In Sterling Deal, Activist Investor Wins from Losing

Comerica Inc.'s agreement to buy Sterling Bancshares Inc. apparently scuttles an activist shareholder's plans to take over the target Houston bank.

Still, the pending sale doesn't mean that Sterling's largest shareholder, TAC Capital LLC, or its chief, Don Adam, will come out on the losing end.

Comerica's all-stock offer, which values the $5 billion-asset Sterling at 2.3 times book value, is one of the highest-priced bank acquisitions in the past 12 months. Adam's stake, built painstakingly over the past five years, should deliver a decent return even if he never gets to stack the board as first planned, observers said.

As a result, Adam's experience could embolden otherwise-dormant bank investors to become more active, analysts and bank shareholders said.

"It is very encouraging" for investors, said Lawrence Seidman of Seidman & Associates, who has participated in numerous proxy fights in the past. The deal "was at a great price, and consolidation is really what the industry needs."

Like most analysts, many bank investors are expecting a wave of consolidation in the banking industry. After several years of depressed returns and disappointing financial results, investors are expecting change as more banks show signs of improvement.

Bankers must realize that "it's okay for investors to ask questions about what is going on," said Dory Wiley, the president and chief executive of Commerce Street Capital LLC in Dallas. "And it's okay for bank management to disagree but not be disagreeable and then find a solution."

Analysts agreed that Sterling's proposed sale to Comerica, of Dallas, took place largely because of Adam's making the first move.

"You don't see this size of a franchise become available very often," said Dan Bass, a managing director at FBR Capital Markets. "There's no doubt that [Adam] triggered the deal."

Speculation of a sale mounted in recent weeks as reports surfaced that Sterling had hired Morgan Stanley to seek potential buyers. Adam had already sent a letter to Sterling's shareholders in November nominating five individuals, including himself, to the board at this year's annual meeting. In the letter, Adam questioned the bank's management and stock performance since TAC first bought shares nearly five years earlier.

A spokesman for TAC declined to comment. TAC quietly increased its holdings in Sterling over the years and owned 9.99% of its common stock at Nov. 1.

Bass said TAC's periodic stock purchases averaged around $7.50 a share. With Comerica's offer equating to roughly $10 per share, Adam will likely be pleased, Bass said. Wiley agreed, though he said Adam probably has "mixed emotions" about the proposed sale since he was gearing up for a proxy fight. "It's like walking into a room with a sibling or spouse and preparing for a fight, but then they greet you with a hug," Wiley said.

Analysts cautioned that the higher price for Sterling is not a guarantee that bank premiums will keep rising. Many viewed Sterling among a small group of midsize banks in Texas with a large, attractive franchise that can command such a premium.

"Sterling has scarcity value in Texas," said Brett Rabatin, an analyst at Sterne, Agee, Leach Inc. For community banks with "franchises in great locations, this bodes well … but I don't think [premiums] will go up across the board."

Rabatin likened the Sterling deal to the recently announced sale of Whitney Holding Corp. in New Orleans to Hancock Holding Co. in Gulfport, Miss. The $8.3 billion-asset Hancock is buying Whitney, with $11.5 billion of assets, in a $1.5 billion all-stock deal valued at 1.7 times book value.

Comerica's offer also saves Sterling's management team, which would likely have come under fire had Adam, who is also the CEO of American Momentum Bank in Florida, taken over the board.

J. Downey Bridgwater, Sterling's chairman, president and CEO, "is in a much better spot" as president of the Houston market after the deal closes, Rabatin said. Adam "would have probably included a change in the CEO position."

Wiley praised Bridgwater for how he responded to TAC's attempted hostile takeover by bringing on a buyer at such a premium. "So many bank CEOs are crawling backwards and getting defensive" when investors speak up, Wiley said. "He could either have embraced Adam and put him on the board … or he could go maximize shareholder value and to his credit, he did."