First Union to buy out Wachovia

$13 billion merger to create 4th-largest bank in country

Reaction is lukewarm

Deal not expected to adversely affect Baltimore area

April 17, 2001|By William Patalon III and Bill Atkinson | William Patalon III and Bill Atkinson,SUN STAFF

Struggling First Union Corp. will buy out Wachovia Corp. in a $13 billion deal that is not expected to have a major negative impact on the Baltimore region, the companies announced yesterday.

In what is being billed as a merger of equals, Charlotte, N.C.-based First Union is exchanging two of its shares for each share of Wachovia stock.

The new company will take the Wachovia name, and will be the fourth-largest bank in the nation once the deal is completed in the third quarter of this year.

"Wachovia and First Union have a common vision, common values, common markets - and now a common name," said G. Kennedy Thompson, the First Union chairman, president and chief executive officer who will become president and CEO of the merged bank.

"While scale is important in this business, this merger is about getting better, not just getting bigger," Thompson said.

Although the merger is expected to bolster the new bank's earnings, reaction to the deal was tepid.

"I don't hate it, but I don't love it," said Claire M. Percarpio, a banking analyst at Janney Montgomery Scott in Philadelphia.

"I would have been more comfortable if Wachovia had chosen a company that had fewer strategic challenges, fewer revenue challenges. Those are the same challenges Wachovia faces."

However, Chris Blum, a financial services analyst at Edward Jones in St. Louis, said the deal "makes some sense, [because] it creates a larger and stronger bank. There will be a stronger competitor on the East Coast."

First Union's shares dropped 72 cents yesterday to close at $31.20, while Wachovia shares rose $1.85 to end the day at $62.05.

The merged bank will have total deposits of $183 billion, assets under management of $222 billion and mutual fund assets of $96 billion. Of the company's 19 million customers, 3.1 million will be online.

The new Wachovia will have 90,000 employees, 2,900 bank branches, 5,100 ATMs and nearly 600 brokerage offices staffed by 8,300 representatives. It will be based in Charlotte.

One key attraction of any deal such as this one is the ability to cut costs by eliminating redundancies. The banks said they expect to divest between $1.5 billion and $2 billion in assets, to close between 250 and 300 branches - though none in the first 12 months - and to eliminate about 7,000 positions over the next three years.

However, the Baltimore region - where First Union has 58 branches and about 1,000 employees - isn't expected to feel the pinch of that cost-cutting, according to a local First Union executive.

"I can't think of anybody here whose job is at risk by virtue of this in Maryland," said J. William Knott, area president of First Union National Bank in Baltimore.

Indeed, the deal could actually provide a boost to First Union's capital markets unit, which employs nearly 200 people in Baltimore and offers such services as advising on mergers and acquisitions and helping companies raise money.

"It provides the opportunity for our capital markets [division] to go ahead and sell additional products to [Wachovia's] customers," Knott said.

Wachovia does not have branches in Maryland.

First Union's stock market value has fallen by more than half since the middle of 1998 as customers deserted the financial institution after its $20 billion acquisition of CoreStates Financial Corp. - an acquisition that proved unwieldy to integrate and that in some cases resulted in ultra-poor customer service.

Thompson took over as CEO last April, succeeding Edward Crutchfield, whose acquisition strategy tripled the company's assets in four years. The new chief executive has spent the past year selling money-losing businesses - such as First Union's money-losing Money Store Inc. home-equity lending business - as well as working to improve customer service.

Wachovia, too, has been troubled. Known as a conservative lender, the Winston-Salem, N.C.-based bank surprised investors in last year's second quarter when it boosted its reserves against bad loans by almost fourfold. Even so, it is generally viewed as a higher-quality bank than its new mate.

"I'd always thought that Wachovia's culture was so intact that it would only go with a partner of equal quality and equal history," said Nancy Bush, an analyst at Ryan, Beck & Co. "This is just amazing."

Wire services contributed to this article.

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