Opinion ID: 2370284
Heading Depth: 1
Heading Rank: 3

Heading: Exploring a Potential Sale of First Niles

Text: In late 2003, First Niles was operating in a depressed local economy, with little to no growth in the Bank's assets and anticipated low growth for the future. At that time Stephens, who was Chairman, President, CEO and founder of First Niles and the Bank, was beyond retirement age and there was no heir apparent among the Company's officers. The acquisition market for banks like Home Federal was brisk, however, and First Niles was thought to be an excellent acquisition for another financial institution. Accordingly, the First Niles Board [3] sought advice on strategic opportunities available to the Company, and in August 2004, decided that First Niles should put itself up for sale (the Sales Process). After authorizing the sale of the Company, the First Niles Board specially retained an investment bank, Keefe, Bruyette & Woods (the Financial Advisor), and a law firm, Silver, Freedman & Taft (Legal Counsel). At the next Board meeting in September 2004, Management advocated abandoning the Sales Process in favor of a proposal to privatize the Company. Under Management's proposal, First Niles would delist its shares from the NASDAQ SmallCap Market, convert the Bank from a federally chartered to a state chartered bank, and reincorporate in Maryland. The Board did not act on that proposal, and the Sales Process continued. In December 2004, three potential purchasersFarmers National Banc Corp. (Farmers), Cortland Bancorp (Cortland), and First Place Financial Corp. (First Place)sent bid letters to Stephens. Farmers stated in its bid letter that it had no plans to retain the First Niles Board, and the Board did not further pursue the Farmers' offer. In its bid letter, Cortland offered $18 per First Niles share, 49% in cash and 51% in stock, representing a 3.4% premium over the current First Niles share price. Cortland also indicated that it would terminate all the incumbent Board members, but would consider them for future service on Cortland's board. First Place's bid letter, which made no representation regarding the continued retention of the First Niles Board, proposed a stock-for-stock transaction valued at $18 to $18.50 per First Niles Share, representing a 3.4% to 6.3% premium. The Board considered these bids at its next regularly scheduled meeting in December 2004. At that meeting the Financial Advisor opined that all three bids were within the range suggested by its financial models, and that accepting the stock-based offers would be superior to retaining First Niles shares. The Board took no action at that time. Thereafter, at that same meeting, Stephens also discussed in further detail Management's proposed privatization. On January 18, 2005, the Board directed the Financial Advisor and Management to conduct due diligence in connection with a possible transaction with First Place or Cortland. The Financial Advisor met with Stephens and Safarek, and all three reviewed Cortland's due diligence request. Stephens and Safarek agreed to provide the materials Cortland requested and scheduled a due diligence session for February 6. Cortland failed to receive the materials it requested, canceled the February 6 meeting, and demanded the submission of those materials by February 8. The due diligence materials were never furnished, and Cortland withdrew its bid for First Niles on February 10. Management did not inform the Board of these due diligence events until after Cortland had withdrawn its bid. First Place made its due diligence request on February 7, 2005, and asked for a due diligence review session the following week. Initially, Stephens did not provide the requested materials to First Place and resisted setting a date for a due diligence session. After Cortland withdrew its bid, however, Stephens agreed to schedule a due diligence session. First Place began its due diligence review on February 13, 2005, and submitted a revised offer to First Niles on March 4. As compared to its original offer, First Place's revised offer had an improved exchange ratio. Because of a decline in First Place's stock value, the revised offer represented a lower implied price per share ($17.25 per First Niles share), but since First Niles' stock price had also declined, the revised offer still represented an 11% premium over market price. The Financial Advisor opined that First Place's revised offer was within an acceptable range, and that it exceeded the mean and median comparable multiples for previous acquisitions involving similar banks. On March 7, 2005, at the next regularly scheduled Board meeting, Stephens informed the directors of First Place's revised offer. Although the Financial Advisor suggested that First Place might again increase the exchange ratio, the Board did not discuss the offer. Stephens proposed that the Board delay considering the offer until the next regularly scheduled Board meeting. After the Financial Advisor told him that First Place would likely not wait two weeks for a response, Stephens scheduled a special Board meeting for March 9 to discuss the First Place offer. On March 8, First Place increased the exchange ratio of its offer to provide an implied value of $17.37 per First Niles share. At the March 9 special Board meeting, Stephens distributed a memorandum from the Financial Advisor describing First Place's revised offer in positive terms. Without any discussion or deliberation, however, the Board voted 4 to 1 to reject that offer, with only Gantler voting to accept it. After the vote, Stephens discussed Management's privatization plan and instructed Legal Counsel to further investigate that plan.