The merger of First Union Corp. and First Fidelity Bancorp stands apart from nearly all the other great bank deals of 1995 in one respect: It relies more on revenue enhancement than cost savings to achieve respectable returns for the acquirer's shareholders.
Rather than closing branches and laying off massive numbers of employees, First Union intends to achieve its gains by selling First Fidelity customers retail products such as its Evergreen family of mutual funds and CAP Account. The latter offers a consolidated statement for checking, money market, and brokerage accounts.
First Fidelity's business customers will be hearing about First Union's capital markets services, which include derivatives, private placements, syndications, and securitizations.
"First Union's assumption here is that they get an increase in cross- sell in the retail system and get capital markets activity from the midsize businesses," said analyst Nancy Bush of Brown Brothers, Harriman & Co. "It's all got to work right for this thing to pay off."
When First Union announced last June that it was buying New Jersey-based First Fidelity for $5.4 billion, it pegged annual cost savings at a meager $106 million, or 10% of First Fidelity's expense base. NationsBank Corp., by contrast, expects to extract $170 million, or 60% savings, from Atlanta- based Bank South Corp., which is only one-fifth the size of First Fidelity.
The difference has to do with branch overlap, which is insignificant in the case of First Union-First Fidelity but massive - particularly in Atlanta - for NationsBank and Bank South.
On the other hand, First Union also predicted that it would be able to boost revenues in the First Fidelity franchise by $79 million a year, an estimate analysts view as conservative, by introducing its sales culture and larger product array. First Fidelity lacked a capital markets group or anything resembling the CAP Account.
"The general idea is that, while there isn't a lot of geographic overlap for the traditional expense savings, First Union is counting on being able to replicate (its) sales success throughout the First Fidelity branch system," said David R. Martin, fixed-income analyst at Fitch Research.
First Fidelity was suffering severe credit problems when Anthony P. Terracciano arrived from Mellon Bank Corp. in 1990 to set things right. Mr. Terracciano did clean up First Fidelity's loan portfolio, cut costs, and restore the bank to profitability.
But his emphasis on short-term cost savings left First Fidelity with a limited product menu and outdated technology. "It was a franchise that had basically been squeezed dry," Ms. Bush said.
Analysts believe First Union will now find a receptive audience among First Fidelity customers for its larger product array. First Union is training 300 First Fidelity employees to sell securities products, including its proprietary Evergreen funds.
First Union's CAP Account, particularly, has been a sales barn burner in the Southeast, doubling balances last year, to $12.7 billion, after an aggressive marketing campaign launched in 1994. First Fidelity, by contrast, sold only third-party funds and offered fewer investment options to its upscale northeastern markets.
Enhancing First Union's chances of success is the fact that the New Jersey market was rocked by several other mergers last year.
As a result of the unions of PNC Bank Corp. and Midlantic Corp., UJB Financial Corp. and Summit Bank Corp., and Chemical Banking Corp. and Chase Manhattan Corp., fully 60% of the depository relationships in the Garden State will be involuntarily converted from one bank to another this year.
"That's a tremendous disturbing factor in terms of customer relationships, and it's a nice opportunity for anybody who's new in the market with a broader product set," said Dean Witter analyst Anthony R. Davis.
