In a letter to shareholders released after the conclusion of Wachovia Corp.'s board meeting, L.M. Baker Jr., Wachovia chairman and chief executive officer, outlined in the most extensive detail yet his case for why he considered SunTrust's hostile proposal a less attractive option than than Wachovia's merger agreement with First Union Corp. In the letter, Mr. Baker cited concern over SunTrust's profit growth and outlook, as well as its performance in "important business lines" including trust and asset management and retail brokerage.
The letter, in its entirety, appears below.
May 22, 2001
Dear fellow Wachovia shareholder:
Last week, SunTrust Banks, Inc. made an unsolicited proposal to acquire Wachovia Corporation. This afternoon, Wachovia's board of directors voted to reject SunTrust's proposal and reaffirmed its commitment to the planned merger of equals with First Union Corporation that was proposed to shareholders last month.
The integration planning for the two companies is proceeding extremely well, reinforcing our excitement over the strong prospects for this combination. We see nothing in the SunTrust proposal to suggest that we should reconsider the First Union merger, which we firmly believe to be in the best interest of Wachovia, its shareholders, employees, customers and the communities we serve. Specifically:
* We believe a combined SunTrust/Wachovia would grow more slowly and be less profitable than a combined Wachovia/First Union or, for that matter, Wachovia alone.
* We believe there are insurmountable strategic and operational obstacles to combining SunTrust and Wachovia.
* We believe that even if Wachovia were seeking to sell itself, which it is not, the potential returns to Wachovia shareholders from a hostile acquisition by SunTrust are unattractive.
There has been a great deal of speculation and inaccurate and misleading information in the media recently about Wachovia, First Union and SunTrust. Before going into detail on the SunTrust proposal, please allow us to set the record straight.
Wachovia conducted an intensive review of its business strategy last year. That review reaffirmed our belief that the greatest potential for future growth and profitability lies in non-traditional banking businesses (such as securities brokerage, capital markets, insurance and wealth management) and in non-traditional approaches to traditional businesses (such as our integrated approach to customer relationship management). Over a two-day period in March, we described Wachovia's business strategies to investors. Their response was favorable.
During our review, we considered whether merging with another financial institution would help us achieve our goals. We knew that partnering with the wrong financial institution would be detrimental to shareholder value. By contrast, we determined that a partnership that broadens our product lines and distribution and enhances market leadership could be advantageous. For several years, we had contemplated the possible advantages of a Wachovia/First Union merger to achieve these objectives. And when Ken Thompson, First Union's new chief executive officer, laid out his company's business strategies last summer it was clear they were remarkably similar to our own.
At the time, First Union was emerging from a period of some difficulties, mainly arising from two past acquisitions. It was clear that we could not contemplate a merger until Ken Thompson and his new management team had gotten the company clearly on track. When talks with First Union began in earnest in April, an intensive examination of its businesses showed the revitalization of the company and a genuine turnaround. The performance of First Union's shares this year suggests that investors agree with our conclusion.
The proposed merger of equals with First Union is compelling. It is built on a genuine sharing of strengths and a cooperative determination of business strategies and practices. For shareholders, the upside is substantial earnings accretion from the outset and potential price-earnings multiple expansion in the future. As our management teams have met over this past month to develop business unit strategies, it has been exciting to see the early results of their collaboration. The potential for growth and high performance seems even stronger.
We have not seen this unique potential in our discussions with SunTrust. Managers from both of our companies have discussed partnering several times over the past decade. These discussions showed that our companies have certain common values around customers, employees and shareholders. However, each time the discussions broke off due to the inability to translate those values into working business strategies and operating models. Time after time, our discussions with SunTrust culminated in the conclusion that these companies could not be combined in a way that realized either the core potential we see in our own businesses or the enhanced potential we would seek for Wachovia shareholders in a merger partner.
Our discussions in December of last year constituted an intense attempt to find a way to combine our two institutions and again ended without a completed transaction. One after another, Wachovia's senior managers came back from discussions with their counterparts at SunTrust to report that they did not believe the two operations could be combined productively. We concluded that even with me serving as CEO of a combined SunTrust/Wachovia for two years, maintaining the Wachovia name and Wachovia directors filling half the board, the divergent strategies for future growth could not be reconciled.
That was the point at which we ended discussions in December. The structural issues around our asset management businesses referred to by SunTrust were not, in fact, the only reason for breaking off discussions; rather, they were symbolic of much broader issues. Wachovia has spent five years developing a high-growth, high-profitability model for our wealth and asset management business. We were unable to understand SunTrust's insistence that we return to a lower-performance model previously discarded by Wachovia. That kind of refusal to explore alternatives was endemic to our discussions regarding other primary business issues as well.
Now we want to discuss four key points about SunTrust's hostile proposal.
A combined SunTrust/Wachovia will not provide adequate future earnings growth. At a time when Wachovia and First Union are embracing a non-traditional approach to banking, SunTrust remains a traditional bank, and a combined SunTrust/Wachovia is merely a bigger traditional bank. SunTrust has now produced lackluster growth over the past two years. Our examination of SunTrust's businesses leads us to question its ability to reverse this stagnation.
We are concerned about SunTrust's inability to grow important business lines, such as trust and asset management, and ultimately to sustain core earnings growth. The deterioration in SunTrust's core earnings in the quarter ending March 31, while not a surprise to us, is particularly disconcerting. In that report, Sun Trust's profit margins clearly came under pressure, fee income was stagnant, and earnings per share growth was dependent on one-time securities transactions, cost reductions and share repurchases. For all these reasons, we believe that a combination with SunTrust would act as a drag on Wachovia's expected future earnings growth.
There is serious implementation risk in the SunTrust proposal. SunTrust is very inexperienced in integration activities, having completed only one transaction with a value greater than $100 million in the past 10 years. The Wachovia transaction is three times larger than any integration attempted to date by SunTrust and is twice as large as the combined assets of all its acquisitions completed in the last 10 years. The fundamental strategic differences already described are, we believe, crippling to the success of any future combination. But even if they could be overcome, the cost savings promised by SunTrust are significantly greater than those we jointly estimated in our December discussions. In our view (and in SunTrust's own view last December), these new cost savings numbers are unrealistically high. They could be achieved only through actions that would slow the combined company's growth, hinder lines of business, and lessen service quality. Even if the promised co!
st savings were achieved, SunTrust projects minimal accretion to earnings per share. If our view of the integration issues is correct, long-term earnings per share dilution would be a more likely outcome. Even when using SunTrust's aggressive assumptions, we expect the Wachovia/First Union merger to be approximately twice as accretive as the SunTrust proposal.
SunTrust's proposal does not compensate Wachovia shareholders for SunTrust's inadequate future earnings growth and serious implementation risk. SunTrust is proposing a hostile transaction that is less attractive in many ways than the combination we considered last December.
By the end of the day it was announced, the asserted 17% premium to the First Union merger agreement fell to just 5%. Clearly the SunTrust stock price cannot support an aggressive hostile transaction.
There is no dividend advantage to SunTrust's hostile proposal. The amended merger agreement with First Union provides Wachovia shareholders the ability to continue to receive their existing annual dividend payment of $2.40 per share. Once the Wachovia/First Union merger is completed, all Wachovia shareholders will have the option to choose either:
* an ongoing cash dividend payment equal to Wachovia's current $2.40 per share annual rate until the new Wachovia's dividend payment meets or exceeds that rate per existing Wachovia share, or
* a special cash payment of $0.48 per existing Wachovia share at closing, plus the regular new Wachovia dividend to be set initially at an anticipated annual rate of $1.92 per existing Wachovia share.
Future dividends are going to depend on the growth of the combined company, and we are convinced that the new Wachovia can grow its dividends more rapidly than SunTrust.
The bottom line is: our merger of equals with First Union is a thoughtful, responsible strategic combination. It is off to an excellent start. We have looked long and hard, and on multiple occasions, at a merger with SunTrust, and concluded it just would not work. Five months after our last discussions broke down, SunTrust is back with a less appealing hostile proposal to take over Wachovia, and our conclusion is the same: it will not work.
We reject SunTrust's hostile takeover bid and we remain fully committed to our merger with First Union.
We firmly believe that when you consider our reasons, you will support this decision. We will be sending you detailed information in the coming weeks about the new Wachovia and asking for your support.
On Behalf of Your Board of Directors
L.M. Baker, Jr.
Chairman and Chief Executive Officer