TriCo Bancshares (TCBK) and First Hawaiian (FHB) have announced an all-stock merger agreement, with FHB shares dropping on the news — a reaction typical when a deal is structured at or below the market price, or when investors fear dilution from the all-stock consideration. FHB reported FY2025 revenues of $951.3M (down 2.9% YoY) with a 29.0% net margin and $2.20 diluted EPS, while TCBK posted $470.6M in revenues (up 0.8% YoY) with a 25.8% net margin and $3.70 diluted EPS — making this a smaller acquirer absorbing a larger target by revenue.

The deal structure matters enormously here. An all-stock deal means FHB shareholders receive TCBK shares rather than cash, so FHB's post-announcement drop reflects both any discount in the implied exchange ratio and TCBK's own share price volatility. The combined entity would face integration risk across two geographically distinct banking markets — Hawaii and California's Central Valley — with limited obvious synergy overlap.

For merger arb players, the key tension is the spread: if FHB trades below the implied deal value, there is an arb opportunity, but all-stock deals carry basis risk since the payout fluctuates with TCBK's price. Regulatory approval (OCC, Fed, state regulators) and shareholder votes on both sides are the primary execution hurdles, with timelines typically running 6–12 months for regional bank mergers.

The bear case on FHB's drop is straightforward — the market is skeptical the deal closes at the announced terms, or views the exchange ratio as unfavorable. The bull case is that any spread compression as the deal progresses represents a pure arb gain. TCBK faces dilution risk if the combined entity's earnings power doesn't justify the share issuance.