Two Chinese American banks in California are locked in a bidding war to buy a small financial institution in New York, part of a scramble to increase market share and buy up small banks with niches in growing Chinese communities.
While Great Eastern Bank only has $310 million in assets, it provides an expansion into New York's ethnic Chinese banking market for either Cathay General Bancorp, the Los Angeles-based holding company for Cathay Bank, and UCBH Holdings Inc., the San Francisco-based parent of United Commercial Bank. Great Eastern has five branches, two in Manhattan, two in Flushing, Queens and one in Brooklyn.
"Both of these banks really want to bulk up their presence in New York and they're willing to pay a big price," said Scott Carmel, an analyst at Moors and Cabot Inc. in Boston. "Now all the Chinese American banks will expect to get higher bids."
The deal for Great Eastern is part of an aggressive expansion strategy adopted by both Thomas Wu, UCBH's chairman and chief executive, and Dunson Cheng, Cathay's chairman and chief executive, in the race to get to $10 billion in assets.
Analysts say that's the tipping point for Chinese American banks to become viable takeover targets. But paying too much for asset growth could backfire as interest rates rise in the next 18 months and real estate prices dip.
Some analysts believe that Dominic Ng, president and chief executive of East West Bancorp Inc. in San Marino, is taking a more measured approach by focusing almost exclusively on California (though East West has one branch in Houston.)
East West, with $7.8 billion in assets, completed its acquisition in September of San Marino-based United National Bank, with $948 million in assets.
Needs regulatory approval
The deal to buy Great Eastern hinges on whether Cathay receives Federal Reserve Board approval to buy a 41 percent stake from a group of shareholders not aligned with the bank's board. Cathay, with $6 billion in assets, paid $28.4 million for option agreements to purchase the shares and plans to use its stake to block any other deal.
William Laraia, Great Eastern's president and chief executive, filed a protest letter with the Federal Reserve Board, claiming that Cathay's attempt to accumulate options could lead to "uncertainties and controversies."
"This is like an old-fashioned battle of chess," said Henry Fields, a partner at Morrison & Foerster, who specializes in Asian banks. "No one can predict the outcome of the situation."
Cathay initially offered to buy Great Eastern for $69.3 million, but was rebuffed. Figuring it could get a better offer, Great Eastern's board turned to the logical white knight, Cathay's main rival UCBH, which has $7 billion in assets. Last month, UCBH agreed to buy Great Eastern for $103.6 million, or $58 a share, in equal parts cash and stock a 33 percent premium to Cathay's original bid.
Then Cathay upped the ante, raising its bid to $63 to go $5 above UCBH. "We'd been in contact with Great Eastern, trying to make a deal with them, and then their investment advisor struck a deal with UCBH," said Heng Chen, Cathay's executive vice president and chief financial officer. "They have a fiduciary duty to their shareholders if our bid is superior."
Though Cathay appears to have dealt itself a winning hand by negotiating the option agreements with outside shareholders, UCBH could still end up the winner.
If the merger application gets the green light by the Federal Reserve, Cathay would have to buy another 25 percent to get the shareholder votes needed for merger approval in New York. If the request is denied, the bank could still exercise its options and sell its shares to UCBH for a roughly $14 million gain, said Joe Morford, an analyst at RBC Capital Markets.
In the past two weeks, Cathay's stock has jumped 12.6 percent, to $38 a share. The company was added to the Standard & Poor's Midcap 400 index, replacing Krispy Kreme Doughnuts Inc. Both RBC Capital and Merrill Lynch cut the bank's rating last week, citing valuation issues.
Cathay and UCBH appear to be going head-to-head in several key markets, with the possibility of further expansion into Atlanta and Chicago. Cathay, with 29 branches, operates four in New York, and one each in Boston, Houston and Seattle, as well as Taipei, Hong Kong and Shanghai.
The highly aggressive UCBH, with 46 branches, has four in New York and just bought Pacifica Bancorp Inc., adding two branches in Seattle. It has made an offer for a bank in Boston, but has not yet entered Texas.
There's plenty of further room for consolidation with two remaining publicly traded banks Summit Bancorp in Atlanta and Metrocorp in Houston. Another 30 or so private banks with assets under $500 million are scattered around California and New York.
"Five branches may not seem like a lot, but it would be much harder for each of these banks to try to grow from within," said Carmel.
At a Glance
Bank: Cathay General Bancorp Inc.
Headquarters: Los Angeles
CEO: Dunson Cheng
Market Capitalization: $1.9 billion
Assets: $6.2 billion
Specialty: Chinese American markets
Bank: UCBH Holdings Inc.
Headquarters: San Francisco
CEO: Thomas Wu
Market Capitalization: $1.6 billion
Assets: $7.34 billion
Specialty: Chinese American markets
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