Fleet Financial Group Inc. announced Tuesday that it has agreed to acquire Shawmut National Corp. for $3.7 billion in stock, creating the ninth-largest banking company in the United States.
The megamerger would increase the assets of Fleet, currently 17th in the country, to $81 billion from $49 billion, and would give it the No. 1 share of most key consumer and business markets in New England.
The region will suffer some short-term consequences - Fleet said it will lay off 3,000 people, or just under 10% of the combined work force. But most analysts viewed the deal as an important and necessary step in a longer-term shakeout.
The principals' stock prices reacted according to form: Fleet was down $3.25 to $30.375, and Shawmut jumped $4.375 to $25. The market also pushed up the prices of other U.S. banks regarded as acquisition candidates. (See article on the back page.)
Within New England, the Fleet-Shawmut deal was seen as a play for market dominance that trumped other possible in-region combinations while deterring would-be invaders. (See article on page 5.)
"Any intrusion from a third party represents new competition, new fire power - why not avoid that if possible?" said Terrence Murray, 55, Fleet's chairman, president, and chief executive officer.
He will be president and CEO of Fleet Financial Group, as the postmerger entity will be named. Shawmut chairman and CEO Joel Alvord, 56, will be chairman of the new Fleet, relinquishing that title to Mr. Murray in 1998.
Fleet will move its headquarters from Providence to Boston, one of Shawmut's dual bases. (The other is Hartford, Conn.) Most of the overlap in the companies' 1,143 branch offices is in Connecticut and Massachusetts, suggesting that is where most cutbacks will occur.
Fleet said it will reduce its branches to "in excess of 900," enough to be the sixth-largest branch network in the country.
The layoffs are part of the bank's plan to achieve $400 million in postmerger savings within 15 months. The bank expects $88 million to come out of branch closings, consolidations of automated teller networks - both companies are owners of the NYCE-Yankee 24 system - and standardization of products.
Fleet will also take $400 million in acquisition-related charges over the next year. Shawmut will take a $30 million charge in the current quarter.
The deal is expected to close in the fourth quarter and be accretive to earnings in 1997.
Fleet had been preparing for a year to make a deal of this size, so analysts were not caught entirely by surprise. When the bank announced last March that it would undertake a major restructuring that included massive layoffs, it stated its interest in a merger of equals.
Shawmut as target was a little more surprising, since Mr. Alvord had made moves - including personnel actions - that many interpreted as reflecting a desire to stay independent.
Mr. Alvord conceded Tuesday that he could not survive independently as long as "the nationwide roll-up in financial institutions accelerates."
Many analysts said Mr. Alvord would resist an arrangement in which he would be second in command, but that is clearly where he stands with Mr. Murray and Fleet.
"The key title here is chief executive officer, and that remains with Terrence Murray," said PNC Securities analyst Charles Vincent.
While Mr. Alvord will step aside when he turns 60, he will have several key executives reporting to him. One is Shawmut president Gunnar Overstrom, who will run the merged company's sizable Connecticut operations as a Fleet vice chairman.
"What really makes this feel good in my gut is the mutual trust and respect that Terry and I have, which is not something that is recent," Mr. Alvord said. "We've known each other for 20 or 25 years."
Analysts called the negotiated exchange of stock, valued at 1.8 times book value, reasonable. They said the same about the estimated cost savings.
Under terms of the agreement each share of Shawmut stock would be exchanged for 0.8922 share of newly issued Fleet stock on a tax-free basis. The transaction, based on Friday's closing stock prices, was valued at $30 per Shawmut share, a 45% premium.
Analysts were taken aback by the speed with which the deal was constructed. Mr. Murray said he got a telephone call from Mr. Alvord about a month ago, and they talked about a merger in general terms. "We wrapped up things in two weeks," he added.
"Investors have to think pretty hard about a transaction that was put together as quickly as that. (Mr. Murray and Mr. Alvord) are going to have to work very carefully not to disrupt their customers," said Sally Pope- Davis, an analyst at Goldman, Sachs & Co.
Fleet said it will capture the No. 1 deposit-share position in Massachusetts, Connecticut, Rhode Island, New Hampshire, and Maine.
Donald Kauth, who follows Shawmut for First Albany Corp., said Fleet has proved it is the region's "800-pound gorilla." It also took over the failed Bank of New England in 1991.
"There used to be four big banking operations in New England - Shawmut, Bank of New England, Fleet, and Bank of Boston," he said. "Now three of them are in one institution."