First Union Corp. approached CoreStates Financial Corp. on Tuesday with a megamerger proposal that the CoreStates board could not ignore.
Reportedly $85 a share, the offer was $6 above the CoreStates price before trading halted for the day, pending a news development, at 1 p.m.
At about $17 billion or 5.4 times CoreStates' book value, the deal would be the biggest in U.S. banking history on both counts. The previous high price was in NationsBank Corp.'s pending acquisition of Barnett Banks Inc., $15.5 billion as of the Aug. 29 announcement date.
The First Union bid was less than the $88 a share from Mellon Bank Corp. of Pittsburgh, which CoreStates spurned last month. Terrence A. Larsen, CoreStates' embattled chairman and chief executive officer, said he and his board lacked confidence in Mellon's paper. He has since pointed out that Mellon's share price dropped proportionally more than other major banks' shares on the day of the big market break.
While both First Union and CoreStates were officially silent Tuesday afternoon, analysts said they thought the transaction would be a good move for First Union. The Charlotte, N.C., superregional has been intent on growth up and down the East Coast.
Aside from CoreStates' visible retail presence in the Pennsylvania-New Jersey-Delaware area, First Union would benefit from CoreStates' wholesale strengths in such areas as international trade finance and cash management, the observers said.
For Philadelphia-based CoreStates, the linkage with $144 billion-asset First Union would put an end to the mounting pressures from the investment community to solve its revenue-growth problems. Despite relatively strong profitability ratios in recent quarters, CoreStates was reeling from a difficult post-merger integration of Meridian Bancorp of Reading, Pa. While some analysts said a merger would be the only way out, Mr. Larsen tried to argue through public statements that the company could find a way to survive independently.
"For CoreStates shareholders, I think it is a very nice pairing," said Claire Percarpio, an analyst with Janney Montgomery Scott in Philadelphia. "First Union has the acquisition experience and is good at it."
She described First Union as "one of the strongest banks in technology, which is a driver in the retail business" and as "generally strong in the areas where CoreStates is weak."
Personalities-Mr. Larsen's defiant independence versus the profit- mindedness of shareholders epitomized by director George Strawbridge Jr.- surely influenced the latest turns of events.
Mr. Larsen, holder of doctorate in economics, joined CoreStates-then Philadelphia National Bank-in 1983 as executive vice president. In 1988 the CoreStates board named him chairman and chief executive at age 40.
His vision of banking was one of traditional client service and risk- averse balance sheet management, which contrasted with the empire-building mentality of NationsBank Corp. or the cost-containment obsessions of Wells Fargo & Co.
At a Bank Administration Institute conference in Chicago last month, Mr. Larsen held court as his audience peppered him with arcane questions such as how equity capital should be integrated into a bank's risk management process. "I must say I feel truly among colleagues," Mr. Larsen said.
It was at that meeting that Mr. Larsen said "the future of banking is a lot more complex" than "six to 12 big banks and a handful of small boutiques." He saw room for CoreStates in that "pluralistic" banking world.
Mr. Strawbridge came to his 2.6% stake through a series of acquisitions: He acquired the interest of the William du Pont family in Delaware Trust Co. in the early 1980s. In 1988 he played a key role in the trust company's decision to sell to Meridian Bancorp. In 1995 he urged Samuel A. McCullough, Meridian's chairman and chief executive officer, to explore what Wall Streeters call "strategic alternatives," which led to its CoreStates deal.
Some analysts have speculated that Mr. Larsen, 50, would not support any deal that did not include a high-profile role for himself.
Analysts said that to make the deal work, First Union would need to realize between 30% and 40% cost savings, laying off large numbers of workers and consolidating branches.
Anthony Davis, an analyst with Dillon, Read Inc., said the deal would likely dilute First Union's earnings by 5% to 7% in 1998. But he said it would "shore up First Union's presence, and when you put the two companies together they fit reasonably well."
He pointed out that First Union was partly to blame for CoreStates' struggles of late, providing competitive pressure on a number of fronts, particularly through the former, New Jersey-based First Fidelity Bancorp.
"It is sort of like First Union snuck in there and beat them up in the middle of the night and then waited for (CoreStates) to come out with the white flag," Mr. Davis said.