On July 25, shares of PacWest Bank, part of PacWest Bancorp, experienced a significant plunge of 27%, dropping from $10.33 to $7.50 in late trading. This sudden decline raised concerns in the financial and cryptocurrency communities, with some spec gating about the possibility of a potential banking meltdown. However, the shares quickly recovered in after-hours trading on the same day, reaching $10.10, following news of the bank's merger with its smaller rival, Banco of California.
The merger, an all-stock deal, is backed by private equity firms Warburg Pincus and Centerbridge, who will inject $400 million in equity capital for approximately a 19% stake in the combined entity. The aim of this merger is to strengthen both banks in The aftermath of the banking turmoil experienced in early 2023. After the merger, the combined banks are expected to have assets totaling around $36 billion and loans exceeding $25 billion.
PacWest has a market capitalization of approximately $1.2 billion, while Banco of California's market capitalization is around $764 million, resulting in a combined market capitalization of about $2 billion, as reported by Reuters. Shareholders of PacWest will receive 0.66 shares of Banco of California common stock for each share they hold in PacWest. Additionally, the combined company plans to repay roughly $13 billion in wholesale borrowings through asset sales.
PacWest faced significant challenges in May, with its shares plummeting by more than 60%, leading to fears of the bank's potential failure, especially following the failures of other US banks like Silicon Valley Bank, Signature Bank, and First Republic Bank earlier in the year. Amid the concerns, the Federal Reserve's emergency bank rescue loan facility, known as the Bank's Term Funding Program, reached a new high, surpassing $100 billion in late June. The merger with Banco of California is expected to bolster PacWest' position and mitigate potential risks, contributing to the shares' recovery in after-hours trading.
