Baker Keeps Selling As Fight Hits Courts

SunTrust Banks Inc., its unsolicited merger proposal now formally rejected by Wachovia Corp.’s board, is pressing on with what could be a long and costly fight that some predict will determine not only the future ownership of Wachovia, but of SunTrust itself.

Almost immediately after Wachovia’s board announced its decision late Tuesday, SunTrust took to the courts, seeking to overturn key points in Wachovia’s $13.4 billion merger agreement with First Union Corp. that make it hard for Wachovia to consider other offers.

The lawsuits were the next logical step in an offensive that began with SunTrust’s $14.7 billion bid for Wachovia on May 14.

“This is war, and the more fronts you can open up as an attacker the more likely it is that you’ll prevail,” said Gil Schwartz, a partner at Schwartz & Ballen in Washington.

But the road ahead could prove treacherous for all involved. Experts say the suits could drag on through months of evidence gathering, during which SunTrust’s public image could end up tarnished as First Union and Wachovia seek to portray it as a weak merger partner desperate to break up their deal.

That effort is already underway. In an interview Wednesday with American Banker and in letters to Wachovia shareholders and to SunTrust, L.M. “Bud” Baker, Wachovia’s chairman and chief executive, struck back at SunTrust and urged the Atlanta banking company to abandon its “hostile” attempt to take over his firm.

On Wednesday afternoon, Wachovia and First Union filed their own suit in superior court in Mecklenburg County, North Carolina. Their suit claims that SunTrust’s “hostile bid” for Wachovia breached a confidentiality agreement SunTrust had entered with Wachovia during previous merger discussions.

In the suit First Union accuses SunTrust of making “misrepresentations in an effort to further its own attempt to merge Wachovia out of existence.”

Mr. Baker was eager to show just how much of a done deal the First Union-Wachovia transaction is, and he said the integration of the companies is “moving full speed ahead.”

The two companies remain committed to what they believe is the best combination for the long term, Mr. Baker said. He declined to identify the dissenter in the board’s 14-to-1 vote in favor of the First Union offer and said that the rest of the board was “overwhelmingly enthusiastic” about it.

In a more direct attack on SunTrust, Mr. Baker said that no matter what the terms, a deal with the Atlanta company would be inferior to one with First Union. He reiterated that frequent merger conversations between SunTrust’s and Wachovia’s chief executives over the years have failed to produce an agreement.

“Notwithstanding my very close relationships with my friends at SunTrust, we have never been able to come up with an agreement on how a combined company would be run,” he Baker said. “Frankly, we were just not inclined to step back in time.”

During merger discussions in December, Mr. Baker said, the two companies remained divided over philosophies and strategies. In the long run, First Union offered a better chance at remaining competitive, especially as Wachovia tried to expand into high-growth nonbanking businesses and deemphasize a traditional business model based on deposits and lending, he said.

The rhetoric could be put to the test, of course, if SunTrust raises its bid, a move the Atlanta company has not ruled out. Mr. Schwartz, a former Federal Reserve lawyer and former partner at Skadden Arps Slate Meagher & Flom, SunTrust’s law firm, said the suits may wind up being merely a sideshow to the main battle for Wachovia.

“It’ll come down to counteroffers,” he said. “I don’t think we’re done yet.”

Before that happens, however, SunTrust has several questions to answer: Is it worth it to pursue an unwilling target, or is it enough just to break up or slow the progress of the First Union-Wachovia deal?

Some say there are fewer questions about how long SunTrust can continue than there are about whether it can afford to stop.

“Either SunTrust has the greatest strategy on earth, or this is ‘you-bet-the-ranch’ stuff that I don’t think is going to come out very well,” said one longtime banking lawyer, who requested anonymity. “SunTrust was clearly caught off guard by the First Union deal, and now it is scrambling to preserve its future.”

SunTrust is facing long odds and risks becoming a takeover target itself, the lawyer said. “If they fail, they have a big arrow pointed at them that says ‘I failed – take me.’ “

In the first of its two lawsuits, SunTrust asked a state court in Georgia to invalidate what it calls an “egregious” $780 million breakup fee in the Wachovia-First Union merger agreement. The suit, which names Wachovia, its board, and First Union, also asks the court to set aside a provision that could prevent Wachovia from talking to another bidder before Jan. 16, even if Wachovia shareholders reject the First Union offer.

In a separate suit in federal court in Georgia, SunTrust alleges that some public statements by First Union and Wachovia about the merger “are materially false and misleading.”

Asked about the lawsuits on Wednesday, a SunTrust spokesman said: “Our goal on May 14, and our goal today remain the same. The First Union agreement stands in the way of [our] negotiating with Wachovia.”

After learning of the suits, Wachovia struck back quickly with a letter asking SunTrust’s board to abandon the takeover attempt. The letter called the unsolicited offer disappointing, and said Wachovia had carefully examined it, but ruled out further discussions.

L. Phillip Humann, SunTrust’s chairman, chief executive, and president, has said he was surprised that Mr. Baker decided against a merger in December, even though it was a “merger of equals” with terms similar to the offer Wachovia got from First Union. Mr. Humann said the companies were within a few days of a deal, and he knew only of disagreements over how the combined company would manage its wealth management business.

But in Mr. Baker’s version of events, a deal was much farther away than that., said: “We did do some exploratory discussions,” said Mr. Baker, who had not spoken publicly before Tuesday’s board meeting. “We did talk with each other. But the truth is, there wasn’t a deal.”

Commenting on SunTrust’s lawsuits, Mr. Baker said: “As we understand them, they are clearly without merit and a kind of tactical issue for them. … We will obviously contest those lawsuits, but it will not impede the progress of our merger, from an everyday standpoint.”

Lawyers familiar with hostile takeovers say hostile bidders commonly use lawsuits to slow or halt another deal. In SunTrust’s case, it could help buy time for the company to win over Wachovia shareholders, kill the First Union deal, then pursue Wachovia again, the lawyers said.

SunTrust’s slightly higher bid continued to lose value Wednesday, perhaps adding pressure on it to compensate investors for the likely disruption of an unfriendly takeover.