Limiting its share repurchases may have hurt SunTrust Banks Inc.s efforts to wrest Wachovia Corp. away from First Union Corp., which early this month agreed to buy Wachovia.
SunTrust bought back about 4.2 million of its own shares during the second quarter as it pursued an unsolicited all-stock bid for Wachovia, but that was no match for the buying being done by Wachovia and First Union. Wachovia said this week it bought about $552 million of First Unions stock, or about 18 million shares, during the second quarter. First Union also was a buyer, repurchasing about 2.1 million of its own shares and entering new forward purchase contracts for another 5.9 million, according to its second-quarter financial statement filed Monday.
In buying First Unions shares, as well as spending millions of dollars on print and broadcast advertising over the summer, Wachovia spent liberally to help First Union, and to save a deal it considered the best alternative for its future.
Once First Union and Wachovia signed a merger agreement, they were in it together, a united front, said Marni Pont ODoherty, an analyst at Keefe, Bruyette & Woods Inc. Wachovia was not going to remain independent, or stay off to the side. They were in it together.
SunTrust is not second-guessing its decisions to limit buybacks to 6.8 million shares or to truncate the repurchases early.
In fact, Barry Koling, a SunTrust spokesman, said Thursday that the buybacks were unrelated to the merger. This buyback authorization was part of an ongoing buyback effort that was underway long before the Wachovia transaction and will continue long afterward. This was not driven by Wachovia considerations.
Last month SunTrust officials said they had voluntarily halted purchases to avoid a controversy that might have drawn attention away from their main aim: persuading Wachovia shareholders to reject the planned $14.5 billion sale to First Union.
SunTrusts purchases stopped altogether after the Securities and Exchange Commission raised questions about the Atlanta companys 11th-hour plan, announced June 13, to buy back an additional five million shares in hopes of goosing its stock price.
Though SunTrust would not confirm whether it discussed the matter with the SEC, sources familiar with the situation said SEC regulators notified SunTrust it was subject to Regulation M a rule that limits stock buybacks in advance of mergers.
To avoid having to make a big deal out of [Regulation M], we voluntarily suspended it, Mr. Koling said. Asked why the company did not try to complete the purchases before mailing its proxy, he said only: We disclose what we purchase, but we dont discuss the whys and whens.
Suspending its share repurchases may have hurt SunTrusts efforts to counter a sharp rise in First Unions stock price, which apparently was helped by aggressive buying by Wachovia following the two companies April 16 deal announcement.
Altogether, First Union and Wachovia accounted for open-market purchases of about 25 million shares, or about 2.6% of First Unions outstanding stock, over a three-month period, according to Ruchi Madan, an analyst at Citigroup Inc.s Salomon Smith Barney unit.
Robert McCoy Jr., Wachovias chief financial officer, said the company was not trying to influence First Unions stock price. Instead, the company saw the purchases as a good investment, he said. It was our opinion that the value of First Unions stock was a good investment opportunity.
Mr. McCoy also said the 18 million shares were not enough to have an effect on First Unions stock price. It didnt influence the market. The market knew we were doing it. During the 45 trading days that we were in the market buying that stock, they [investors] traded 140 million or 150 million shares. And it did not go down after we stopped the buying in late June.
The steep climb in First Unions share price about 18% between April 16 and the Aug. 3 Wachovia shareholder vote frustrated SunTrust officials, who saw the relative value of their bid for Wachovia melt away.
Because both SunTrust and First Union offered stock for Wachovia, changes in their share prices affected the relative value of their competing bids. When SunTrust made its offer May 14, it was worth 16.7% more than First Unions. By the end of the campaign, the premium had shrunk to 6%, a figure many analysts said was not enough to persuade shareholders to reject the First Union deal.
On Aug. 3 Wachovia shareholders approved the sale to First Union by what Wachovia executives called a 3-to-1 margin among votes cast. The company has yet to release a final tally, which could come any day.
SunTrusts chairman and chief executive, L. Phillip Humann, was not available for comment Thursday. In an interview last week with American Banker, he blamed SunTrusts failure to stop the deal on the narrow premium between his bid and First Unions.
I think the single biggest reason that we were not successful is the impressive and somewhat inexplicable 18% rise in the price of First Unions shares, he said. So, although our offer, from May 14 to Aug. 3, improved from $70 a share to $75 a share, First Unions offer improved [to] about $70. Basically what happened is the spread decreased from 17% to about 6%, but more than all of the decrease is due to the rise in First Unions stock.