Inside a bank’s call to be an M&A buyer and seller at the same time
Are we a buyer, or are we a seller?
It’s an age-old question for banks of a certain size that is as complicated as ever amid lingering challenges to growth, predictions of further consolidation and the difficulty in determining when — or if — regulatory relief and tax cuts sought by President Trump will occur.
Pacific Continental in Eugene, Ore., wrestled with the question for months after being approached by Columbia Banking System in Tacoma, Wash., about a takeover. Its answer was a rare one: We are both.
Informal talks first occurred in June 2015 in Seattle, when Melanie Dressel, Columbia’s CEO, met with Roger Busse, Pacific Continental’s CEO, the companies said in a recent regulatory filing.
A major sticking point was the fact that Pacific Continental was pursuing acquisitions of its own. The $2.5 billion-asset company was in discussions to buy Foundation Bancorp and was holding talks with several other targets.
Pacific Continental’s board decided last February to postpone a meeting between its chairman and his counterpart at the $9.5 billion-asset Columbia and plow ahead on the Foundation deal, which was publicly announced in April.
The chairmen finally met on May 24 at a restaurant at the Portland, Ore., airport. Pacific Continental’s Bob Ballin made it clear that his company planned to stay independent until it had completed the acquisition and integration of Foundation Bank. The following month, the executive committee of Pacific Continental’s board reiterated that senior management needed to focus on Foundation rather than negotiating a deal with Columbia.
Pacific Continental even raised $35 million in late June, issuing subordinated debt for the purpose of funding future acquisitions. Columbia’s board, however, was kept apprised of the debt offering and Pacific Continental’s progress integrating Foundation, the filing said.
Busse budged somewhat in late June, asking Dressel for “a general idea of potential valuation and synergies,” though noting that his company remained focused on growth strategies. Dressel said that a nondisclosure agreement would be required before she would provide that information.
Pacific Continental’s board met with its investment bank in mid-July to go over the bank equity market, the acquisition landscape and potential acquisition candidates. A potential merger with Columbia was also discussed, and the board decided to authorize Busse and his team to negotiate a nondisclosure agreement.
The filing makes no mention of any other suitors for Pacific Continental, which did not reach out to any other banks to gauge interest in a merger.
The management teams of Columbia and Pacific Continental, along with each company’s investment bank, met on Aug. 11 at the Seattle-Tacoma International Airport conference center to discuss financial results, business models, credit processes and niches, among other things.
Columbia made its first offer on Sept. 8, proposing a 90% stock deal that valued Pacific Continental at $484.4 million, or $21 a share.
Pacific Continental responded a few weeks later, requesting terms that valued the company at $21.50 a share, a collar agreement and more severance benefits for its employees. While Columbia agreed to a compromise on severance, the company held firm to the financial terms it provided in its original offer. Other protections were worked in to cover potential fluctuations in Columbia’s stock price.
Bank stocks then began to rise significantly after the presidential election.
As a result, Columbia in early December proposed an all-stock deal with a floating exchange ratio if Columbia’s stock topped $37.56 a share and outperformed the KBW Index over a set period of time.
The new offer, combined with the appreciation in Columbia’s stock price, increased the proposed deal value by 33% from the original offer to $27.93 a share. Eliminating the cash component also improved certain transaction metrics at Columbia, including its regulatory capital ratios.
Columbia, meanwhile, was looking at a litigation issue at Pacific Continental that seemed headed for settlement. While the filing did not provide specifics on the issue, Pacific Continental said in a regulatory filing last year that it had reached a settlement agreement in a case involving claims the bank aided a client’s sales of illegal securities.
Pacific Continental’s board agreed in late December to accept the new offer. The ultimate deal value was $27.85 a share — or $660 million — when it was announced on Jan. 9 of this year.