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Heritage Commerce outbid 3 others in Tri-Valley Bank deal

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Heritage Commerce outbid 3 others in Tri-Valley Bank deal

San Jose, Calif.-based Heritage Commerce Corp has secured its bid to acquire San Ramon, Calif.-based Tri-Valley Bank early on by offering a merger proposal with the highest valuation among competitors.

In the third quarter of 2017, Tri-Valley's financial adviser, FIG Partners, contacted 11 companies for a potential merger. Of these, four submitted nonbinding indications of interest, including Heritage.

Heritage offered an all-stock deal with an implied value of around 75 cents per share and an aggregate value of $31.3 million. This proposed offer had the highest valuation among the four parties and gained the approval of the Tri-Valley board, subject to the negotiation of several nonfinancial terms.

In early October, the two companies executed their nonbinding indication of interest and exclusivity agreement. By the end of the month, the draft merger agreement included a fixed exchange ratio of 0.0529 Heritage common share for every Tri-Valley common share. The draft also required Tri-Valley to maintain a minimum level of shareholders' equity.

However, in November, the companies considered the effects of lowered federal taxes to Tri-Valley's deferred tax assets and shareholders' equity, which could fall into a level that would be below the minimum required by the merger.

Taking this into consideration, Heritage revised its merger proposal to a fixed exchange ratio of 0.0517 Heritage common share for each Tri-Valley Bank common share.

Tri-Valley's financial adviser, FIG Partners, estimated that should the bank's federal tax rate decrease to 21%, its lowered shareholders' equity could cause the exchange ratio to drop to around 0.0479 Heritage common share for every Tri-Valley common share, with an implied value of 76 cents per share. This did not sit well with four Tri-Valley directors, who rejected the proposal.

On Dec. 18, 2017, the Tri-Valley board met with Heritage CEO Walter Kaczmarek and proposed a fixed exchange ratio with an implied value of 77 cents per share, based on Heritage's 20-day weighted closing price. Heritage agreed, revising its offer to 0.0489 Heritage common share for each Tri-Valley common share.

Prior to a meeting to decide on the proposed offer, Tri-Valley Director David Beretta resigned, saying he would not be able to comply with his noncompetition and shareholder agreement. The Tri-Valley board on Dec. 20, 2017, unanimously approved the proposed terms and executed the merger. The deal was announced that day after markets closed.