Mercantile set to buy F&M for $500 million

Biggest acquisition yet for Baltimore bank

Frederick bank viewed as a prize

Deal being submitted at $46 per share

March 14, 2003|By William Patalon III | William Patalon III,SUN STAFF

In its biggest acquisition to date, Baltimore-based Mercantile Bankshares Corp. has agreed to acquire F&M Bancorp of Frederick in a cash-and-stock buyout worth an estimated $500 million, the two banks announced yesterday.

With the acquisition, Mercantile will leapfrog into the No. 2 position in terms of Maryland deposits. The buyout also will give Mercantile a foothold in many affluent markets where it lacks a strong presence. It's already Maryland's largest independent bank.

"I think this is a great deal for Mercantile, for its customers and for its shareholders," said Edward J. "Ned" Kelly III, the bank's chairman, chief executive officer and president.

"F&M is a great franchise [and] this deal will allow us to realize cost savings as well as revenue growth."

Calls to F&M President and CEO Faye E. Cannon were referred to Mercantile. But in a statement, Cannon said that "both of our companies are relationship-driven and highly complementary in commercial and retail banking, mortgage banking, and investment and wealth-management."

The deal is expected to close by the end of the year. It requires the approval of F&M shareholders, as well as state and federal regulators.

The deal calls for F&M shareholders to receive payment for each of their shares in one of three ways, depending on market conditions: $46 in cash, 1.2831 shares of Mercantile stock or a combination of the two, the banks said.

Based on Mercantile's current stock price, the bank anticipates that three-fourths of the deal will be financed with Mercantile shares, the rest with cash.

Analysts, in general, viewed the acquisition as a fine opportunity for Mercantile.

"Overall, I think the purchase of F&M Bancorp is a good thing for Mercantile," said Gary B. Townsend, a vice president and banking analyst for Friedman, Billings, Ramsey Group Inc., in Arlington, Va.

"I don't think the price is excessive ... and it fleshes out [Mercantile's] network geographically."

Claire M. Percarpio, an analyst with Janney Montgomery Scott LLC in Philadelphia, also thought the two banks are a good fit, and predicted that the integration would go smoothly.

Percarpio did voice two misgivings. First, she said, she would prefer that more of the purchase price would be paid in cash, instead of in Mercantile stock, since issuing more shares dilutes each stockholder's share of the company. Second, Percarpio said, by some measures, Mercantile is paying too much for F&M.

On a per-share basis, the deal is worth $46 per F&M share, a 48-percent premium over its Wednesday close of $31.

In a terrible economic and stock-market "environment like this, it's frustrating to see that it's still a seller's market," Percarpio said.

"It should be more of a buyer's market."

Mercantile said the two banks will eliminate any overlap by closing branches and cutting jobs, an exercise that will eliminate about 35 percent of F&M's operating expenses - or about $26.5 million.

The branches that get eliminated could be either F&M or Mercantile affiliates, since Mercantile intends to keep the best ones. While Mercantile would not comment directly on the employee cuts, insiders hinted that the bulk of the cuts will come from F&M's 750-member work force.

Mercantile employs about 3,000 people.

Investor reaction was generally upbeat. F&M shares rocketed $11.49 yesterday to close at $42.49. Mercantile shares - which at one point were down as much as $4.05, or 12 percent - lost $1.46 each to close at $32.75.

Mercantile's Kelly said the strength in both stocks underscored investors' belief that the deal will get done - and yield good results.

Mercantile is already the largest independent bank in Maryland.

It had total deposits of $8.26 billion at the end of last year, ranking it third in the state behind leader Bank of America Corp., and Allfirst Financial Inc.

By completing the F&M deal, Mercantile would have total deposits of $9.9 billion, vaulting it over Allfirst, according to statistics from Mercantile, F&M and Bloomberg News.

Mercantile, with assets of $10.7 billion, has 16 banking affiliates in Maryland, one in Delaware and three in Virginia.

F&M - the holding company for Farmers and Mechanics Bank, as well as for Home Federal - is based in Frederick. It has assets in excess of $2 billion. It has 48 locations in Baltimore, Carroll, Howard, Frederick, Montgomery and Washington counties.

This deal is the first bank acquisition engineered by Kelly, who became CEO in March 2001. Before assuming that post, Kelly was a New York investment banker whose specialties included bank mergers.

Kelly said he was already familiar with F&M when he joined Mercantile and knew the two banks would mesh well, but that early overtures were politely rebuffed. F&M then changed its mind and approached Mercantile, according to those close to the negotiations.

Mercantile said the addition of F&M will boost profits as early as next year.

"This is a great opportunity," Kelly said.

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