First Union Corp. has joined the growing list of banks buying brokerages, with a $471 million deal for Wheat First Butcher Singer Inc.
The announcement Wednesday surprised many banking and Wall Street observers because a senior First Union official said in June that the company preferred to build its stock underwriting business internally.
Market sources also noted that Wheat First, based in Richmond, Va., is not as big as the securities companies that other banks have moved in on.
"I thought First Union would go after a more high-profile name," said Richard X. Bove, bank analyst at Raymond James & Associates. "Maybe First Union is willing to piece together a series of regional brokerage firms similar to the way they pieced together banks to put together the entity they have now."
Edward E. Crutchfield, chairman and chief executive officer of First Union, called Wheat First a "perfect partner," with equity underwriting, merger advisory, and municipal finance capabilities that complement First Union's geographical, corporate banking, and capital markets strengths.
G. Kennedy Thompson, co-head of capital markets at Charlotte, N.C.-based First Union, said that as a result of the deal the nation's sixth-biggest commercial banking company would operate the eighth-largest retail brokerage.
"This is the capstone to our capital markets capability," Mr. Thompson said. "This will enable us to introduce Wheat First's equity capabilities to our debt capabilities."
Wheat First is the 56th-largest underwriter of stock and debt so far this year, according to Securities Data Co. To date it has underwritten $329 million in stock and debt, while First Union has underwritten $1.5 billion, mainly asset-backed and mortgage-backed securities.
Wheat First's mutual fund unit would add $9 billion to the $31 billion of assets under management at First Union.
The definitive agreement, announced 30 days after First Union said it would buy Signet Banking Corp. of Richmond for $3.25 billion, is expected to close in the fourth quarter and would immediately add to earnings, the acquirer said.
The merger involves an exchange of 10.27 million First Union shares and is being accounted for as a pooling of interests. To retain "certain key employees" at Wheat First, First Union said it created a $75 million pool of restricted stock to be distributed over three years.
First Union is paying 3.35 times book value and 15 times earnings.
Analysts had fully expected First Union to join the likes of NationsBank Corp. and BankAmerica Corp. in buying a securities company.
First Union received regulatory approval in May to underwrite equities, and executives said then that they wanted to build the business by hiring 60 stock traders and researchers. "We're going to build it a step at a time, piece by piece," said First Union managing director Louis A. "Jerry" Schmitt.
Mr. Thompson acknowledged Wednesday that the rash of bank-brokerage mergers forced First Union's hand.
"Since April five institutions have accelerated the development of their equity underwriting, including three American banks," he said. "If we couldn't provide the same array of financial services, we risked losing customers."
Wheat First's greatest strength is its 19-state broker network, which accounted for 69% of the firm's revenue for the fiscal year that ended March 31, according to Securities and Exchange Commission filings.
The underwriting business, which accounted for 20% of revenues in 1997, has eroded since the 1980s.
In 1987, Securities Data said, Wheat First Securities Inc. led $3 billion of stock and debt offerings. After it merged with Butcher & Singer of Philadelphia in 1988, underwriting fell to $1.2 billion in 1989, $369 million in 1993, and only $322 million last year.
Of 12 deals Wheat First has led this year, seven were municipal bond offerings-a capability First Union already has. Wheat First has led four stock offerings and one debt offering. First Union has never led a stock offering, according to Securities Data.
"Buying Wheat First is a low-risk, potentially high-return move, and it's a better strategy than to build slow from within," said R. Harold Schroeder, bank analyst at Keefe, Bruyette & Woods Inc. "Banks have to provide the products their customers want, or they should get out of the way. First Union did what it had to do and picked a firm that matches up with them well."
As befits a regional firm, Wheat First does most of its business with middle-market companies.
Of the brokerage's 295 offerings recorded by Securities Data, 95 were with Ryland Group Inc., a Columbia, Md., home builder and mortgage finance company. Three of the last five stock offerings led by the firm have been for tobacco processors or sellers.