By Ross Barrett, Tigran Minasian, Jian Wee Soh, Kai Ye, Oscar Silva, and Yagnesh Patel, (Imperial College London), Junqi Wang, and Annant Bhargava (University of St. Andrews)
Photo: Miquel Parera (Unsplash)
Overview of the deal
Acquirer: HSBC Holdings Plc
Target: Silicon Valley Bank UK
Total Transaction Size: £1
Closed date: 13th March 2023
Target advisor: Rothschild & Co.
Acquirer advisor: HSBC
SVB, a leading venture capitalist firm, announced its decision to sell stocks to raise additional capital on March 9th, causing its share prices to plummet by 60%. This sparked concerns of deposit failure among its VC/start-up clients worldwide, including in the UK, where as much as 30% of tech startups were severely affected. The Bank of England responded by issuing a court order to place SVB into an insolvency procedure. This prompted a group of influential VC investors in the UK to petition for government intervention and the re-capitalisation of SVB UK. Following a quick search for potential bidders, HSBC emerged as the most competent buyer.
The acquisition will enable HSBC to focus on its operations in the EMEA region and strengthen its Private Banking and Corporate Banking arm, while also allowing for greater engagement with the venture ecosystem in the UK and Europe. Moreover, HSBC completed the transaction without any monetary support from the UK government, and the due diligence process took only five hours.
“This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.” - Noel Quinn, CEO (HSBC)
Company Details (Acquirer - HSBC)
HSBC, or the Hongkong and Shanghai Banking Corporation, is a multinational bank with its headquarters in London, UK. It is one of the largest banks in the world, serving over 40 million customers through its global network of over 3,900 offices in 65 countries and territories.
Founded in 1865, headquartered in London, UK
CEO: Noel Quinn
Number of employees: 220,000
Market Cap: $135.6bn (as of 30/03/2023)
LTM Revenue: $55.3bn
LTM EBT: $17.5bn
LTM P/E: 9.2x
LTM P/BV: 0.7x
Recent Transactions: AXA (Aug 2021), HSBC Life Insurance Company (May 2020), Juratek (Oct 2019)
Company Details (Target - Silicon Valley Bank UK)
Silicon Valley Bank, along with its UK subsidiary, were part of SVB Financial Group, a publicly traded financial institution which specialised in the technology industry and was the favoured lending institution for nearly 50% of all venture-backed tech startups. The UK branch, which ran under its own local banking licence, was the first overseas location that SVB had opened, in order to gain a lead of the thriving opportunities in the innovative technology communities across the UK and Europe.
Prior to the liquidity insolvency of the parent company, SVB UK served some 3,300 British tech start-ups; and contrary to its parent, which was positioned strongly in mortgage-backed securities, the portfolio of SVB UK primarily consisted of short-term, liquid assets, therefore, suggests sufficient capitalization. The recent collapse and seizure of SVB due to a deposit run caused by the meteoric central bank-endorsed rate hikes led to the downfall of the California-based lender’s British arm.
Despite limited presence in the UK and the lack of crucial functions supporting the financial system, SVB UK was placed into a Bank Insolvency Procedure by the Bank of England (BoE) on March 10th in order to ease further panic among British startups and investors.
Founded in 2010, headquartered in London, UK
CEO: Erin Platts
Number of employees: ~700
Market Cap (parent company): $6.3bn (as of 09/03/2023)
LTM Revenue (parent company): $5.8bn
LTM EBT (parent company): $2.2bn
Projections and Assumptions
HSBC’s London-listed share price fell 3.6% in morning trading upon the deal announcement and continued downhill to drop nearly 8% two days later. However, its acquisition of SVB UK ensures the bank does not get liquidated and thereby safeguards deposits amounting to a total of £6.7 billion that were held by start-ups in life-sciences, biomedical, fintech and other technology sectors.
The £1 deal value was a symbolic gesture of HSBC acquiring SVB without its assets and liabilities, but it was partly driven by an urgency to close the deal and thus the inability to value all of SVB’s loan book in such a short time. In fact, due diligence concluded 70% of SVB UK’s loan book were high-quality credit lines, but the other 30% were not fully analysed, thus making it a gamble for HSBC as these unanalysed loans could potentially backfire in the future. Nevertheless, SVB’s £5.5 billion loan book represents only a tiny fraction of HSBC’s $3 trillion global balance sheet and HSBC should be able to inject liquidity should the need arise.
Besides that, due to HSBC’s well-known scepticism towards cryptocurrency and digital assets, it is expected that HSBC will scale down lending towards cryptocurrency companies and may lose some of SVB’s customers in that space. With SVB’s reputation of being a one-stop shop for technology start-ups, this acquisition is expected to regain confidence in SVB, but customers may learn their lesson from this fallout and choose to diversify to larger banks instead, avoiding risk of concentration in one bank. Furthermore, ever since the fallout of SVB, investors are leaning towards safe haven assets like money market funds as these funds invest in lower risk assets such as short-dated US government debt and offer attractive yields in a high interest rate environment. The accelerated pace of inflow has caused these funds to swell by over $286 billion, thus implying it will take some time for investors to regain confidence in riskier technology lenders like SVB.
The UK’s tech sector is of utmost importance to the British economy, supporting thousands of jobs. The acquisition of SVB by HSBC, under the advisory of the UK Treasury and Bank of England, will prove beneficial to HSBC - introducing the UK giant to the tech-startup environment - whilst also reviving the near-collapse of the UK start-up ecosystem.
Given the severity of the crisis, HSBC not only will protect the clients’ assets and depositors at SVB UK but will also open up growth opportunities with no additional risk incurred. Whilst still pursuing their long-term strategy, HSBC enhances their ability to serve innovative and fast-growing firms in the technology and life sciences sectors, as mentioned by their CEO, Noel Quinn. On that note, HSBC has a strong financial position, wherein, they will be able to support the fiscal instability of SVB, regaining investor and depositor confidence. In turn, SVB UK customers can continue to bank with the knowledge that their deposits are backed by the strength, safety, and security of HSBC.
Further, HSBC, being Europe’s largest bank with strong affiliations across the EMEA, could help roll out SVB’s innovation throughout the EMEA region. Similarly, through HSBC’s strong risk management strategy, such a crisis will be mitigated in the future, keeping the bank’s capital equipment healthy and financially viable.
Risks and Uncertainties
HSBC’s profitability originates largely from Asia, while maintaining a ring fenced operation in the UK; it has already separated its western and Asian business operations due to pressures from its largest shareholder Ping An, a Chinese insurer.
What lies in the dark is the valuation of the eroded amount of SVB UK’s equity value since the start of the bank run (prior to the collapse of its parent, SVB UK had £1.4 billion equity value). Although the due diligence process before the acquisition proved that SVB UK's £5.5 billion loan book consisted of around 70% high-quality credit lines, the other 30% remained difficult to assess.
Another noticeable risk for HSBC is the corporate culture clash. Startups and venture capitalists, which focus more on growth opportunities in sectors such as technology and life sciences, and possess the spirit of opportunism and entrepreneurship, tend to behave differently compared with big banks when it comes to risk appetite. HSBC has not yet decided whether to keep SVB UK as a separate brand, though the procedure of client integration will be tricky.
For the banking sector overall, the increasingly hawkish stance made by global central banks on tackling inflation remains the current trend. Rapid rate hikes, along with potential mismanagement, shrink profitability of lenders and further distort their portfolios as prices of short-term assets tumble and the costs of borrowing skyrocket; finally, liquidity runs contributed to the demise of several regional banks in the US including SVB, as well as European lending giant, Credit Suisse. The real challenges lie ahead for policymakers and corporate leaders on how to stabilise public confidence for the financial services industry and avoid further panics among investors.
“The UK’s tech sector is genuinely world-leading and of huge importance to the British economy, supporting hundreds of thousands of jobs. I said yesterday that we would look after our tech sector, and we have worked urgently to deliver on that promise and find a solution that will provide SVB UK’s customers with confidence.” - Jeremy Hunt, Chancellor of the Exchequer (HM Treasury)