Major Shareholder Rejects ISS' Recommendation Regarding Pacific Enterprise Bancorp's Flawed and Ill-Conceived Merger With BayCom Corp
Shaul Kopelowitz, who holds approximately 9.9% of the outstanding common shares of Pacific Enterprise Bancorp (OTC: PEBN) ("PEBN" or the "Company"), today responded to the recommendation issued by Institutional Shareholder Services, Inc. ("ISS") regarding the Company's proposed merger with BayCom Corp ("BCML"). As publicly stated, Mr. Kopelowitz plans to vote AGAINST the proposed merger at the upcoming special meeting of shareholders to be held on December 13, 2021.
Mr. Kopelowitz commented:
"As one of the largest shareholders of PEBN, I am very disappointed that ISS recommended for the proposed merger with BCML, which I believe is an ill-conceived and strategically flawed transaction. I question how ISS can believe the Company performed a 'reasonable review of strategic alternatives' when it seems there are superior alternatives available that would not subject shareholders to such a punishing discount, including the liquidation of PEBN.
The fact that a liquidation has clearly not been considered makes me wonder whether the Board of Directors and management are really acting in the best interests of shareholders or simply making decisions based on outside factors, such as potential future employment opportunities at BCML and the change in control payments they stand to receive if the deal goes through.
To be clear, I do believe that the future is bright at PEBN despite management's attempts to paint a dire picture of the Company's prospects as a standalone entity. One may be forced to question why management would hold such a pessimistic view of the Company if they believe they are the right leadership team to drive future growth at PEBN and if they have fully committed themselves to the bank.
In my view, the proposed transaction does nothing for shareholders other than deprive them of meaningful value. In its report, ISS notes that 'PEBN shareholders may be concerned that the offer implies a material discount to the unaffected share price,' before asserting the proposed deal is in shareholders' best interests. In fact, the merger consideration represents a 26.2% discount to PEBN's share price on the day prior to the announcement ? an unacceptable figure.1
In its report, ISS notes that the merger agreement does not preclude a third party from making an alternative proposal, but this statement seems disingenuous at best. As stated in BCML's October 29 Form S-4 filing, the merger agreement limits PEBN's ability to pursue alternatives to the merger.2 And, as further noted in the S-4, 'these provisions could discourage other companies from trying to acquire [PEBN], even though such other companies may be willing to offer a greater merger consideration to [PEBN] shareholders than the merger consideration that [PEBN] has offered in the merger.' In talking to industry sources, I understand there is interest from a bank which was not given a fair look at PEBN when Hovde Group, LLC allegedly fully marketed this deal.
ISS cites the fairness opinion provided by Hovde to PEBN shareholders in its report. However, I believe shareholders should consider the following points when assessing the fairness opinion's validity:
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Hovde was paid $100,000 by PEBN for the fairness opinion. Compare this to the $25,000 that BCML paid to Janney Montgomery Scott LLC for its fairness opinion. One must wonder about this discrepancy, especially as BCML is the larger of the two banks.
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Hovde's fairness opinion, while in my view is highly flawed, clearly states the following: 'Hovde's opinion should not be construed as implying that the merger consideration is necessarily the highest or best price that could be obtained by [PEBN] in a sale, merger, or combination transaction with a third party.' I believe this is downright insulting to shareholders when Hovde was not only providing the fairness opinion, but also responsible for the entire marketing process. One would assume that Hovde would be willing to stand behind its work. Apparently, this is not the case. Given Hovde's reluctance to rely on its own marketing, I believe PEBN's Board and shareholders should be extremely wary as well.
- Even if one was to presume that the methodology Hovde used in determining that the consideration BCML offered in the proposed merger agreement was sufficient, there is an additional issue: Hovde's fairness opinion is based on financial results up to June 30, 2021. PEBN's shareholder equity has increased by approximately $2 million since that point in time and shareholders are practically being asked to vote in favor of giving away that money for free.
While ISS seems to believe that PEBN shareholders will be able to ?participate in the upside potential of the combined entity,' I seriously question how anyone can believe there is significant upside potential in BCML, which has underperformed the S&P Regional Banking ETF by 18% and 50% over the last one- and two-year time horizons, respectively.3 Seeing as the Company's share price fell nearly 19% in the 24 hours following the announcement, I believe the market shares my view that the proposed merger is not in our best interests.4 I plan to vote AGAINST the proposed merger at the upcoming special meeting of shareholders and do not see how other shareholders could support the deal at this point in time. I remain open to engaging with PEBN's Board in a constructive manner to share my ideas and input on behalf of all shareholders."
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1 Institutional Shareholder Services report.
2 BayCom Corp Form S-4 filing, dated October 29, 2021: https://www.sec.gov/Archives/edgar/data/0001730984/000110465921131852/tm2129683d2_s4a.htm.
3 Total shareholder return for BCML and SPDR S&P Regional Banking ETF calculated as of the close on December 7, 2021.
4 Total shareholder return for PEBN runs from market close on September 7, 2021, the day of the announcement, to market close on September 8, 2021.
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