The Justice Department has been honing its demands on same-market mergers to assure that spun-off branches will be able to compete successfully against their entrenched rivals.
A Justice Department official said Tuesday that the agency has been intervening in the nitty-gritty of agreements between merging banks that are required to divest units and those that are buying them.
The department used its clout in several recent bank merger spinoffs, including those of Bank One Corp. with First Chicago NBD, and Zions Bancorp with First Security Corp. of Salt Lake City.
A prime example is its intervention in Sovereign Bancorp's $1.4 billion bid to buy 268 Fleet Boston Financial branches.
In a statement referring to the Fleet Boston spinoff, the Justice Department vowed to "restore competition that would otherwise have been lost by the merger." The department described the divestiture as the biggest in bank merger history.
The department stipulated that Fleet Boston divest entire businesses, including middle-market and small-business lending franchises in New England.
Sovereign executives said in an interview last week that because of the intervention by the Justice Department, the bank is well prepared to compete against Fleet Boston and other banks in New England. They cited several stipulations - demanded by the Department of Justice - to convince analysts and investors that the acquisition will be successful.
Above all, the Justice Department required that Fleet Boston Financial Corp., the merged bank, sell Sovereign an entire branch network, complete with all employees and account relationships. In eastern Massachusetts, for example, Sovereign will acquire all the former Fleet branches.
Jay Sidhu, chief executive officer and president of Sovereign, said that before the deal was completed, "the DOJ came to us and told us, 'What we want to create is a new competitor. What are the things you see that are essential?' And we told them."
Mr. Sidhu said Sovereign asked for four main provisions: A non-compete clause, the inclusion of bank managers, no pick-and-choose selling of assets, and an agreement between Fleet and the Justice Department spelling out the duties and responsibilities of Fleet, which will not be allowed to solicit employees of Sovereign for three years.
"The key is retaining customers and preventing employee runoff," said Joseph Campanelli, president of Sovereign's New England division. Mr. Campanelli had been with Fleet until two years ago, when Sovereign bought Fleet's automotive group.
"These relationships go back years and years, and we don't want to disturb that," Mr. Campanelli said.
Six executives from Fleet or BankBoston will join Sovereign before the completion of the deal, which is expected in April. Each has had at least 18 years experience in commercial banking.
Another key item in the agreement is a clause that prevents Fleet Boston from handing over any loans 90 days past due.
"That prevents Fleet from stuffing branches with bad loans," said David Winton, an analyst with Keefe, Bruyette & Woods Inc.
Analysts have been critical of Sovereign's capital structure, which is weaker than originally planned, largely because its stock price dropped to a bit above $8 a share, from the $10 on which initial projections were made.
But Mr. Sidhu said the company's capital structure will be bolstered by the deal. The after-tax cost of the $1.4 billion acquisition will be only $900 million, he said. This savings is possible by writing off core deposit intangibles and goodwill, he said. After tax, that means Sovereign would pay a 7.8% premium on deposits and 6.5 times pro forma earnings.
"Our philosophy is clear: You under-promise and over-deliver," Mr. Sidhu said in a recent interview at Sovereign's Boston office. "We will achieve our goals or sell out. That philosophy has driven us for the last 15 years."