Inside a Landmark IPO: The Hudson City Bancorp Conversion
By Ben A. Plotkin
Six years ago, based solely on its institutional longevity, most industry observers viewed Paramus-based Hudson City Bancorp – with a savings bank charter dating back to the Civil War era – as an unlikely candidate to pioneer one of the most significant financing strategies in the history of U.S. banking.
Since 1999, however, those observers have been left scratching their heads, as this staid 137-year-old institution completed a conversion to public ownership that involved two of the largest bank financing transactions of their kind, culminating in a $3.9 billion equity offering that ranked as the seventh-largest equity offering ever completed by a U.S. company, across all industry categories.
For the senior management of Hudson City, the decisions to abandon the familiarity and perceived safety of the bank’s longstanding mutual status and to explore innovative financing strategies were neither easy nor without obstacles or controversy on the road to completion of its landmark conversion in June.
In the face of aggressive competition from interstate banking giants, and driven to maintain independence and profitability through expansion of its branch offices throughout New Jersey, Hudson City knew that long-term success would likely require significant change. Despite all the outward signs of financial stability and progress – including a strong balance sheet, and designation as “One of the Most Efficient Banks in America” from American Banker – Hudson City’s senior executives understood, as early as the mid-1990s, that the bank needed to examine all of its strategic alternatives, including demutualization.
“Typical of all mutual banks, the most significant initial hurdle for us,” explains Hudson City’s Chairman, President and CEO Ronald E. Hermance Jr., “involved the irreversible decision of whether or not to become a public company – a process that took many months for our board to review and decide on.” In the end, according to Hermance, “Hudson City’s decision to demutualize was based on our belief that publicly owned companies are better equipped to attract, retain and motivate the most talented people who, in turn, drive top- and bottom-line growth. We understood then, as we do now, that human capital is a bank’s most important asset, and that our long-term competitive strength would be greatly enhanced by our ability to provide employees with equity participation in Hudson City’s growth.”
UNCHARTED FINANCING TERRITORY
Florham Park-based Ryan Beck & Co.’s longstanding relationship with Hudson City began while the bank was under the direction of Leonard S. Gudelski, who had served as the bank’s president since 1981 and successfully guided his institution through a troublesome period for savings and thrifts – characterized by double-digit inflation and record high interest rates. Despite this turmoil, by the beginning of 1990, under Gudelski’s guidance, Hudson City had 69 branches with total assets of $3.2 billion, and designation as the largest savings bank headquartered in New Jersey.
In the early 1990s, Ryan Beck & Co. – an early proponent of the stock-based mutual holding company (MHC) structure as a means for thrifts and savings banks to manage an orderly transition to public ownership – approached Hudson City’s senior management regarding its potential application for their bank.
Hermance, who served as Hudson City’s senior executive vice president and chief operating officer at that time, admits that his bank was “intrigued by the underlying concept, but reluctant to commit to a financing strategy that was ‘neither fish nor fowl,’ so relatively new and largely untested. Instead, we decided to closely monitor the experience of other banks who applied the mutual holding company structure to demutualize.”
As Hudson City watched from the sidelines during the mid-1990s, several banks successfully applied the mutual holding company structure to achieve their performance objectives, establish benefit plans to enhance recruitment and retention of human capital, and fund charitable foundations to build customer loyalty within the communities in which they served.
Most of those new MHCs planned for demutualization through a two-part conversion process over time, rather than a one-time 100 percent conversion, primarily to prevent overcapitalization – a significant advantage of the mutual holding company structure.
In fact, the experience of those early adopters of the MHC structure during the mid-1990s provided Hudson City with the road map for its demutualization. According to Hermance, “What had seemed like an untested approach when Ryan Beck first proposed the MHC structure gradually made more sense to us, and over time we came to believe that this was the most viable strategy to achieve our long-term objectives.”
During that period, Ryan Beck & Co. worked closely with Hudson City’s senior management team and board members to establish familiarity and confidence in the MHC concept, and to ensure a more complete understanding of the overall capital markets system.
TAKING THE FIRST STEP
By February 1999, the bank was ready to act, and a formal Plan of Reorganization and Stock Issuance was approved by Hudson City’s Board of Managers. Under that plan, the bank would become a wholly-owned subsidiary of holding company Hudson City Bancorp Inc., whose common stock began trading in July 1999 on the NASDAQ National Market under the symbol “HCBK.” Based on an appraised value of approximately $6.5 billion, the bank converted 47 percent of the Hudson Mutual Co. into $545 million in capital – making this transaction the largest of its kind at that time.
With sufficient capital on hand, Hudson City was fully prepared to fund its ambitious growth plans, which included organic growth and branch office expansion outside of New Jersey for the first time. In October 2004, the bank opened its first New York branch in Suffolk, Long Island.
Based on the rapid success of that branch, which attracted roughly $38 million in assets, the bank set its sights on the addition of up to as many as 10 to 15 new branches annually. Between mid-1999 and March 2005, Hudson City grew assets of $7.5 billion to $21 billion. During this same time, its stock price appreciated by more than 600 percent.
THE BANK TAKES A BOLDER SECOND STEP
In May 2005, after more than six years of successful operation as a mutual holding company, Hudson City announced that its board and shareholders had approved plans to initiate the second stage of its conversion to total public ownership through an offering and sale of the remaining 53 percent of the bank’s common stock. The significant size of the offering – representing nearly 393 million shares – combined with the rising interest rate environment, made this second step no easy decision for Hudson City.
“Legitimate concerns from both inside and outside of the bank regarding timing of the transaction and marketplace acceptance of the offering were closely examined,” Hermance notes, “but eventually we were convinced that the deal had a high likelihood of success and would be in the best interests of our shareholders, customers and employees. So we consulted closely with our board and regulators at the Office of Thrift Supervision, and made the decision to complete the bank’s conversion.
“A critical factor in that decision-making process was the trust and confidence that had been established between the bank and its outside advisors, both in connection with the first stage of Hudson City’s conversion, and during the years following our initial offering. In this type of high stakes transaction, it’s essential to work with banking and legal partners who understand your bank’s culture and personality, who can tailor solutions to meet your needs, and who have your organization’s best long-term interests at heart,” according to Hermance.
The amount of preparation and complexity of a multibillion dollar stock offering cannot be understated; requiring thousands of man hours in a concentrated, coordinated campaign over the course of many weeks – involving experts in law, investment banking, capital markets, securities trading, brokerage operations and information technology – in order to ensure an orderly and successful transaction. Although Hudson City was a 1999 veteran of this process, the bank understood that the significantly larger size and very different market environment of its second transaction would not allow them to take anything for granted.
GOING FOR THE CONVERSION
Toward that end, and recognizing the potential for global investment interest in the transaction, Hudson City selected Ryan Beck & Co. as the sole manager for its subscription offering and joint lead manager of its syndicated offering, and also assigned Lehman Brothers as global coordinator and sole book runner of the syndicated offering. This unique combination of local and industry knowledge with international caché resounded well within the investment community: a total of 392,980,580 shares of common stock sold at a purchase price of $10 per share, with 135,608,879 shares sold in a subscription offering sole-managed by Ryan Beck & Co., and 257,371,701 shares sold in a syndicated offering for which Lehman Brothers Inc. acted as global coordinator and sole book-running manager.
With its conversion completed, and equipped with the financial resources and corporate structure to compete against banks of any size, Hudson City remains the largest savings bank headquartered in New Jersey. With 1,000 full-time employees, Hudson City currently operates 89 full-service branches throughout New Jersey, also serving customers throughout metropolitan New York and Philadelphia. According to Ron Hermance, “Hudson City is ready to begin its next century of banking.”
Despite the size, complexity and duration of the Hudson City demutualiztion, there were four fundamental reasons why this landmark transaction succeeded:
1. Hudson City had a longstanding track record of sound financial management – providing Wall Street and prospective investors with the credibility necessary for them to support both stages of the bank’s demutualization.
2. Hudson City examined all of its financing options and carefully measured the experience of other banks. Perhaps more importantly, once the most appropriate course of action was identified, the bank’s senior management and board had the courage to put its plan into action and to maintain a consistent focus through completion.
3. Hudson City’s senior management communicated openly and consistently with its board, presenting them with a thorough and honest appraisal of the potential risks and rewards of maintaining the bank’s mutual status versus conversion to public ownership, either through a one-time transaction or an MHC structure.
4. Hudson City established and nurtured trusting relationships with their outside advisors, providing them with the insights and confidence that, in turn, created a strong atmosphere of teamwork as well as the incentive to do whatever was necessary to accomplish the bank’s goals. In that regard, Ryan Beck & Co. was honored to have served as a member of their team.
More broadly, Hudson City’s success in converting to public ownership is a reflection of the culture and character of the institution – where personal values and “doing the right thing” for customers, shareholders and employees are held in high regard. In that respect, regardless of corporate structure, Hudson City provides a reliable roadmap for other banks to follow.
Ben A. Plotkin is chief executive officer of Ryan Beck, which he joined as an investment banker in 1987. Since joining Ryan Beck, he has been responsible for managing numerous offerings of equity and debt securities for financial institutions. He can be reached via e-mail at email@example.com.