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Hudson City Bancorp, Inc. Message Board

  • JJR1998 JJR1998 Aug 23, 2000 1:22 PM Flag

    A Deal Gone Bad

    First Federal Bankshares (FFSX) demonstrates in
    spades what can happen to a second-stage conversion in a
    weak market. FFSX originally IPO'd on 7/13/92 and
    filed to second-stage on 10/18/98. During those six
    years the price increased by 398%, closing at $24 on
    the filing date. (During the speculative frenzy of
    early 1998 it was bid up to a high of $39 a

    The exchange terms of the filing stated that at
    minimum, 1.647 new $10 shares would be exchanged for every
    old share. At supermax, the exchange called for 2.569
    new $10 shares for every old share. The closing date
    was 3/22/99 and the price had fallen to $22.63 a
    share. In a shaky market, the $22.63 that minority
    shareholders would be exchanged out of, was scary. At worst
    the minority shareholder's $22.63 could be worth
    $16.47 and at best it could be worth $25.69 at the open.
    To compound the problem of valuation and add one
    more unwanted variable to the mix, FFSX decided to
    concurrently buy Mid Iowa for 194% of book value. (In
    hindsight this wasn't wise and I don't think these
    transactions should ever be done at the same time

    What happened? The offering went at minimum and the
    $22.63 was worth $16.47 at the open. This price
    represented 71.5% P/B. At this low price under normal
    conditions a pop would have occurred. Unfortunately, the
    confluence of a poor market and poor management decisions
    were enough to drop the stock price by another 3.1%.
    The minority shareholders lost about 30% on the day.
    The depositors who took part in the offering lost
    3.1%. Little capital was raised in the offering, so
    valuation are more compelling for long term holders. (One
    would hope, though, that management acts a little
    smarter in any future transaction).

    Looking at a
    good deal and a bad deal demonstrates the riskiness of
    these second-stage transactions. In a shaky market,
    nobody knows with any certainty exactly how any of these
    deals will turn out. (Because of current market
    conditions I don't know with any certainty how the American
    Savings' IPO will turn out either). By studying past
    second-stage offerings, at least we understand the mechanics
    of the transactions. I think in the future, the
    thrift market will not be as unsettled as it is today
    and we will be able to make reasonable assumptions
    about these transactions.

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