What happened
Shares of Columbia Banking System (COLB) traded down 14% at midday on Tuesday after the regional bank announced plans to combine with Umpqua Holdings (UMPQ). The deal will create a West Coast banking powerhouse, but investors are not feeling enthusiastic about the deal on Tuesday.
So what
Before markets opened, Columbia Banking and Umpqua announced an all-stock merger that would create a $7.7 billion market capitalization bank with more than $50 billion in combined assets. Terms of the deal call for Umpqua shareholders to receive 0.5968 shares of Columbia Banking for each Umpqua share they own. Based on Monday's closing price, Umpqua shareholders are getting about $23.44 per share, a 12% premium.
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Columbia is smaller than Umpqua, and though technically the acquirer, Umpqua holders would own about 62% of the combined entity. Post-deal the combined bank will operate under the Umpqua Bank name with Clint Stein, Columbia's current CEO, retaining the title at the merged entity.
"This is a historic partnership that will enhance what both banks are able to do for clients, team members and communities, while driving significant value for our shareholders," Stein said in a statement. "We believe blending the complementary expertise, services and innovative technology of both banks will position the combined organization as the preferred bank for business and families across the West."
Now what
The combined bank would have $43 billion in deposits spread across Oregon, Washington, California, Idaho, and Nevada, and should have the resources needed to better compete against bigger, well-funded rivals. The two banks expect to strip out more than $1 billion in annual costs, making the resulting company more efficient.
But at least today, Columbia investors appear to be disappointed that their shares get no premium to complete the deal. Shares of Umpqua, by comparison, initially traded up on the news but fell in sympathy with Columbia as the day went on. With the deal being all-stock, the value of the transaction will ebb and flow with the price of Columbia shares.
Columbia shares have been relative underperformers so far this year, up just under 15% for the year heading into Tuesday compared to Umpqua's nearly 40% gain. For long-term holders the deal makes a lot of sense, but based on the stock's reaction on Tuesday it appears investors who were hoping for an acquisition premium are now looking elsewhere.
