The teeth of $10bn gift horse Silicon Valley Bank have received a thorough dental examination from acquirer First Citizens Bank. One result is a lawsuit against HSBC.
In March, First Citizens bought the failed tech lender in an auction staged by US banking regulators. It made the acquisition at a $10bn after-tax discount to net value. The market capitalisation of First Citizens jumped from $7bn to $19bn.
But there is a difference between the accounting value of assets and the nebulous but equally important value of a franchise. First Citizens is now suing HSBC, which acquired SVB’s UK business. The US lender has accused the British bank of improperly planning to hire more than 40 US bankers. The manoeuvre was allegedly launched on Easter Sunday and codenamed “Project Colony”.
First Citizens was not just buying valuations on a piece of paper when it purchased SVB. It was also acquiring the employment contracts of SVB bankers and with them client relationships.
So-called restrictive covenants — non-compete and non-solicit provisions — are increasingly controversial in the US. Critics including the likes of US competition regulator Lina Khan view them as a restraint of trade that harms entrepreneurship, labour markets and economic wellbeing.
But for companies like First Citizens, top employees are pricey investments replete with institutional knowledge and trade secrets. According to the SVB lawsuit, HSBC was told that the group of bankers could generate a whopping $1bn in annual profit within a few years. First Citizens must itself have reckoned on a windfall beyond that bald £10bn.
The corollary is that notional losses to the Federal Deposit Insurance Corporation exceeded that sum.
First Citizens claimed in court papers that bank rescues supported by private actors will be unappealing if key staff are easily lured away.
The more important public policy question is whether there is a better way of rescuing distressed banks. Fire sales may too easily deliver big apparent gains to a few bold acquirers and recruiters.
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