In a major consolidation of the Wisconsin banking market, Marshall & Ilsley Corp. on Monday agreed to acquire rival Valley Bancorp. in a deal valued at $875 million.

The transaction, the second largest announced this year in banking, will form a company with $12.1 billion of assets, 285 offices in Wisconsin, and 12 units in Phoenix.

Although, Marshall & Ilsley will remain Wisconsin's second-largest bank company after swallowing the state's No. 3 competitor, it will pull almost even with front-runner Firstar Corp., which holds $12.8 billion of assets.

Terms of the Deal

The stock-swap deal, worth about 2.6 times Valley's book value, is expected to be completed in the second quarter of 1994. Under terms of the transaction, Milwaukee-based Marshall & Ilsley will exchange 1.72 shares of its common stock for each Valley share outstanding.

Analysts said Marshall & Ilsley is paying a high price, but they expressed confidence that strong cost-cutting prospects would make the deal work favorably.

Valley, they noted, has fat that Marshall & Ilsley, which has built its reputation as a technology-minded bank, can cut.

Valley, based in Appleton, posted a 67.64% ratio of operating expenses to operating revenues in the second quarter. That compares with 64.8% for Marshall & Ilseley and 62.3% for a group of 29 midwestern regionals tracked by Keefe, Bruyette & Woods Inc.

Cost-Cutting Goal Set

Officials of Marshall & Ilsley told analysts that its initial goal would be to reduce Valley's annual noninterest expenses. by $36 million, or roughly 22%. The company predicted the deal would be accretive to its earnings per share in 1995.

"I would be horrified at the price, if not for Valley's relative inefficiency," said Mark Lynch, a bank analyst with Lehman Brothers Inc.

On the credit-quality front, Valley is squeaky clean. At midyear, it posted a slender 0.81% ratio of nonperforming assets to gross loans.

However, the company posted a comparatively modest return on assets of 1.07%.

Among the Most Profitable

By contrast, Marshall & Ilsley delivered a strong 1.67% annualized return on average assets in the second quarter, placing it among the industry's leaders in profitability. The company's stock trades at roughly 195% of book value, or 13.5 times the prior 12 months' earnings.

Marshall & Ilsley said James B. Wigdale will continue as chairman and chief executive of the company. Valley's top officer, Peter M. Platten 3d, will become vice chairman and head of retail and community baking at the merged entity.

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