| Case Studies
Farm and Home Savings
Our experience with California Federal prompted many
calls, including one from Farm and Home Savings, which was a large mutual
savings bank with offices in Missouri and Texas. They had a letter of intent to do an
underwritten initial public offering with Salomon Brothers as the managing underwriter.
Their idea in calling us was to save underwriting commissions on the shares that could be
marketed directly in their service area.
Farm and Home followed several other large mutual banks in
the new conversion IPO market and that "window of opportunity" actually slammed
nearly shut before they were ready to offer shares. Institutions had gotten their fill, at
least temporarily, of savings bank shares. Investment bankers at Salomon Brothers began to
encourage us to sell as many shares as we could in the direct portion of the offering.
This added incentive for the DPO led to some experiments.
For instance, large announcements of the offering were made in the daily and weekly
newspapers, shopping news and organizational newsletters wherever the bank did business.
Radio announcements were played on all the local stations. Cable television was used to
get the word out and cause people to telephone for a prospectus package. Even billboards
carried the news.
One of the innovations was to employ local securities
brokers to sell shares in the direct offering. (Regulations did not permit an
"underwriting," but the bank could pay commissions for "best efforts"
selling.) We met in nearly every brokerage office in their area, both independent and
branches of large firms. Some brokerage management officials would not let any of their
sales people participate at all, while others left them alone to participate. The bank
paid a commission that was meant to equal what a selling brokerage firm would receive in
an underwriting syndicate (60% of a 7% commission, which we rounded up to 4.5%).
When the brief DPO period was over, the bank furnished
each participating firm with a printout of the firm's sales, by broker and by customer,
and a check for the commission. The broker program had produced about $7 million of the
$45 million sold in the DPO. Sales by the underwriters, almost entirely to institutions,
were another $27 million. Ironically, the amount sold by underwriters included exercise of
their "Green Shoe" option, which allowed them to sell another 15% of the entire
offering. In other words, the offering was originally to have been for about $63 million.
With $45 million sold directly, the underwriters were able to get orders for the balance,
plus another $9 million in new shares. On the other side, the bank received $9 million in
additional capital for the same costs and effort.