Spain's Banco Santander played a pivotal role in the $5.5 billion merger between First Fidelity Bancorp. and First Union Corp., Wall Street sources said.

Investment banking sources said that Santander, Fidelity's largest shareholder, and its chairman, Emilio Botin, enthusiastically pushed the merger. And why not? On paper the deal figures to raise the value of Banco Santander's stake in First Fidelity to $879 million, more than double its initial investment.

Santander is "a very shrewd, very innovative, and very high- quality bank," said Derek Bullman of the James Capel investment banking firm in London. "For now, it looks like they plan to remain as shareholders in the new bank."

When Santander acquired its stake, it signed a "passivity agreement" with regulators which limited its ability to seek acquirers for First Fidelity. However, the Spanish bank participated in the review of all the potential bidders and in the negotiations with First Union, sources said.

Santander with its adviser, Morgan Stanley & Co., was said to have discussed mergers with First Fidelity over the past two months. The company's director general, Juan Rodriguez Inciarte, said at a press conference, however, that he was presented with the formal merger proposal only 15 days ago.

Four Banco Santander officials were prominent at the press conference announcing the deal Monday morning, a large showing for a shareholder. And observers said Spain's largest bank was in a position to have nixed the deal.

But the $113 billion Spanish bank had little reason to do that. The bank, which owns 29.99% of First Fidelity, bought its stake at an average cost of $28 a share. The merger price was set at $64.29 a share.

Santander will get one of the new six seats on the company's board of directors.

Santander's strategy, unlike European competitors National Westminster Bancorp and ABN Amro, has been to invest in U.S. banks, rather than to buy whole companies.

Since Mr. Botin hired Gonzalo de las Heras away from J.P. Morgan & Co. in 1990 to advise on international strategy, the Spanish bank has increasingly invested in the Americas. It has a presence in Puerto Rico, owns a stake in Kemper Corp. and reportedly bid unsuccessfully to acquire a thrift in Florida.

Overall, North and South America represents 16% of Santander's $3.3 billion of 1994 revenues, said Mr. Bullman.

"The parallels between Banco Santander and the new First Union are remarkable," said Edward Crutchfield, chief executive and chairman of the new company. "It is very helpful to have a shareholder understand our business so well."

The negotiations toward the end focused on ways to avoid leaving Santander, which would own 11.4% of the new company, with a controlling interest in First Union.

In fact, First Union amended its poison pill to become effective only when the Federal Reserve deems a bank with a stake of 4.9% or more to have a "controlling interest." Previously the poison pill was triggered any time a bank owned 4.9% or more.

In case the Fed renounces the passivity agreement it has signed and deems the Spanish bank a controlling interest, Santander will have three years to shed its holding below 4.9%.

Some Wall Street sources familiar with the deal disagreed that Banco Santander was a catalyst. While approving of and helping the process, the bank did not drive the deal, these sources said.

"This was a cooperative effort, that is the story," said one investment banker.

All agree, however, the deal could not have proceeded without a blessing from Madrid.

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