With speculation focused on Virginia lately, a growing number of analysts see compelling logic in a merger of equals between Crestar Financial Corp. and BB&T Corp.
The resulting entity, bank analysts contend, would be a powerful, efficient franchise with a dominant position in key southeastern markets.
"It makes a tremendous amount of sense," said Hal Schroeder of Keefe, Bruyette & Woods. "When you ask, 'Who's next in Virginia?' this is one that comes up."
Speculation about Crestar has been brewing since Virginia became host to a mad merger party in early June.
First, Wachovia Corp. announced acquisitions of Jefferson Bankshares and Central Fidelity Banks. Then First Union Corp. responded with a deal to purchase Signet Banking Corp.
Crestar, based in Richmond, suddenly was the last target of meaningful size in the state, with the No. 2 market share in Washington.
Crestar, a healthy midsize bank with $22 billion of assets and market capitalization of $5 billion, cannot survive among the Goliaths forever, analysts said.
BB&T, with assets near $30 billion, including those of the recently acquired United Carolina Bancshares, and $5.5 billion of market capitalization, is in a similar position.
With No. 1 market share in North Carolina, the Winston-Salem-based banking company competes with the same "big three"-Wachovia, First Union, and NationsBank Corp.
Mr. Schroeder said a merger of equals would allow the two banks to "control their destiny longer."
While many mergers of equals have been disappointing, as synergies and cost savings were hampered by culture clashes and unclear chains of command, Anthony Davis, of Dillon Reade, said Crestar and BB&T could avoid such problems.
"BB&T's mergers of equals with Southern National Corp. (more than two years ago) is the best I've seen in a decade in terms of execution and delivery without mistepping," he said. He said both companies are oriented toward quality service, and they have similar sales cultures.
And both chief executives have indicated a desire to remain independent, analysts said.
Officials of both banks declined to comment on "market rumor or speculation."
BB&T got a nod on Tuesday from senior bank analyst Edward Najarian of Wheat First Securities, who reinitiated coverage on the Winston-Salem-based bank with an "outperform" rating and 12-month price target of $58. Shares closed Tuesday at $50.81, up 43.7 cents.
Mr. Najarian called the merger idea "an intriguing possibility that would create a powerful franchise running from Baltimore down to South Carolina." He said the high-growth region is one of the most attractive in the country for banking.
"If a merger of equals were to indeed transpire," the company with more than $50 billion of assets would be "very competitive with the Big Three," Wachovia, NationsBank, and First Union, he said.
Michael Granger, of Fox-Pitt Kelton, noted BB&T's interest in the Virginia area, where Crestar is No. 3. He said the joined companies would make a "fantastic southeastern franchise."
A lone dissenter was veteran bank analyst John Mason, with Interstate/Johnson Lane. "I think it would be a disaster." He called the banter "light-weight speculation on the part of some analysts. It would hurt the stocks if they were to do that."
Even merged, the company would be too small to be a long-term survivor. "If you marry up with someone close to your own size, you have to defer acquisition for some time and would loose any takeout premium," he said.
"A merger of equals may be the best thing for them, but in terms of investment appeal," Mr. Mason was not buying.
On Wall Street, investors cheered the Federal Reserve Bank's decision to leave interest rates unchanged, with the Dow Jones industrial average rising 114.74 points, or 1.47% to 7,918.10. Bank stocks traded higher, but still slightly lagged the market. The Standard & Poor's bank index rose 0.98%, to 580.58, while the S&P 500 gained 1.48%, to 926.01.
Shares of Aames Financial Corp., Los Angeles, rose $2.31, to $22.56, amid merger rumors. Washington Mutual Inc., Seattle, was said to be eyeing a deal.