Only last year, Wachovia CEO L. M. "Bud" Baker, told our sister publication, the American Banker: "If you are looking for performance you will not find it in the largest companies."

Now, Wachovia, once the industry's yardstick of prudence and quality, has succumbed, agreeing to be acquired by, of all companies, First Union. Wachovia once had been dubbed the "Morgan of the South," and like J. P. Morgan, which has been taken over by Chase Manhattan — Wachovia slipped in recent years. And this is an era that does not tolerate mistakes.

Desperate for growth and high profits without making big acquisitions, Wachovia stretched far to increase its loans. It took on riskier credits without backing them with sufficient reserves. Within the past year, loan losses surged, causing its profits and stock price to plunge. That forced it to sell off businesses to raise the money it needed for recovery.

Aggravating the consequences of its slide, Wachovia had become a relatively small player, with only $74 billion in assets. Unable to attract the full attention of investors no matter how successful its recovery policies might have been, it was doomed as a meaningful player.

But why sell to First Union? From Wachovia's point of view, it makes a lot of sense. Indeed, with its mighty internal culture, Wachovia might turn out to be the ultimate winner.

The merged bank will operate under the Wachovia name. And Wachovia will have half the directors on the board. And although Ken Thompson, First Union's CEO, will be CEO of the new Wachovia, senior Wachovia officers will continue to play important roles.

If, on the other hand, Wachovia had been taken over—perhaps at a much higher premium—by San Francisco's Wells Fargo & Co., FleetBoston Financial Corp., or even Atlanta's SunTrust Banks — Wachovia would be sure to disappear from the map.

Now Wachovia has a chance. It is being acquired by a company with even bigger problems than its own. Analysts have been cheering the job Ken Thompson has been doing since he took the reins at First Union last year, but he still has a long way to go. Conceivably, Wachovia people ultimately will rise to the very top.

Both Wachovia and First Union are based in North Carolina, a southern state proud of its heritage and of its banks. Directors of both banks recognize that if Thompson fails to turn First Union around fast enough, First Union itself could become the target for an out-of-state takeover. As we reported in our March 2001 issue, FleetBoston, for one, has been lusting after First Union.

Its merger with Wachovia makes that takeover, or any other, now less likely. In part, that's because it would be more expensive to buy a $329 billion-asset bank than a $254 billion-asset one. But more important, the merger of the two is likely to produce substantially higher profits if only because of cost savings from an in-market merger. The bottom line: Don't give up on the old Wachovia.

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