Preferred Issues: M&A Is Matter of Timing for Royal Bank and First Union

Had the timing been different, signs going up on Summit Bancorp branches could well have carried the name not of FleetBoston Financial Corp. but of another New England bank.

Royal Bank of Scotland chief executive Fred Goodwin, whose company owns Citizens Financial Group in Providence, R.I., has talked fairly often in the six months since the Fleet-Summit deal of his own interest in adding to the company’s U.S. presence through acquisitions.

Mr. Goodwin, it seems, had his eye on Summit but was worried that investors were not ready to see Royal Bank, which last spring won an extended and bitter battle against Bank of Scotland for control of National Westminster PLC, attempt another sizable acquisition. “We would have bid if we had been further down the line,” he told U.K. newspapers shortly after learning that Fleet chairman and chief executive Terrence Murray had beaten him to the $7 billion punch.

For all the strategy considerations and cost-savings opportunities highlighted during presentations by First Union Corp. and Wachovia Corp. last week, it was the timing of the deal that drew the most attention. For some, it only made sense if G. Kennedy Thompson, who had sworn off dealmaking since taking over as chief executive at First Union, believed the chance was not only worth taking, but about to disappear.“The signals coming out of First Union had been that they were not interested in acquisitions,” said James Schutz, an analyst at Stephens Inc. “The fact that they did a big deal was a huge surprise, and the only conclusion about motivation that seems to make sense is that they thought they would lose the opportunity.”

Likewise, Wachovia chairman and chief executive L.M. Baker in agreeing to the deal raced ahead of Wall Street by going out on a bullish limb with respect to First Union shares. Though several analysts had been doling out measured compliments regarding the progress of First Union’s turnaround efforts, Mr. Baker effectively traded his bank for a hefty stake in First Union; Wachovia’s shareholders are to own one-fourth of the merged company.

Wachovia, by forfeiting the chance for a takeover premium, faces a tricky sell to investors, who will want to be shown that their new First Union holdings — albeit under the name Wachovia — are as good a value as Wachovia is for First Union. This message would rely on a belief that First Union is well on its way to restoring its earnings momentum.

“My guess is, they have turned the corner, and I think we’ve both gone a long way,” Mr. Baker said a day after the deal was announced.

Timing the market is risky, of course. “You can’t time the market,” is the one statement everyone on Wall Street accepts but only a few act as if they believe. There is no denying that timing helped these two banking companies. The Federal Reserve’s surprise interest rate cuts on Wednesday had nearly all financial stocks basking in a healthier glow. At the same time, Fed Chairman Alan Greenspan maintained the perception of distance between monetary policy and the stock market — choosing a moment when the market had stabilized on its own to bestow the liquidity gift.

Royal Bank of Scotland by no means gave up on adding to its U.S. operations once Summit was out of play. If anything, Mr. Goodwin is stepping up efforts to get out the message that Citizens’ footprint will soon be growing and acquisitions are likely to play a major role in that expansion.He reinforced that message to investors and analysts during his presentation at Royal Bank’s annual meeting on March 1 and will probably reiterate and amplify these comments to a United States audience (American shareholders account for about 7.5% of Royal Bank’s investor base) during meetings with analysts and investors in New York this week and again in Boston in early May.

Though he has expressed interest in continuing to expand in New England, where Citizens has about 330 branches in Massachusetts, Rhode Island, New Hampshire, and Connecticut — and where the “new Wachovia” has a presence — a primary goal is to find the company new territories.

Don’t look to Mr. Goodwin to undertake yet another bidding war in an effort to break up the First Union-Wachovia deal, though. While the timing may be right, the company prefers to keep its focus on opportunities in the Northeast, in states contiguous to its current market.