Finova Group Inc. of Phoenix moved Thursday to beef up its small- business lending, announcing it has agreed to buy Sirrom Capital Corp. for $379 million.
This is the 12th deal by Finova, which has been mounting a challenge to regional banks in lending to small and medium-size corporations.
Sirrom makes loans to very small businesses secured by equity in the borrower. The Nashville-based lender's stock plummeted in July when it said it would write off about $10 million from a bad loan. Since then it has been plagued by shareholder lawsuits and skepticism about its accounting methods. The company's share price fell from a 1998 high of over $34, to $2.375 in October. It rose $2, to $8 Thursday.
The Finova deal would give Sirrom shareholders 0.1634 shares of Finova stock for each share of Sirrom-or about $9.30 a share, based on Thursday's opening price.
Most of Sirrom's top management - including John A. Morris Jr., the co- founder and chairman-will be leaving after the deal closes, said Finova chief executive Sam Eichenfield during a conference call with analysts.
"There are enormous synergies that will come out of this effort," Mr. Eichenfield said, pointing out that many of Sirrom's 250 customers also have loans from Finova.
In addition to a $535 million loan portfolio, the Sirrom deal includes Harris Williams & Co., a Richmond, Va.-based merger and acquisition adviser. Mr. Eichenfield has often expressed interest in providing such services.
Analysts said buying Sirrom was an important step in Finova's plan to become a one-stop-shopping center for small businesses.
"This rounds out their product menu," said Reilly Tierney, an analyst with Fox-Pitt, Kelton, New York. "It's very complementary to their existing businesses."
The deal, though, is "not a layup," Mr. Tierney said, in part because Sirrom makes loans that are generally more risky that Finova's, and Sirrom is facing several shareholder suits.
Several analysts during the conference call expressed concerns about the quality of Sirrom's portfolio.
Mr. Eichenfield said that he has "looked at every single loan" Sirrom has. Finova will also conduct final due diligence on all of Sirrom's loans right before the deal closes, Mr. Eichenfield said.
In addition, Finova will be converting Sirrom's accounting to its methods and paying off Sirrom's debt, he said.
Sirrom will settle the shareholder suits before the deal closes, he said. "We have satisfied ourselves that there are sufficient funds for Sirrom to dispose of shareholder litigation," Mr. Eichenfield said. "We'd like to consider it a closed issue."
Mr. Eichenfield also said during the conference call that the company's 1998 earnings will be in line with analysts' predictions.
Some observers said Sirrom's strategy of securing loans with company equity is very similar to an early, unsuccessful strategy by Heller Financial Inc. Chicago-based Heller was forced to take a $1.1 billion writedown in 1990 after several loans tanked; it then changed its lending strategy.