‘Bottom Feeders’: Who Would Be Interested in Silvergate Now?

Silvergate Capital’s stock has been decimated. Its staff has been slashed. It has gone up against historic customer withdrawals. 

And now the crypto bank has analysts and investors weighing the prospects of a healthier firm buying the up-against-the-wall business. 

After an unflattering business update from Silvergate, the company’s woes have analysts and investors speculating whether a healthier financial player could look to buy the crypto bank. 

Silvergate said in a preliminary fourth quarter earnings report Thursday that it so far has weathered a literal run on the crypto bank. Customers clawed back more than $8 billion from 

their accounts in the wake of FTX’s collapse. 

To fulfill those withdrawals and generate liquidity, the bank had to sell assets at a major loss, it said. Silvergate did not immediately respond to an additional request for comment. 

The company’s stock (SI) was down 42.6% through Thursday’s close. Its shares have plummeted about 90% over the past year.  

“The digital asset industry has undergone a transformational shift, with significant over-leverage in the industry leading to several high-profile bankruptcies,” Silvergate wrote in its update. “These dynamics have sparked a crisis of confidence across the ecosystem and led many industry participants to shift to a ‘risk off’ position across digital asset trading platforms.” 

The situation, which Samuel Dibble, a partner at law firm Baker Botts, dubbed “an old fashioned bank run,” could set the stage for an acquisition down the line. 

The case against any acquisition 

As a publicly traded company, a deal of the friendly or hostile variety is “always a possibility,” according to Dibble. But any potential purchase would hinge on regulatory sign off and approval from Silvergate’s board, he said. Shareholders would also likely have to play a role. 

“If there are larger banks that are interested in getting involved in the businesses Silvergate kind of dominated, they might look at this as a great opportunity to build that capability out,” Dibble said. 

Not everyone is sold on the idea that an acquisition is even possible anytime soon. That’s especially true, industry participants told Blockworks, due to the prospects of heightened digital asset scrutiny from US regulators, as well as a slew of macro headwinds weighing down markets. 

Donald Putnam, a managing director with mergers and acquisitions specialist Grail Partners, told Blockworks he does not see any buyers for Silvergate — or any other crypto bank.

At any price. 

“The litigation and regulatory risks are fatal to any deal,” Putnam said. “The bottom feeders will wait for the bankruptcy, buy the technology, team and a few clients for pennies on the dollar, and rest easy knowing the bankruptcy process has wiped away all the unknown risks.”

Plummeting crypto deposits

Silvergate’s total deposits from digital asset customers declined from $11.9 billion at the end of the third quarter to $3.8 billion as of Dec. 31. 

Mark Palmer, head of digital assets research at BTIG, said in a Thursday research note that the drop to $3.8 billion was below BTIG’s estimate of $5.2 billion.

Still, Palmer reiterated his buy rating on Silvergate, calling the business “well-positioned to be dynamic with its spend” and capable of pulling back on costs.

“One of the things that distinguished Silvergate…is they really sort of put all their eggs in one basket,” Dibble said. “Banks usually try not to concentrate quite too heavily, so they have some diversification of their portfolios.” 

Crypto has been volatile enough, even compared to its historically choppy standards, that even adhering to stringent liquidity provisions imposed by federal and state financial watchdogs was not enough to protect Silvergate from the run, Dibble said. The notion takes Silvergate’s ability to generate cash into account.  

“It’s not great to have to incur a huge loss…but almost any bank would be in a similar position if they had this kind of a run on their withdrawals, because nobody’s got that kind of cash,” Dibble said. 

Silvergate said Thursday it would cut 200 positions, or about 40% of its staff, to further reduce its expenditures. 

Putnam said he considers the company a distressed asset. While he called the staff cuts “a strong move,” he added that there is no way the company can cut its way to profitability. 

“The basic problem is the balance sheet,” he told Blockworks via email. “Like everyone else, their liabilities are worth exactly what they always were, in dollars deposited. Their assets – crypto holdings – are not only falling in notional price, when they have to sell – in size – the actual cash bid is far far lower, if there is any bid at all.”

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