Where two financial institutions offer similar services and have the same target audience, merging may prove beneficial.
Merger not only strengthens the asset portfolio and market position of a bank, it also provides economies of scale. This enables the bank to adopt a competitive pricing policy to lure more customers. Recently, CapitalSource, Inc. (NYSE:CSE) and PacWest Bancorp (NASDAQ:PACW) have gone one step ahead by merging together to enhance their service portfolio and better serve their clients.
Value creation resulting from the merger
This merger strengthened PacWest Bancorp (NASDAQ:PACW)’s market position in California, making it the 6th largest bank in the state with a total of 96 branches operating in California. The bank will now own a total of $15 billion in assets. The merger has also resulted in diversification of the bank’s loan portfolio. It will now be serving the clients in a broader market. The merger supports PacWest Bancorp (NASDAQ:PACW) growth as a business-focused bank. It provides PacWest a significant opportunity to attract CapitalSource, Inc. (NYSE:CSE) loan customers as depositors.
The merger of PacWest and CapitalSource, Inc. (NYSE:CSE) is a financially compelling opportunity. The deal is expected to result in 9.4% and 18% accretion to Earnings Per Share (EPS) by 2014 and 2015 respectively, after including the estimated synergies. This will raise PacWest’s stand-alone expected EPS of 2014 and 2015 from $2.17 to $2.37 and $2.39 to $2.82 respectively. It is forecast to add 10% value to the bank’s tangible book value per share. Return on average tangible book value per share is expected to reach approximately 17% and return on average assets to rise to 1.65% by 2015.
The bank will also be able to maintain a strong capital position with a 11.7% tier 1 common equity ratio, a 10.5% total capital ratio and 15.7% total risk based capital, based on IBES consensus estimates.
PacWest has a track record of being a disciplined acquirer and experienced integrator. However, Block & Leviton LLP has begun scrutinizing this merger on the basis of a possible infringement of fiduciary duty by the board of directors of CapitalSource, Inc. (NYSE:CSE) in failing to maximize shareholder value with the proposed acquisition by PacWest. If the case is proven right, then PacWest may be forced to pay a higher price for this acquisition which would reduce the net synergies realized. However, it will benefit the shareholders of CapitalSource.
The current status of rivals in the banking industry
Bank of America Corp (NYSE:BAC) is also a key player in the U.S. banking industry.