A California bank's hardball pursuit of two smaller rivals begs the question: Will the traditionally friendly bank merger market turn nasty as deals pick up?
PacWest Bancorp's (PACW) two M&A faux pas — an aggressive move on one target Tuesday and a poaching of another two weeks ago — illustrate the dynamics giving wannabe acquirers cause to push reluctant sellers to the altar if regular wooing fails.
It is a buyer's market, perhaps the biggest one banking has seen in decades. That means the few banks that can and want to acquire, such as the $5.4 billion-asset PacWest, have an unusual amount of leverage. Acquisition-hungry banks and investors are also losing patience with banks that probably cannot stay independent in the long run but are healthy enough to delay a sale until stock prices rebound. They blame such delaying tactics for the slow bank-merger market.
PacWest Chief Executive Matthew Wagner apparently sees an advantage in this environment for suitors willing to break some of the gentlemanly rules of pre-crisis banking, experts say.
He went public on Tuesday with his $212 million bid for First California Financial Group (FCAL) when decorum dictates walking away and staying mum when a takeover offer is rejected. On April 30 he ignored the dictum that one does not torpedo another banks' merger agreement with a $58 million offer for American Perspective Bank in San Luis Obispo, Calif., which Umpqua Holding Holdings (UMPQ) was to buy for $44 million.
Bankers have a notorious herd mentality, and Wagner's risky West Coast maneuvering has certainly caught broad attention, investment bankers and deal lawyers say. It raises the prospect that others will stop playing so nice, particularly for banks with stakes outstanding to activist hedge funds or financiers clamoring for change.
"There is this pervasive sense that there should be more consolidation going on than there is," says Jacob W. Thompson, an investment banker who handles bank deals for Samco Capital Markets, an Austin broker/dealer. "You may see some more of these activist shareholder-driven transactions."
Hostile takeovers generally do not work for banks because of the way banks are regulated and controlled. Boards have broad leeway to reject offers deemed insufficient, and banks have tended to have passive, friendly investors.
The recession changed that last dynamic as hedge funds and distressed-fund players took a larger position in the industry. First California was put into play in February when two of its largest investors — the Pohlad family and investor group Castine Capital Management — said in regulatory filings that it should sell itself due to anemic shareholder returns.
Some would say the PacWest offer stops short of a completely hostile bid, which typically involves buying debt or equity as a means of exerting initial influence. Still, "it certainly doesn't have the makings of a friendly deal," Thompson says. "They are being aggressive and they are certainly not taking no for an answer. And they are hoping the activist shareholders will be their ally."
These sorts of spats typically cannot happen because buyers and sellers almost always enter into nondisclosure agreements prior to even preliminary discussions, he says. Talks between PacWest and First California are said to have broken down over nondisclosure terms.
PacWest is using a deal tactic known as a "bear hug," which basically comes down putting pressure on a board to yield to a bid or negotiating term, says Kip Weissman, a partner with the law firm Luse Gorman Pomerenk & Schick.
They have rarely happened in banking because the commoditized nature of the business has negated the need for hardball tactics. If one bank did not want to sell, a buyer could always try and buy another property with a similar business model, Weissman says.
PacWest may be wagering that the old M&A rules no longer apply to First California, which has some scarcity value as a $2 billion-asset bank with 19 branches in a desirable stretch of California, Weissman says.
The move is a gamble for PacWest because it could stain its reputation among future sellers, Weissman says.
It also could also force First California into the hands of another buyer.
There are a number of fairly large banks interested in expanding in California, from U.S. Bancorp (USB) to Umpqua.
"If you are going to be a roll-up player it is very important to have a good reputation among other targets," Weissman says. "There is an element of hostility in it. The buyers have some risk here."
Also, he notes: "With a stock deal they'll acquire these activist investors" in First California.