HSBC’s eleventh-hour decision to offer £1 for Silicon Valley Bank UK was driven as much by its inability to fully analyse 30 per cent of the target’s loan book as the opportunity to win a host of start-up clients.
The bank’s executives had already determined that SVB UK and its customers were a good strategic fit, but they were struggling to work out a price.
Due diligence had concluded that about 70 per cent of SBV UK’s loan book was high-quality credit lines, backed by commitments made by limited partners, said people familiar with the discussions. The other 30 per cent were harder to analyse, but could be worth the gamble.
When the executives realised late on Sunday night that there were no rivals left, they settled on a bid of £1.
“We felt it was really attractive financially, with a £1.4bn equity value prior to the run on the bank,” said one of the people. “Late at night, reading the body language of the government, we got the sense there were no other bidders. So we said: ‘lets do it’.
“The question now is how much has eroded since [the run began]. It requires a lot of understanding of the assets,” the person added. “But ultimately we think it will be [worth] a lot closer to £1.4bn than £1 . . . You can take a lot of risk with that kind of cushion.”
Despite being ringfenced from its larger California-headquartered parent, SVB UK was hit by a liquidity crisis late last week after a swathe of the bank’s 3,300 tech-focused customers withdrew their money following the collapse of the US business.
For HSBC, which is attempting to grow its commercial banking business in high-growth industries such as life sciences, biomedical, technology and non-crypto fintech, the deal was too good to turn down. Chief executive Noel Quinn said the acquisition made “excellent strategic sense”.
HSBC believes that the start-up entrepreneurs could make clients of its private banking arm — a priority area for growth — while later-stage companies considering an initial public offering could cross over to the capital markets team.
“We are not gambling the bank’s future . . . but it was a nice opportunity and in the UK it would have taken two to three years of our strategic plan to build this kind of expertise and client base,” said one senior executive.
“There is also an enormous amount of goodwill towards us in the start-up community now,” another person involved in the process told the FT. “It has been great PR for the bank and [for relations] with the government.”
Andrew Williamson, managing partner at Cambridge Innovation Capital, said SVB spent 40 years working closely with the life sciences and tech industries.
The venture group instructed its companies to move their money out of SVB last week. But now, he said they would move the money back into HSBC, who should see a “groundswell of support”.
Vishal Gulati, managing partner of Recode Health Ventures, said he hoped HSBC retained the specialists from SVB who have a “deep understanding” of start-ups.
SVB UK can be easily absorbed by HSBC. Its £6.7bn of deposits and £5.5bn loan book only represents a tiny fraction of its new owner’s $3tn global balance sheet.
HSBC — often criticised for its conservative culture — moved with an uncharacteristic alacrity to buy the bank on Sunday led by chair Mark Tucker and chief Quinn. The bank approved a deal after an expedited due-diligence, signing between 3am and 4am on Monday morning.
The government did not run a beauty contest with other companies and considered HSBC the only credible suitor because it has “more liquidity than God”, according to a person familiar with the rationale of the government and Bank of England.
HSBC also did not seek any government guarantees for the debt and pledged to immediately inject £2bn into SVB UK to help fund its holdings of long-dated assets and keep operations running while it integrated the business.
However, the lender did secure a waiver from ringfencing rules to allow it to absorb some leveraged financial sponsor positions that would ordinarily be excluded from its UK unit, one of the people said. By law, British lenders must separate their investment and retail banking operations.
For the deal to be a success HSBC will have to ensure there is no further deposit flight. It must also convince a tech-savvy client base that a high street lender with a history going back to 1830s Birmingham can provide for their needs.
Executives, who have not decided whether to retain SVB UK as a separate brand, are leaning towards assimilation, pending feedback from new customers. HSBC UK chief executive Ian Stuart was due to address SVB staff on Wednesday.
“It is not like SVB is a centuries-old venerable brand, and now it is damaged,” said another senior figure at the UK lender.
However, the acquisition will also not change HSBC’s well-publicised scepticism about cryptocurrencies and digital assets.
“The crypto stuff will probably leave, either of their own accord or being politely off-boarded,” said one of the people involved. “They will realise that life would be too hard as a customer of HSBC.”
An investor at a UK-based venture capital company said the sector was taking a “wait and see” approach over long-term relationships.
HSBC is also in “wait and see” mode say executives. “In the global scheme of things it is a small bite, but potentially a very profitable one,” said one of the people involved in the deal.
“At the eleventh hour when it really mattered we were the only bidder . . . We’ve done the clients, country and the UK economy a big favour. So who cares if we make a lot of money?”
Additional reporting by Hannah Kuchler, Chris Giles, Siddharth Venkataramakrishnan and Scott Chipolina