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TheStreet Open House

Expect Wave of Smaller Bank M&A Deals to Continue: Jefferies

NEW YORK (TheStreet) -- The merger deal announced late on Monday between PacWest Bancorp (PACW) and CapitalSource (CSE) was particularly sweet for investors, but most deals over the next year and half should be much smaller, according to Frank Cicero, the global head of financial institutions investment banking at Jefferies LLC.

Jefferies served as the lead financial adviser for PacWest, while JPMorgan Chase was the adviser for Capital Source.

Following the announcement of the $2.3 billion acquisition of CapitalSource by PacWest, CapitalSource's shares rose 22% to close at $11.97 Tuesday, well above the offered value of $11.64 a share. PacWest's shares rose 7% to close at $34.77.

The combination was a particularly attractive one for CapitalSource, because its main subsidiary had an industrial loan company (ILC) charter. An ILC charter has a disadvantage because banks of this type are not allowed to gather coveted demand deposits (checking accounts) which typically are noninterest bearing.

Shares of both companies continued to rise on Wednesday, with CapitalSource up 1% in afternoon trading to $12.14, and PacWest up 2% to $35.43.

Investors should not expect to see many additional ILC deals similar to the one between PacWest and Capital Source.

"There is no other company I am aware of with CSE's size and stature, a nationwide finance company, while also looking identical to a bank on the ground, but unable to take demand deposits because of the ILC Charter," Cicero says.

When discussing what the PacWest/Capital Source might signal for bank M&A trends, Cicero says "In some ways, this deal was a continuation of a trend we have been seeing for a year and a half or so, but the difference is it is just a bigger deal. We have seen many $100 million to $500 million transactions, where stronger banks have bought competitors, and investor reaction has been good."

"Most of these deals have been at reasonable premiums, that have produced very good pro forma financial results. Looking at the number of years to earn back book value reduction, as well as [internal rate of return], the premiums have been low enough to satisfy investor demands," Cicero says.

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