PacWest Bancorp to buy tech lender Square 1 Financial
PacWest Bancorp, a Century City company built through acquisitions, is making one of its more unusual purchases — one that would give it entree into the fast-paced world of young tech and life sciences firms.
By buying East Coast tech lender Square 1 Financial Inc., the parent company of Pacific Western Bank would be transformed into one of only three U.S. banking firms with deep expertise in handling some of the nation’s fastest-growing companies, along with the venture capitalists who back them and take them public.
The all-stock deal valuing the Durham, N.C., lender at $894 million would create a company with $19.3 billion in assets, more than 80 branches in Central and Southern California and more than 20 loan offices mostly in tech areas throughout the country.
It’s particularly good news for Southland tech and biotech boosters. They were excited that PacWest, with its local roots, was entering the fray and expanding the lending power of Square 1, already a major source of funds for smaller deals in the region.
“I like the potential that they’ll have more active involvement in their home market,” said Jim Andelman, managing partner for Rincon Venture Partners in Santa Barbara.
The deal comes as start-ups are blossoming in the Southern California tech scene, including entertainment app Snapchat Inc. in Venice and match-making service Tinder in West Hollywood.
The area has attracted commitments from behemoths Google Inc. and Yahoo Inc. to consolidate and expand their operations along side home-grown firms such as electronics maker Belkin International Inc. and advertising technology creator Rubicon Project Inc.
Though many banks are trying to expand their roster of technology clients, the niche is dominated by Silicon Valley Bank in Santa Clara, which handles more than half of all early-stage tech enterprises.
The bank and its parent company, SVB Financial Group, have set the pattern for tech lending and services. At the end of last year, it had $34.7 billion in deposits in the bank and $32 billion in client funds with another SVB subsidiary — an indication of how the tech industry is awash in cash, much of it provided by investors to fund breakneck growth.
The client funds constitute “operating money for companies that want to be the next billion-dollar concern,” said San Francisco bank analyst Julianna Balicka, who follows Silicon Valley, Square 1 and PacWest for brokerage Keefe, Bruyette & Woods.
PacWest has grown to more than $16 billion in assets, largely through the acquisition of more than 20 broader commercial banks. But the 10-year-old Square 1, with $3.1 billion in assets, has focused on a field mostly foreign to PacWest.
Tech start-ups typically need fewer bank loans to grow than older-line businesses, and their access to venture funding often fulfills much of their cash needs.
Venture capitalists, however, cannot provide the deposit and cash management services that banks can, and start-ups also might want to use bank loans to move quickly without surrendering any equity to venture capitalists.
Square 1 and Silicon Valley Bank also handle enormous sums for venture capitalists, accounting for money raised by venture capital partnerships and distributing the funds with precision in highly complex deals often involving international companies and investors.
Though based on the other side of the country, Square 1’s bloodlines run to the Southland. Balicka said the lender was opened in 2005 by former technology industry bankers at Imperial Bancorp in Inglewood.
Square 1 Chief Executive Douglas H. Bowers and his counterpart at PacWest, Matthew Wagner, did not return phone calls seeking comment about the deal, which was announced Monday.
The sale, expected to close in the fourth quarter, is subject to the approval of regulators and Square 1 shareholders.
In a statement, Wagner said the deal represents “an excellent opportunity to grow core deposits, expand our nationwide lending platform and increase our presence in the dynamic technology and life-sciences markets.”
Bowers said merging with PacWest “will be a terrific opportunity for our clients, employees and stockholders.”
“As part of PacWest, we will maintain our steadfast commitment to the entrepreneurial and venture communities, will be able to offer clients a wider array of products and will be well-positioned to continue to serve them through all stages of their growth,” he said.
As a smaller institution, Square 1 can quickly lose a growing client. Advertising software developer Shift in Santa Monica, for example, needed to raise its $15-million credit line as it added on more clients, but Square 1 was tapped out, Rincon Venture’s Andelman said.
Under the PacWest deal, Square 1 would be part of a bank six times its size and, therefore, would be able to increase such lines and hold on to its customers.
“It’s great they’ll have a bigger balance sheet,” Andelman said.
The purchase price was at a premium as bank takeovers go these days — 2.6 times tangible book value, a frequent yardstick. But with its tech focus, rapid growth and hoard of low-cost deposits, Square 1 is an uncommon bank.
“The price is not rich for what you are buying,” Balicka of Keefe Bruyette said.
For instance, PacWest would benefit greatly from Square 1’s low-cost deposits, she said, while Square 1 would be able to make far larger loans as part of a bigger institution.
Square 1 would keep its name and operate as a division of Pacific Western Bank.
Square 1 Bank’s single bank branch reflects a peculiar characteristic shared by Silicon Valley Bank: Clients are interested in structuring deals and arranging processing for complex financial transactions more than having a location to make deposits and withdraw funds.
Anywhere tech deals are done, both banks set up offices that mostly do not qualify as full-service branches. Square 1, for example, has 12 loan production offices in tech hubs across the country, including San Diego, Orange County and Santa Monica.
Silicon Valley Bank’s 35 offices include ones in England, China, India and Israel, as well as Irvine and Los Angeles. Only five of them — all in Northern California — are full-service bank branches.
For the venture capitalists and technology entrepreneurs in Southern California, the deal may make it easier to get loans and specialized banking services without relying on Silicon Valley’s larger venture capital and tech banking communities.
After Monday’s announcement, a Square 1 banker called a Southern California venture capitalist to assure him that the deal would be positive for start-ups shared in their respective portfolios. Gerard Casale, managing director of TYLT Lab, said he appreciated the sentiment.
Casale and Andelman worry, though, over what would happen when the hot market for start-ups turns cold. Tech-focused banks such as Silicon Valley Bank and Square 1 tend to keep lending through boom and bust cycles. But more diverse banks tend to pull back at times.
“That’s the rub,” said Casale, who has funded 18 deals in the last 18 months. He wondered whether PacWest would curtail Square 1’s lending: “Will it be aggressive or conservative when the market’s not frothy?”
