Wall St. reacts cautiously to Keycorp-Society merger.

Wall Street on Monday reacted cautiously to the proposed merger of Society Corp. and Keycorp, reflecting analysts' skepticism about projected revenue gains.

The shares of both companies rallied early Monday but the trend reversed after analysts got vague responses from the two parties on the magnitude and timing of revenue gains that would be achieved as a result of the merger.

Society's shares were unchanged for the day, and Keycorp's shares lost $1, closing at $37.50.

Although Society technically is acquiring Keycorp in a stockswap transaction, the "merger of equals" is structured so that no purchase premium is involved. Investors will get 1,205 newly-issued Society shares for each Keycorp share, approximating the exchange value before the deal was announced.

|Not a Home Run'

One plus for the union is the excellent performance fundamentals of both partners. Their strengths provide great latitude in pursuing experiments and dealing with potential problems.

"In the short run, the deal is not a home run for either group of shareholders," said Livia Asher, a bank analyst with Merrill Lynch & Co., New York. "But both parties are dealing from positions of strength, and the merger potentially could break some new ground in the banking industry."

Economies of Scale

On the plus side, Ms. Asher said, the deal will form an 18-state distribution network that promises economies of scale in product development and delivery. Modest cost savings are projected.

And with $8 billion of market capitalization, the successor entity will have an expanded capacity for takeovers.

"We're not out of the acquisition business," Victor J. Riley, Jr., chairman and chief executive of Keycorp, told analysts Monday afternoon, urging them to bless the deal and bid up his company's stock price. "I hope that before this merger is completed, we are going to be able to announce another acquisition to you, and explain its accretiveness."

Potential Drawbacks

But there are potential drawbacks to the deal. Analysts say that benefits from the merger - which is expected to be completed in the second quarter of 1994 - won't be realized right away because neither partner will be dominant and the Cleveland and Albany bases of the companies are so far apart. And like most mergers, this one does not guarantee insulation from the industry problems of core deposit erosion, soft loan demand, and margin compression.

"It could be that Society and Keycorp are merging their way into the top 10 without doing much for shareholders," said George Salem, analyst with Prudential Securities, New York.

In explaining the impetus for the merger, Mr. Riley said his company and Society had virtually exhausted the potential for further performance enhancements through cost cutting. "Expense reductions were something neither one of us could live off of forever," he said.

By joining forces, Mr. Riley said, the banking companies will boost revenues by grafting Society's fee-based products onto an expanded delivery system that will total 1,400 offices and operate in 20 of the nation's 100 largest cities.

He said product development costs would be cut as overlapping operations such as mutual funds are merged. And at an operational level, he said, changing branch product mixes to incorporate Society's offerings "is nothing different from what we have been doing for 15 years."

And despite the long-distance nature of the union, the companies still expect some cost savings from the deal, said Robert W. Gillespie, Society's chairman and chief executive.

5% of Expenses

Projected annual savings of between $80 million and $105 million represent roughly 5% of the annual operating expenses of the two companies, he said.

After the savings are realized in 1995, he said, the merged entity will achieve a ratio of operating expenses to operating income "several" percentage points lower than the already low 60% levels currently being reported by the two companies.

Mr. Riley added that the fact Society and Keycorp operate a number of identical computer systems should ease the integration process.

No Guarantee of Success

Fred Cummings, a bank analyst with McDonald & Co., Cleveland, said the big question in the short term "is whether they can deliver the cost savings and integrate the cultures." If efficiencies aren't delivered as promised, he said, "in the short term, this deal won't do much for shareholders."

And given that this is a merger of equals, the analyst warned, Society and Keycorp can't take success for granted. As Comerica Inc. learned in its Detroit merger with Manufacturers National Corp., he said,mergers can get bogged down when there isn't a dominant partner. Lots of decisions can get delayed in lengthy negotiations between equal partners.

Improved Company May Result

At the same time, said Chicago Corp. analyst Kenneth Puglisi, a thoughtful melding of the two banks'products and systems could yield a merged banking company that in the long run is better than either of its predecessors. And pressures for cost savings are eased in deals where no purchase premium is involved, he said.

In preparation for the merger, Society and Keycorp will take fourth quarter restructuring charges totaling between $90 million and $110 million.

4% Staff Reduction Estimated

Mr. Riley estimated roughly 1,400 jobs would eliminated from a combined work force of roughly 35,000, a reduction of about 4%. He said both companies commenced hiring freezes Monday, and he predicted normal attrition - through retirements and voluntary departures - would bring about much of the planned reduction.

In addition, Mr. Riley said, the companies will offer an early retirement package. By next year's merger closing date, he said, "We don't expect to have to hand out a lot of pink slips."

Conservative Estimates

Analysts said projected annual savings equaling 5% of combined operating expenses are conservative even by interstate merger standards, where the norm has been roughly 10%.

They added that the two companies' systems sufficiently differ that the long-distance integration very well could delay product rollouts, analysts said, in turn delaying revenue gains.

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