By Joe Mantone and Nathan Stovall, SNL Financial staff writers
Shareholder activism is continuing to gain steam in the bank space with some new investors joining the fray and even having success effecting change at larger depositories.
“It’s a waterfall”
Astoria Financial Corp., a long-rumored seller, represents the most recent example. The Lake Success, N.Y.-based thrift agreed to hand over its reins to New York Community Bancorp Inc. just months after Basswood Capital Management LLC disclosed a 9%-plus stake in the company, requested a board seat, and said a sale was one of the ways the company could enhance shareholder value. After Basswood made the disclosure, Astoria initially indicated it planned to remain independent, but soon after, its plans to sell came to the fore.
Basswood was also part of a successful activist campaign in the summer, seeing Metro Bancorp Inc. agree to sell to F.N.B. Corp. after the investor, activist shareholder PL Capital and a number of others piled into the company's stock in a short time frame. Sandler O'Neill & Partners LP Principal Emmett Daly said last month at the SNL Bank M&A Symposium that there are 10 to 15 hedge funds in the market that once "one of their buddies gets into your stock, it's a waterfall."
Changing their stripes
Some traditional investors have broken from their normal approach and taken an activist stance. Clover Partners LP's Johnny Guerry launched a successful activist campaign against Hampden Bancorp Inc. in 2014, after owning the stock for some time. Hampden ultimately sold to Berkshire Hills Bancorp Inc.
Guerry said at the SNL Bank M&A Symposium in October that he did not initiate the position with the intention of taking an activist stance but ultimately reached that point after Hampden underperformed. The investor said he could revisit activism again if a bank was not producing adequate returns and could deliver more value for shareholders through a sale.
More recently, longtime bank investor Terry Maltese of Maltese Capital Management LLC took an activist stance against 1st Century Bancshares Inc., expressing concern over what he sees as a "significant change in the strategic direction" of the company. Maltese has on occasion supported other activists in the past, but we failed to find other instances, at least in recent years, where the investor launched its own activist campaign.
Is threat overblown?
Still, some have argued that activism isn't as prevalent as others have suggested. Wayne Goldstein, co-founder and principal at Endicott Management Co., said the popular opinion today is that there are many activist "sharks" in the banking industry, but he does not see it.
Deal advisers are convinced that list of activists is growing. At the SNL event, Sandler's Daly said activists have received added support from advisory firms such as ISS, which has favored activists in the bank group and not just management teams. The shift has brought an entire new universe of investors into the activist arena as it is now fair game for large funds like Wellington Management, Vanguard Group and Fidelity Management to vote with activists and not side with management, Daly said. Those investors have far deeper pockets than the longtime traditional activists in the bank space, suggesting that larger institutions could become a target.
Plays a role in mergers and acquisitions
Activism has become fairly common in bank M&A. During the Nov. 4 Mergermarket Financial Services M&A Symposium, Daly said Sandler O'Neill estimates that as much as 25% of bank M&A during the last five years has had some sort of activist element. Daly believes that larger banks could increasingly find themselves the subject of activist campaigns.
"It's actually starting to ratchet up," Daly said about activists targeting bigger banks.
Other advisers at the Mergermarket event made similar comments. Wells Fargo Securities LLC Managing Director Brian Moon said the current environment is ripe for activism. He said coming out of the crisis just about all financial services companies weren't trading well, but with many businesses now performing better, activists can target the companies whose stock prices are lagging.
"The last several years, we're creating winners and losers, and it's easier for activists to go in there and point at people and say, 'You're underperforming. What can we do to change that?'" Moon said.
Moon added that activism might not always lead to a full sale of a company but could prompt larger institutions to sell certain businesses. In the past, many believed that being bigger was better because it led to more diversification and better ratings. However, now with concerns over being too big to fail, larger financial institutions face more regulations and capital requirements, which make it more difficult for them to grow their returns on equity.
"It may not always be 'bigger is better,'" Moon said.
Moon noted that activist investor Carl Icahn has suggested that American International Group Inc. break up into smaller companies, and GE is downsizing its General Electric Capital Corp. in order to help shed its designation as a systemically important financial institution. GE's stock price has climbed nearly 20% since it made that announcement in April.
"This is now impacting the psyche of a number of institutions who have been underperforming," Moon said.
Gary Howe, the head of Lazard Freres & Co. LLC's financial institutions group, said he believed that activism could generate meaningful change in a large financial institution within the next year.
"I'm unclear which one," he said at the Mergermarket event. "But it's likely."
Pushing for divestments
At least one bank and thrift activist investor, PL Capital Principal Richard Lashley, has floated the notion of certain regional banks unlocking value by selling portions of their franchises in different parts of the U.S. Lashley more recently disclosed that PL Capital it is in the process of forming a new fund that will focus on banks with assets between $3 billion and $75 billion as it hopes to build on its past success.
Of course, activists in the banking space face regulatory challenges. Schulte Roth & Zabel LLP Partner Joseph Vitale noted that there are regulatory constraints on noncontrolling shareholders engaging in activist actions.
"The [Federal Reserve] is very actively monitoring and concerned about these things," Vitale said at the Mergermarket event.
However, that doesn't mean regulators will automatically stand in the way of the activists. Vitale said the Fed could find itself not averse to an activist's strategy or could even view an activist's proposal as favorable.
If the Fed does feel that way, "that's going to make it a lot easier and allow the activist more room to wiggle," Vitale said.
Joe Mantone and Nathan Stovall are senior writers and columnists with SNL Financial. The views and opinions expressed in this piece are those of the authors and do not necessarily represent the views of SNL.
This article originally appeared on SNL Financial’s website under the title, "Shareholder activists gaining traction in banking”