Midwest Case Has Lessons In Bank Bid

Small shareholders of First Interstate Corp., the subject of a hostile takeover bid made last week by Wells Fargo & Co., might want to study the recent history of Wallace Computer Services before they decide how to respond.

Moore Corp. Ltd., a Toronto-based seller of business forms, recently boosted its offer to acquire Wallace to $60 a share from $56 and placed a Nov. 3 deadline on the offer.

Moore’s initial offer, made July 30, prompted a 33 percent increase in the price of Wallace’s shares the following day. The shares have closed above $56 each day since - a good hint that the smart money expected a higher bid, which is exactly what happened.

Wallace, based in suburban Hillside, Ill., is also in the business of selling forms and other supplies to business. The consensus of analysts is that Moore needs Wallace for strategic reasons but initially offered a low-ball bid.

The revised bid at $60 is more fairly priced, although some analysts have mentioned $65 as a proper target price.

In any event, the situation is fraught with risk. If Moore truly backs off after Nov. 3, as it has threatened to do, Wallace shares could fall sharply. If Moore accepts shares tendered by the deadline and acquires Wallace, remaining minority shareholders who did not tender could face delays in getting their money out of the stock.

That’s why many Wallace shareholders, including institutional investors, took their 33 percent gain and sold shortly after the first Moore offer, and many more sold when the bid went to $60. Trading volume in Wallace stock since late July reflects this reaction. Wallace stock closed at $58 Friday, supporting the view that $60 a share may be the end of the line for this deal, despite the possibilities of a higher bid or even another bidder.

First Interstate stock has also traded above the level represented by Wells Fargo’s offer, which would be a stock-for-stock transaction.

Moore officials urge Wallace shareholders to tender their shares now to “send a message” to Wallace management and pressure it to accept the $60 bid before the deadline. Shares tendered at this point will not be purchased by Moore because Wallace has an anti-takeover provision that makes the acquisition prohibitively expensive if Moore acquires 20 percent of Wallace. Wallace could not, however, ignore a groundswell of tender offers at $60.

The vast majority of Wallace shares are in the hands of institutional traders that can turn on a dime in nail-biting takeover situations. The “message” from small investors really doesn’t matter, and they can be at a serious disadvantage trying to play the takeover game.

This is one time when exercising your rights as an individual shareholder by holding shares in your safe-deposit box can be a major mistake.

John Wilcox, chairman of the proxy solicitation firm Georgeson & Co., said individual Wallace shareholders may be able to wait until the last minute to make up their minds. But they should first deliver their shares to a broker that works for a so-called eligible institution, or one that is allowed to tender shares at the last minute without having to deliver them for 10 days.

“It’s much more difficult for the small investor to undo anything that he does. He needs time,” said Bill Willis Sr., president of the proxy solicitation firm Kissel Blake Inc.

So far only about 2 percent of Wallace’s shares have been tendered to Moore, but that doesn’t mean the $60 bid is unappealing.

Bartley Madden, a partner in Chicago-based HOLT Value Associates, said the answer for small investors may be simple: Don’t tender to Moore; sell on the open market.

The stock had climbed from $29 at the end of last year to $44 just before Moore’s first bid. Moore “would have to make superlative improvements in Wallace to get a return on their purchase price above their cost of capital,” Madden said.