Financing Last Hurdle To Bank of Boston Deal

Some Question Wisdom of a Shawmut Merger

Bank of Boston Corp. and Shawmut National Corp. were near a merger agreement Friday, but the companies had yet to nail down financing for a deal, according to sources close to both companies.

Even if a deal can be consummated, analysts add, the outlook for the new Bank of Boston, as it would be called, remained iffy.

Neither company had received commitments as of Friday for about $625 million in capital that the banks believe they will need to complete the deal, sources said. Much of that total will go toward a huge writeoff of problem loans that regulators are expected to require at the New England banks.

Just over 5.5% of Bank of Boston's $32 billion in assets were nonperforming as of June 30. At Shawmut, 7.3% of $22 billion in assets were nonperforming.

Sources say Bank of Boston was negotiating intensely with several investors, who, as a group, backed its failed bid for the Bank of New England Corp. with commitments of $500 million in equity last spring.

Enough uncertainty remained, however, for Shawmut to be continuing negotiations with other potential merger partners. Sources said Shawmut had been talking with Bank of Montreal, whose officials did not return calls for comment.

Shawmut also has held talks with BankAmerica Corp., but the West Coast giant has backed off. A well-placed source at BankAmerica, which is working to complete its takeover of Security Pacific Corp., said it is no longer interested in Shawmut, either as an acquirer or as an equity partner.

A source at the Office of the Comptroller of the Currency said late Friday afternoon that no merger application had been received from the New England banks. "I would be astonished," if a deal were inked over the weekend, he said.

Investors Sought

The banks were believed to be in intense negotiations with a group of investors who backed Bank of Boston's losing bid for the failed Bank of New England earlier this year. The group included Liberty Mutual Insurance Co., Raytheon Co., General Cinema Corp, Warren Buffett's Berkshire Hathaway Corp., Fidelity Investments, and Thomas H. Lee & Co., a Boston-based leveraged buyout specialist.

Sources said Mr. Buffett and Fidelity have no interest in participating in a Shawmut deal. Officials at the other companies could not be reached for comment or declined to comment.

If Bank of Boston and Shawmut were to merge, the new company would dominate the New England banking scene. On a pro forma basis, the companies would have $55 billion of assets, making it the 9th- or 10th-largest bank in the nation after the pending mergers of BankAmerica and Security Pacific, Chemical Banking Corp. and Manufacturers Hanover Corp., and NCNB Corp. and C&S/Sovran Corp.

Bank of Boston now ranks No. 2 in New England, behind Fleet/Norstar Financial Group Inc., which won the bidding for Bank of New England. Shawmut is the third-largest bank company in the recession-plagued region.

Despite its projected size, analysts fear that a Shawmut-Bank of Boston union would remain weak. Many of the cost advantages projected for other big bank mergers would not apply, they fear, because the loan problems are so big and the banks' cultures are so different. Bank of Boston is a Brahmin bank with a major focus on corporate banking and the wealthy. Shawmut, which has many more branches, is more geared toward retail customers.

Regulatory Scrutiny

A deal also is likely to face intense regulatory scrutiny at a time when safety and soundness issues are a top priority for Washington legislators and regulators.

The two companies' problems would not disappear after a merger. But some observers said the two companies would do better together than alone.

"You're not going to have a company that is like Fleet in quality," said Nancy Bush, an analyst for Brown Brothers Harriman & Co. in New York. "But it will be better than the two weak sisters that exist right now."

Other analysts, however, have evoked the specter of the First Republic Corp. merger in Texas in 1987. That merger fizzled, when the woes of two troubled banks - Interfirst Corp. and RepublicBank Corp.-proved to be worse than oneas the Texas economy soured.

Savings Put at $300 Million

The banks are said to be projecting $300 million in cost savings from the merger, leading to incremental earnings of $200 million annually. But their likelihood of meeting that mark is still open to question.

The biggest question about a merger continues to be the status of the New England economy. The combined real estate loans of the companies would be $7.9 billion, or 22% of their total loan portfolios. Economists see no signs of a turnaround in the real estate-scarred region. There are no guarantees that the trough of the recession has been reached, Richard Syron, president of the Federal Reserve Bank of Boston, said in a recent interview.

Under terms outlined by sources Friday, the deal would be valued at about $650 million, based on the 0.87 of Bank of Boston shares that Shawmut stockholders would receive for each of their 73 million shares outstanding.

At Friday's close, Bank of Boston's share price was $11, up 75 cents. Shawmut's shares closed at $9.75, up 50 cents. Both stocks were heavily traded.

14% Cut in Workers

The combined company would realize $300 million in annual cost savings largely through staff reductions, analysts suggested. The banks anticipate laying off 14% of their 27,900 in combined workers. They also would reduce their 525-branch system in Massachusetts, Connecticut, Rhode Island, and Maine.

Crucial personnel issues have been worked out after weeks of difficult negotiations. Bank of Boston chairman Ira Stepanian would become the chief executive officer and president of the company. Shawmut National Chairman Joel Alvord would be interim chairman of the merger company, which will be called Bank of Boston, but would leave after a designated period.

Mr. Stepanian is 55. Mr. Alvord is 52.

Charles Gifford, president of Bank of Boston, and Gunnar Overstrom, president of Shawmut, would become vice chairmen of the new company.

PHOTO : Ira Stepanian, To run merged bank

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