SAN FRANCISCO - Doubling the size of its California operations, Detroit-based Comerica Inc. has agreed to buy Pacific Western Bancshares, the largest independent bank company in the Santa Clara-silicon Valley region.
The stock-swap transaction is valued at about $133 million, based on the $29 price at which Comerica's shares closed on Wednesday. That would translate to a purchase price equal to about 1.58 times Pacific Western's book value.
Analysts said Comerica's offer was high in view of Pacific Western's weak earnings and extensive asset quality problems, which reflect a downturn in California commercial real estate. Pacific Western's stock closed Thursday at $9.375 a share, down $1.25, following a runup in trading last week on rumors of a deal. Comerica fell 62.5 cents to $28 a share.
Move to Consumer Banking
For Comerica, which has $27 billion of assets and subsidiaries in California, Texas, Florida, Illinois, and Michigan, the acquisition represents a shift toward consumer banking in the Golden State.
Until now, Comerica has accumulated almost $1 billion of assets in California by buying business-oriented banks in the San Jose and Los Angeles areas.
Pacific Western, which is based in San Jose and has $1 billion of assets, holds an extensive commercial loan portfolio, but also operates a 23-branch retail banking network. It boasts a strong market share in a three-county region from San Jose south to Monterey.
The purchase will make Comerica "a full-service bank in California," said W. Todd Isom, an analyst with Duff & Phelps, the Chicago-based rating firm.
Yearlong Search for Suitor
Comerica ultimately would like to build a niche commercial and consumer banking franchise with as much as $5 billion of assets in California, said J. Michael Fulton, president and chief executive of Comerica Bank California.
From Pacific Western's view-point, the agreement climaxes a yearlong effort by its chairman and chief executive, Phillip R. Boyce, to find a buyer. Mr. Boyce founded the bank company 18 years ago, and has built it into northern California's second-largest independent bank.
Since disclosing last year that he had hired Morgan Stanley & Co. as his investment banker, Mr. Boyce has held merger talks with French-owned Bank of the West and Los Angeles-based First Interstate Bancorp, in addition to the Detroit bank, industry sources said.
Mr. Boyce was not negotiating from a position of strength. Pacific Western's nonperforming assets equalled 5.93% of total assets at the end of June, while its loan-loss reserves stood at a relatively weak 30% of nonperformers. If the reserve were boosted to the industry average coverage ratio of 70%, Comerica's effective purchase price would be about 1.9 times book value.
Three years ago, before its current slump, Pacific Western turned down an offer from the now-defunct Security Pacific Corp. for about 2.3 times its book value.
"It's unfortunate that Pacific Western shareholders will be leaving 10 to 12 cents per share on the table because management misjudged the market," said Calvin E. Wong, a principal of Alpha Capital Co., whose firm sold off a large stake in the San Jose bank over the last few years.
Downplays Payout Package
Mr. Boyce, who has been controversial in recent years because of his multimillion-dollar compensation packages will remain as a director and adviser to Comerica Bank California.
Sources familiar with the merger agreement said he stands to receive as much as $10 million in stock options, severance benefits, and other payouts as a result of the merger.
But in an interview, Mr. Boyce said his personal stake, not counting the value of his stock holdings, "would be less than half" that $10 million estimate.