First American Corp., Nashville, emerged from the shadows to win the bidding for Deposit Guaranty Corp., agreeing Monday to pay $2.7 billion in stock for the Jackson, Miss., banking company.

The deal ends speculation about the fate of $6.8 billion-asset Deposit Guaranty, which put itself on the block two weeks ago. First American was a dark horse bidder; observers had expected Deposit Guaranty to go to Union Planters Corp., Memphis, or Regions Financial Corp., Montgomery, Ala.

The acquisition-First American's largest to date-would create a $17.4 billion-asset regional contender with deposits of $13 billion, and 340 branches in Arkansas, Kentucky, Louisiana, Mississippi, Tennessee, and southwestern Virginia.

The transaction also marks a sharp departure in strategy for First American. In recent years, the banking company has focused on small, in- market purchases of banks and thrifts and on nonbank deals in the brokerage and electronic payments fields.

Analysts said First American, armed with a high stock price, took advantage of its buying power and could use Deposit Guaranty as a springboard for further acquisitions in the Gulf states.

"This was the first good opportunity they had to significantly expand out of state," said Michael Granger, an analyst at Fox-Pitt, Kelton. "It will provide them with scale and size to expand into some other states."

Dennis C. Bottorff, First American's chairman and chief executive officer, said the acquisition is part of the banking company's strategy to join an elite group of top-performing financial institutions that he called the "sweet sixteen."

"This combination substantially advances the progress of First American toward that goal," Mr. Bottorff said.

The combined bank would increase return on equity from 16.8% in the third quarter to 19% after the merger, Mr. Bottorff said. That would place First American within striking distance of the 20% return on equity that is characteristic of the top performers.

In addition, the combination would improve First American's net interest margin from 4.90% to 4.40% "We will be substantially more profitable," Mr. Bottorff said.

But the deal did not come cheap. First American's offer equals 4.19 times book and 25 times Deposit Guaranty's estimated earnings in 1998.

At least one analyst found the transaction surprising because Deposit Guaranty operates in some less-than-stellar markets.

"First American had an attractive franchise in Tennessee, which is a state that other banks want to go to, and I think they've diluted it somewhat with this deal," said Joseph Roberto, an analyst at Keefe, Bruyette & Woods.

But others argued that the deal, which is scheduled to close in the second quarter, ensures First American's independence for the foreseeable future. The bank has frequently been named as a takeover target.

This is particularly important, they said, because an October agreement by Columbus, Ohio-based Banc One Corp. to buy New Orleans-based First Commerce Corp. may have sparked a consolidation wave among banks in the Deep South. Analysts said New Orleans-based Hibernia Corp. may be next.

Indeed, E.B. Robinson Jr., Deposit Guaranty's chairman and chief executive officer, who will become vice chairman and chief operating officer of the combined bank, admitted that the First Commerce deal was partly what influenced Deposit Guaranty to put itself up for sale. "I don't disagree that First Commerce being bought is changing a lot of people's minds," he said.

Mr. Robinson also said that Deposit Guaranty had received an unsolicited offer from another bank in the region which he refused to name. The bid forced Deposit Guaranty's board to go in search of "the very best merger partner we could find," he said.

The deal provides for the exchange of 1.17 shares of First American for each share of Deposit Guaranty. First American said it would take a $102 million restructuring charge in the second quarter to account for merger- related items.

First American executives projected cost savings of 25%, or $65 million, from the consolidation of back-office systems and personnel. Between 500 and 900 jobs are expected to be eliminated out of a combined total of 7,700.

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