Trust and mutual respect were key reasons why BBCN Bancorp chose a merger with Wilshire Bancorp.
Strong financials matter, too, but it often takes more than good numbers to compel Korean-American banks to merge. That's why many rumored combinations in that niche industry fail to materialize.
The Los Angeles companies finally got to a point where they were comfortable reaching a deal that cements BBCN's position as the nation's biggest Korean-American bank. The stakes of the merger were high, especially for Hanmi Financial, which attempted to thwart the deal with an unsolicited bid for BBCN in late November.
As for Hanmi, top executives at BBCN and Wilshire assert that an assessment of execution risk and hurt feelings from past negotiations contributed to a decision to leave the smaller Korean-American bank on the outside looking in. Still, they wouldn't rule out making a bid to roll up Hanmi in the future.
"If we had delayed the Wilshire deal to open negotiations with Hanmi, there was a good chance BBCN would lose both deals," said Kevin Kim, the $7.6 billion-asset BBCN's chairman and chief executive. "That would have been the worst case for our shareholders."
In September, BBCN asked Keefe, Bruyette & Woods, its investment bank, to evaluate possible deals with Wilshire and Hanmi to see which would be more beneficial, Kim said. Based on KBW's assessment, the board opted to pursue Wilshire, with Hanmi serving as a backup plan.
Hanmi's public overture was made after BBCN and Wilshire had ironed out the preliminary terms of their merger and were working under an exclusivity agreement that expired on Monday. Kim said BBCN still instructed KBW to evaluate Hanmi's offer against the Wilshire deal; the investment bank determined that Hanmi's offer wasn't "materially superior," Kim said.
BBCN was also concerned that ditching Wilshire to talk to the $4.2 billion-asset Hanmi would free Wilshire up to look at other opportunities. Another worry was that the $4.7 billion-asset Wilshire's asking price could have gone up if talks resumed, Kim said.
One of Wilshire's directors had actually fielded a phone call from Hanmi, which expressed an interest in merger, said Steven Koh, Wilshire's chairman. Wilshire, however, had previously spent almost a year in 2012 in talks with Hanmi that proved fruitless.
"We were hurt a lot, emotionally and financially" by the previous experience, Koh said. "Trust and transparency in this kind of merger in the Korean banking space is very important."
C.G. Kum, Hanmi's president and chief executive, characterized this year's call as a casual request to keep his company in mind if Wilshire ever considered pursuing a partnership.
Given KBW's evaluation, BBCN decided it was in the best interest of shareholders to move forward with Wilshire, even though the decision lacked the full support of BBCN's board. Wilshire and BBCN announced their $1 billion all-stock deal on Monday.
"The combination of these two banks came through mutual, sincere trust and transparency," Koh said. "From the beginning until now, and in the future, we respect each other. We are comfortable with each other."
Kum said Hanmi went public with its offer after numerous letters sent to BBCN failed to generate conversation, though a "significant number of BBCN directors through intermediaries" had reached out to express interest in a deal.
Hanmi would continue to "evaluate its options," Kum said, but he declined to say whether they would include appealing directly to BBCN's shareholders. Kum, whose offer is still on the table, said he continues to receive calls from BBCN investors who are concerned about the Wilshire deal and want "more clarity about our proposal."
Kum maintained that Hanmi's offer is still better for BBCN's shareholders since it included a roughly 10% premium.
Those arguments are unlikely to sway Kim, who said he has "full commitment from both BBCN and Wilshire to keep this deal intact from any outside interference." He added that BBCN would use "whatever resources were necessary to protect the deal."
While it was promoted as a merger of equals, BBCN's shareholders would own 59% of the surviving company, which would operate under a new name. BBCN was formed through a similar process when Center Financial and Nara Bancorp merged in 2011.
Reflecting on the Center-Nara merger, Kim said he believed the combination was successful, though integration took longer than expected. Management had to wade through how to bring "two cultures into one," which went beyond "physically putting them into the same office." Success came down to giving employees of both banks "the kind of mentality that they belonged to the same team and were working for the same company," Kim said.
"I think these are lessons we can apply to the Wilshire process," Kim added. "It should be more efficient. The similarities between the two companies are so great."
While BBCN and Wilshire are currently focused on completing and integrating their deal, the executives said future acquisitions are possibilities. Hanmi, meanwhile, could also fit into a long-term plan.
BBCN and Wilshire "have some significant challenges they need to deal with in the near term," Kum said when asked the potential of Hanmi eventually merging with the rebranded BBCN. "Let's see what happens."