News > Deals
First Union buys Wachovia
April 16, 2001: 4:49 p.m. ET

All-stock $13B link of N.C. banks gives little premium to Wachovia shareholders
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NEW YORK (CNNfn) - First Union Corp. said Monday it has agreed to buy Wachovia Corp. for about $13 billion in stock, a move that would combine two North Carolina-based rivals and create the nation's fourth-largest bank.

Terms of the transaction call for First Union (FTU: down $0.72 to $31.20, Research, Estimates) to offer about two of its shares for each share of Wachovia (WB: up $1.85 to $62.05, Research, Estimates). The transaction values Wachovia at about $63.84 a share, a 6 percent premium to its closing price of $60.20 last Thursday.

Wachovia holders will also receive a special dividend of 48 cents a share before the deal is completed, the companies said. But even including that in the value of the purchase brings the premium to only 6.8 percent based on Thursday's close.

A report in the Wall Street Journal Monday speculated that the low premium could bring other bidders for Wachovia, although hostile bids are extremely rare in banking.

The companies expect to take a one-time merger-related charge of $1.4 billion and believe regulators will require them to divest about $1.5 billion to $2 billion of deposits.

The purchase, which is anticipated to close in the third quarter, is expected to immediately add to cash earnings per share for both companies upon closing and provide an internal rate of return of more than 20 percent for both groups of shareholders.

The acquisition will result in annual cost savings of $890 million when complete, the companies said. The combined company is also implementing a hiring freeze and plans to cut 7,000 staff jobs. Half of the cuts will come from attrition, executives on a conference call said. Cost savings would amount to about 8 percent of the banks' combined current expense base.

A merger of equals

Executives also fashioned the deal as a merger of equals. The board of directors for the combined firm will be comprised of 18 members, with nine coming from First Union and nine from Wachovia.

The move would boost First Union (FTU: Research, Estimates), now the No. 5 bank, to No. 4, with about $324 billion in assets, moving it past Chicago-based Bank One Corp. (ONE: up $0.45 to $35.41, Research, Estimates). First Union had assets of $252.9 billion in the most recent quarter, while Wachovia had assets of $71.8 billion at the end of 2000.

The companies said the merger will produce the largest retail bank in the eastern United States, with deposits of $183 billion, assets under management of $222 billion and mutual fund assets of $96 billion. It said it will have 19 million customers, served by 90,000 employees, 2,900 banking branches, 5,100 ATMs, and nearly 600 brokerage offices.

"This represents an exceptional strategic fit," said First Union CEO G. Kenny Thompson on a conference call open to media and analysts. "We are not about to revert to past practice of dilutive acquisitions. We are not interested in growth for growing sakes."

The combined company, which will be known as Wachovia Corp., vowed not to engage in any acquisitions on the retail bank branching side until the present merger is completed.

Charlotte, N.C.-based First Union has had problems with mergers before. Last June, the bank announced a series of other restructuring steps and plans to take a $2.8 billion charge mostly due to problems associated with its 1998 buy of the Money Store, its home equity lending operation. First Union also lost many customers after its $20 billion purchase of Philadelphia-based CoreStates Financial Corp. in 1998.

First Union made about 90 acquisitions to grow into a major bank in recent decades, but this would be the first major deal under Thompson, who assumed the bank's top job last year.

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Both companies have had to deal with a slowing economy. First Union on Monday reported first-quarter operating profit of $610 million, or 62 cents a share. That was down from $838 million, or 85 cents a share, a year earlier, but in line with Wall Street forecasts.

Winston-Salem, N.C.-based Wachovia reported first-quarter earnings of $1.22 a share Monday, down from the $1.30 it reported in first quarter 2000. However, the results were ahead of the $1.18 a share expected by earnings tracker First Call. Wachovia also agreed last Monday to sell its $8 billion credit card portfolio for undisclosed terms to Bank One.

Executives were conservative Monday in their cost-saving estimates to be generated from the Wachovia-First Union transaction deal. They want to avoid situations "where they overpromised in the past," executives on the call said.

L.M. Baker Jr., Wachovia's chairman and CEO, will be chairman of the new company, while G. Kennedy Thompson, First Union's chairman and CEO, will be CEO and president.

Credit Suisse First Boston represented Wachovia while Merrill Lynch advised First Union. graphic