First Union's Response, No Sweetener Necessary

May 16, 2001, 1:00 a.m. EDT 3 Min Read

CHARLOTTE, N.C. - A day after SunTrust Banks Inc.'s rival bid for Wachovia Corp., First Union Corp. fired back with a point-by-point retort in which it cast itself as the better strategic and cultural fit but offered no indication that it would engage in a bidding war.

With First Union seemingly set against raising its offer, it must rely on other considerations to persuade shareholders to accept a bid that currently works out to be worth about 6% less than SunTrust's. Not surprisingly, First Union structured its response to SunTrust's bid with a sharp focus on investors' concerns.

Atlanta-based SunTrust's $15 billion all-stock offer, announced on Monday, had something for a variety of audiences - a higher price and richer dividend for shareholders, and the prospect of fewer job cuts for employees. But First Union keyed on the topics of growth, risk, and cost savings. It used its overlap with Wachovia and planned job cuts as a selling point.

"I think people are going to clearly understand that our deal will provide a better platform with a lot less risk and more earnings potential," said Robert Kelly, First Union's chief financial officer, in an interview. "They're guaranteeing enormous integration risks," he said of SunTrust. "Clearly this doesn't make any sense for Wachovia shareholders."

He also argued that a SunTrust deal would mean considerably less in cost savings than a First Union deal, because SunTrust would have to pay up-front costs like a break-up fee of up to $780 million.

On the subject of job cuts, it was particularly evident where First Union was pitching its message. Mr. Kelly did not so much counter as dismiss SunTrust's contention that it would cut fewer Wachovia jobs than First Union would. "That's not an advantage to the shareholders," he said.

SunTrust agreed to boost its dividend to $2.22 a share this year to keep Wachovia shareholders from taking a yield hit. Mr. Kelly downplayed the disparity with First Union's dividend. Once the companies are combined, Wachovia shareholders will be getting the equivalent of $1.92 annually to begin, plus a one-time 48-cent payout to make up the difference between Wachovia's dividend and First Union's.

First Union's own projections show its distributions are likely to remain lower than SunTrust's for the next few years. But First Union argues that the current value of its one-time payment more than makes up for that disparity when a discounted cash flow model is applied to the payments (First Union used a 13% discount rate). Whether that model is one that will convince shareholders is an open question but on this topic, as on price, First Union showed no sign of budging on its terms.

"We feel very strongly that we're offering a comparable offer to Wachovia shareholders," Mr. Kelly said. "We are going to maintain our [dividend] payout ratio, and within two years we'll be up to the Wachovia level of dividend."

Critics of the First Union-Wachovia deal have pointed to differences in the two companies' cultures as an argument against the combination. But Mr. Kelly said the smooth progress so far of integration talks is a sign that the two companies are a good fit.

"My suspicion is that the cultural differences between a SunTrust and Wachovia may be far greater than with us," he said. "You know, the SunTrust deal's been talked about for years. Why did it never happen? The advantage of doing a friendly deal is that we can be very customer focused and we can make decisions together."

Still, many analysts have said they like the idea of a SunTrust-Wachovia match better, even as they question whether the Atlanta-based challenger can pull off an unsolicited takeover.

"I think it would be a tremendous boon" for Wachovia, said Nancy Bush, an analyst with Ryan, Beck & Co. "I believe the companies are tremendously similar. Employees at the middle levels of Wachovia will have a much less difficult time assimilating to this change."

A spokesman for Wachovia reiterated that its board plans to meet "in the near future" to discuss the SunTrust offer, though he would not say if a date had been set.

Barry Koling, a SunTrust spokesman, declined to comment in detail on First Union's response. "We made what we believe is a compelling, attractive proposal [Monday] to Wachovia's board. And we are looking forward to Wachovia's board reviewing it. We hope and expect that they will see the superiority."

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