The stock blip that changed a bank’s future

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Stock price volatility cost an unnamed bank a chance at buying Guaranty Bancorp in Denver.

Exclusive talks fell apart in April after a swoon in the would-be acquirer’s stock price spooked the committee tasked with finding the best deal for the $3.8 billion-asset Guaranty, according to according to a regulatory filing.

A month later, Guaranty agreed to sell itself to the $10 billion-asset Independent Bank Group in McKinney, Texas, for $1 billion. It is one of the five biggest bank acquisition deals announced this year.

The unnamed bank’s woes illustrate the fast-moving pace of M&A. The episode also highlights the delicate nature of takeover negotiations.

Guaranty’s board first considered selling after meeting with an investment bank in late October, the filing said. The investment bank met with a potential buyer in early December, but the institution shortly determined that it wasn’t in a position to pursue a deal.

Paul Taylor, Guaranty’s president and CEO, met with David Brooks, Independent’s chairman and CEO, on Feb. 28. Taylor met the leader of another bank a week later at an investor conference.

While the filing never identified the other bank, it notes that three Guaranty directors — John Eggemeyer III, Suzanne Brennan and Edward Cordes — recused themselves due to current or previous relationships with the suitor. Cordes is Guaranty’s chairman.

Eggemeyer is chairman of PacWest Bancorp, where Brennan once served as the chief risk officer of its bank. Cordes’ relationship with PacWest, if any exists, is unclear.

PacWest declined to comment for this story. A call to Guaranty wasn't immediately returned.

Both would-be acquirers provided preliminary all-stock offers on March 12 that Guaranty determined to be “substantially similar in implied value,” the filing said. The remaining details of those offers were not disclosed.

Three days later, Guaranty decided to pursue the unnamed bank’s proposal. They entered into exclusive discussions on March 16 over a deal with an implied value of $32.42 a share, or roughly $950 million.

A broad dip in bank stocks took place in the weeks after the negotiations began. The problem for the unnamed bank was that its shares fell more than the broader banking sector, the filing said. The KBW Nasdaq bank index declined by more than 10% over the last two weeks of March.

Guaranty’s committee determined that the unnamed bank’s stock price “was more volatile” than the overall sector. That concern, along with a reduction in expected cost savings, led the committee to second-guess pursuing a deal, the filing said.

Guaranty allowed the exclusivity period to expire on April 16 even though the other bank offered to use cash to cover a fifth of the proposed deal’s consideration. The same day, Guaranty’s investment bank reached out to Brooks, who remained interested in pursuing a deal.

Independent and Guaranty entered into a confidentiality agreement on April 20 to facilitate an exchange of information. Independent was not operating under an exclusivity arrangement.

Independent and the unnamed bank were urged in late April to increase their offers, which each bank provided on April 27.

Independent offered an all-stock deal that valued Guaranty at $33.08 a share, or roughly $969 million. The other bank’s offer included up to 20% cash and an implied value of $32.42 a share, or about $950 million.

Despite a possible cash component from the unnamed bank, Guaranty’s board and its advisers “noted that in each instance the implied value of the consideration offered by Independent was higher,” the filing said. Guaranty and Independent entered into a nonbinding letter of intent and began exclusive negotiations.

Guaranty’s board, excluding the directors who recused themselves, unanimously voted on May 22 to approve a merger with Independent. Directors at Independent also approved the deal unanimously on the same day, and the acquisition was announced.

The acquisition priced Guaranty at 319% of its tangible book value, based on data compiled by Keefe, Bruyette & Woods.

Independent expects the deal to be 6.5% accretive to its 2020 earnings per share. It should take about three years to earn back the expected 4.7% dilution to Independent’s tangible book value per share.

Taylor and Cordes will join Independent’s board. Michael Hobbs, president of Guaranty’s bank, will become Independent’s Colorado market CEO.

“This transaction represents the build out of our Colorado footprint through the acquisition of a high-quality bank operating in dynamic markets along the Front Range,” Brooks said in a press release announcing the deal. “Guaranty brings a committed management team, consistent level of high profitability, clean balance sheet, strong core deposit base, and a track record of growth.”

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