Fleet Financial Group is now the 800 pound gorilla in New England, thanks to its recent acquisition of Shawmut National Corp. Valued at $3.7 billion, the deal will fatten Fleet up to nearly $80 billion in assets (once it has made some divestitures to placate the antitrust gods) and give it top market share positions in Connecticut, Massachusetts, New Hampshire, Maine and Rhode Island. Fleet CEO Terry Murray will move the corporate throne from Providence to Boston.

[Expanded Picture]But market dominance has its price, and picking up the tab - initially at least - will be Fleet's existing shareholders. Murray wanted Shawmut so bad he was willing to take on significant dilution to get it. Murray is paying 1.8 times Shawmut's book value and will finance the deal by issuing more stock. This will have the effect of reducing - or diluting - Fleet's 1996 earnings per share (EPS) somewhere between 10% and 13%, depending on which securities analyst's report you read. Earnings this year also will be dragged down by significant merger-related restructuring charges.

Shareholders and analysts profess not to like dilution - it's like a currency devaluation where suddenly your monetary holdings are worth less through no fault of your own. But they're often willing to go along if they believe a deal's long-term benefits justify the short-term pain. Fleet expects the merger to boost EPS - and thereby earn back the dilution - within 12 to 15 months of closing, or by early 1997. Advest analyst Frank Barkocy argues that the Shawmut acquisition is good enough to justify taking on dilution. "The long-term benefits kind of scream out at you," he says. It also makes sense that Murray is willing to pay top dollar because, adds Barkocy, "no other institution in that market would have benefited as much as Fleet." But Paul Sowell, an analyst at S.G. Warburg & Co., is less forgiving. He sees significant risks to the merger, and questions whether Fleet can restore shareholder value within two years. "We're not really positive about the deal," he says.

Murray says he will work off this dilution - or put another way, restore Fleet's lost EPS - by greatly reducing the expense base of the combined institutions. The Fleet/Shawmut merger is a fairly typical in-market deal: Aggressively cut overhead, keep most of the revenue and end up a big winner.

Murray's goal over the next two years is to cut $400 million - or 14% - out of the new bank's overhead. Can he do it? When it comes to expense management, Murray's track record is mixed. He made big cuts in Bank of New England's expense base - but Fleet's efficiency ratio was still a porky 67% as recently as 1993, when top superregionals like Wells Fargo & Co., Wachovia Corp. and PNC Corp. were down in the mid-50s. Then Murray announced a large restructuring last year and promised to put the bank on a low fat diet. Murray has delivered, shedding $300 million in expenses and getting Fleet's efficiency ratio below 6O%.

But Sowell - who thinks Murray has done a terrific job controlling overhead of late - worries that cutting costs this time around won't be so easy. The bank may face local political pressure not to lay off large numbers of employees, since that could rattle a regional economy still recovering from a vicious recession in the early 1990s.

In early March, Connecticut Gov. John Rowland threatened to block the deal unless Murray promised not to cut an already announced 1,200 jobs in his state. Murray backed down.

One also wonders whether the continued uncertainty about job security will begin to affect the productivity of Fleet employees. "That's definitely a concern," agrees Sowell. "At what point do they get fed up?"

Sowell is skeptical about the Shawmut acquisition in part because he questions whether Murray can really cut $400 million in overhead by 1997. "I think the payoff period is fairly long, and I think it could stretch out even longer than one year (from the closing date)," he says.

Barkocy has no great concerns on that score. While acknowledging that no one likes dilution, Barkocy believes "there is a commitment to get (the cutting) done and done as quickly as possible." He also agrees that Fleet employees aren't likely to be thrilled by another restructuring, but figures that a lot of that $400 million will come out of Shawmut's hide anyway.

There's just one problem with that theory. The merger calls for Shawmut CEO Joel Alvord to stay on as chairman until 1988. Although Murray holds the power - he'll be president and CEO in the new bank - one must wonder if Alvord will let his old company get filleted like a cod at a Boston fish market.

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