CoreStates Financial Corp. announced a definitive agreement Tuesday to acquire Meridian Bancorp, creating what they call "the hometown banking company" for eastern Pennsylvania, northern Delaware, and central New Jersey.
The deal, a tax-free exchange of stock valued at $3.2 billion, would be the eighth biggest in U.S. banking and create a $45 billion-asset company, 20th-largest in the industry.
Meridian, based in Reading, Pa., was widely seen as a prime Mid-Atlantic takeover target, but its management had long expressed a desire to stay independent. The $47.16 a share price Meridian stockholders would get represents 2.08 times book value and 12.3 times anticipated 1996 earnings per share.
By becoming larger, Philadelphia-based CoreStates will be able "to leverage our investments in technology and our delivery systems, particularly in retail," said chairman and chief executive officer Terrence A. Larsen, who is to keep those titles at the combined entity.
CoreStates' share price fell $1.50 Tuesday, to $37, apparently reflecting concern about the high premium. Meridian gained $4.0625, to $42.875, but the announcement failed to spur gains in other bank stocks caught in the market's turbulence. (See back page.)
CoreStates said it could sustain 7.4% dilution in earnings per share next year, a "worst case" scenario that doesn't account for potential new revenues. CoreStates also predicted substantial in-market cost savings that would make the deal accretive in 1997.
Citing analysts' consensus, CoreStates said the combined company would earn $3.98 a share next year and $4.75 in 1997.
The companies issued summary earnings reports for the third quarter. CoreStates raised its income by 28%, to $133.9 million, or 96 cents a share, with returns on assets of 1.85% and equity of 22.91%.
Meridian earned $54.4 million, or 96 cents a share.
The two companies, which have been busy cutting work forces and branch networks, said they anticipated further staff reductions of "less than 10%" of their combined 19,127. They also plan to close or sell 115 of their 667 total branches.
Counting ongoing reegineering and cost reduction drives, CoreStates said it would achieve $186 million in annual, pretax cost reductions, or 35% of Meridian's cost base, by the time the merger is consummated in the second quarter of next year. Of those savings, $112 million would be personnel- related.
CoreStates also said it would incur a restructuring charge of about $175 million pretax in the quarter the deal closes.
"I think it makes strategic sense for CoreStates, but it is (paying) a full price," said Sandra J. Flannigan of Merrill Lynch. "They will need to realize the types of cost savings they're talking about as well as ensure that the revenue loss isn't significant."
The two branch networks overlap the most in eastern Pennsylvania and in New Jersey, where CoreStates stands to boost its market share substantially.
Following the merger, CoreStates will be No. 1 in deposits in what will be its top four markets - Philadelphia (23%), Reading (46%), Trenton, N.J. (33%), and Pennsylvania's Allentown-Bethlehem area (27%).
With Mr. Larsen, 49, as chairman and CEO of the combined CoreStates, Samuel A. McCullough will serve as president and chief operating officer. Mr. McCullough, 56, is chairman, president, and CEO of Meridian.
The companies also designated five other members of an "office of the chairman," of whom only David E. Sparks, 51, the chief financial officer, currently works at Meridian.
For Mr. Larsen, the deal was seen as an important strategic breakthrough following a failed effort earlier this year to merge with Bank of Boston Corp. CoreStates has been criticized in the past for doing dilutive deals, but such criticism was muted Tuesday.
"Five percent dilution in 1996 is not pretty, but I don't think this represents a return to the CoreStates of old," said Dean Witter analyst Anthony R. Davis. "This is one of the few deals they felt they had to do in-market, and I do believe people are underestimating the earnings power of this thing."
Meridian's decision to sell out came as no surprise.
Rumors were flying last month on the eve of an annual board planning meeting. At a press conference Tuesday, Mr. McCullough did not deny reports that his board was pressuring for the sale. He said Meridian was merely considering all options.
Mr. Larsen said the two companies had held informal discussions for a number of years, but didn't begin serious negotiations until two weeks ago.
CoreStates has several specialties, including international trade services, asset-based lending, credit cards, and transaction services that can be delivered through Meridian's distribution system. CoreStates was the founder of the MAC automated teller network, now a joint venture of several other superregional banks. Meridian is one of the biggest participating members.
Meridian contributes strengths in trust, money management, and small- business lending, and a strong telephone center and in-home banking program.
J.P. Morgan and Keefe, Bruyette & Woods advised CoreStates on the transaction. Meridian utilized the investment banking services of Goldman Sachs, Lehman Brothers, and Morgan Stanley.