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Going Dutch

From all practical appearances, William Ryan is a traditional New England banker. He began his banking career with Essexbank in …

From all practical appearances, William Ryan is a traditional New England banker. He began his banking career with Essexbank in Peabody, MA, and then worked his way up through the ranks of Bank of New England before joining Peoples Heritage Bank of Portland, ME, in 1989. Now 52, with a quarter-century banking experience behind him, Ryan is chairman, president, and chief executive of Peoples Heritage Financial Group, a $5.4 billion banking company and the fifth largest banking institution in New England.

While his background may be considered somewhat staid, Ryan has been fairly nontraditional in his stewardship of Peoples Heritage, aggressively acquiring small New England banks-seven since 1994-while attempting to retain a fidelity with shareholders by periodically returning to the market to buy back shares.

“Our job is to create value, and right now we are able to do that to a large degree by buying profitable companies and merging them into our company,” says Ryan. “But we also want to have a stock that is priced competitively with other banking companies; to do that is to care about your shareholders by buying back stocks when you can.”

Such was Ryan’s strategy when Peoples Heritage recently agreed to acquire Haverhill, MA-based Family Bancorp, a $925 million-asset bank. Peoples will acquire Family Bancorp for approximately $113.2 million through a tax-free exchange of stock, issuing a total of 5 million shares to Family Bancorp shareholders. Well aware that issuing 5 million new shares would dilute value, Ryan opted to buy back shares for reissue. But with the merger deadline steadily approaching, Ryan concluded that a standard buyback, which can stretch on for months, would not be satisfactory. So he turned to a little-used financial technique called a Dutch auction.

A Dutch auction allows a company to specify the number of shares it plans to repurchase within a set time frame, as well as a specific price range within which shareholders may tender their shares. Peoples Heritage originally announced it would buy back 2.5 million shares in a range of $21 to $24. At the close of the offering period, the bank set the share price at $24, a level that allows it to buy the maximum number of shares. The set price will be paid for all purchased shares, even those tendered at a lower price.

This last feature is one Ryan considers a key advantage of the Dutch auction, because it “deals with all shareholders equally,” he says. “During the few months it would take to do a buyback, stock prime swings could make some shareholders happier than others. This is the fairest way to do it.”

Some companies choose to integrate the Dutch auction into an overall repurchase plan. As part of a comprehensive set of initiatives designed to build shareholder wealth, Campbell Soup Co. devised a plan earlier this year through which the company will purchase $1.5 billion in shares in the Dutch auction and another $1 billion over two years on the open market, according to David W. Johnson, Campbell chairman, president, and chief executive.

“Share repurchases, which reduce our cost of capital, will henceforth be a conscious element of our long-term drive to build shareholder wealth,” says Johnson. “Share repurchases will accelerate EPS growth, which, in turn, will enhance share valuation, building shareowner wealth.”

In some industries, there is increasing pressure to boost returns to shareholders. For companies that want to elevate stock prices to keep them competitive, repurchase programs make for sensible solutions, and the Dutch auction is a good way to do it quickly.

About five years ago, banking companies weren’t doing regular stock buybacks or Dutch auctions, observes Frank Cicero, vice president at Keefe Bruyette & Woods, a New York investment bank that is acting as dealer manager for the Peoples Heritage auction. “But over the last two years, banks have found they have an abundance of capital because the industry has been performing so well.”

For Peoples Heritage, the Dutch auction fits perfectly with its strategy to increase market share by growing the company profitably while creating shareholder value, Ryan says. “The market has told us over the last three to four years that it is happy with our strategy-and our profits. The buybacks, and Dutch auction, are a good way to let our shareholders know we are also thinking of them.”

Steve Bergsman is a Mesa, AZ-based freelance business writer who has written about corporate finance for Reuters, Barron’s, Global Finance and Corporate Finance.

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