it, too, were brought under a stronger parent. At a time when a lot of other banks on Mr. Ryan's list looked expensive, Hudson was the opportunity.

"If this was a bank that was doing everything we were doing, and doing it very well, I would be hard-pressed to show how I could pay a premium for their stock and create value for our shareholders," he says. "My job, from a due diligence standpoint, is not to second-guess what they did in the past but to look at what they could do in the future."

Step one was a series of phone conversations with Mr. Neilson to talk about how the two banks would fit -- "social issues," Mr. Ryan calls them. "You don't talk about numbers. You don't talk about the sale of the company and what price. You talk about whether both of us could feel comfortable that putting our companies together wouldn't tear our companies apart."

He also wanted to gauge the seriousness of the regulatory problems. Hudson, he learned, had hired a former New York banking regulator to work in a new department that dealt with legal issues, including compliance with money laundering rules. Mr. Ryan hit the phones and talked to other bankers who had run afoul of the law, to find out how hard it was to get back on the regulators' good side.

Once satisfied that those problems could be solved, Mr. Ryan brought his finance people in to help solve the hard questions: How clean was Hudson's loan portfolio? Other than the FDIC ruling, why wasn't it growing much? And could Banknorth improve things enough to make a deal work financially?

Mr. Ryan sent a huge staff -- "30 or 40 people" -- to comb through Hudson's back rooms and come up with answers. It quickly became clear to him that some of the repairs would be easy.

For example: Hudson's branches have an average of $30-million in deposits. Banknorth's have more than $50-million. Why? "It's obvious to us that Hudson United was not able to spend as much marketing dollars in marketing themselves as they'd probably like to spend," he said. "We'll give 'em more."

Hudson was trying to make up for its growth problems by cutting corners in other areas, too. Many of their branches close at 3 p.m. "We haven't closed at three o'clock in many, many years," Mr. Ryan says. Fixing his new acquisition "really isn't as difficult as some people are making it out to be."

Biography: Bill Ryan, chairman, Banknorth Group Inc.

61 years old; married; four children, 12 grandchildren
Education: Stonier School of Banking at Rutgers University
Management style: "Roll up the sleeves. [I'm] hands-on with employees."
Best move: Becoming CEO of Peoples Heritage Bank in the early 1990s and helping save it from financial trouble
Worst decision: He once tried to make tellers wear uniforms
Famous for: Driving his Cadillac 50,000 miles a year visiting other bank executives, mostly in the hope they'll sell to Banknorth if they put themselves up for auction some day
Favourite management reading: The Bible