WILSON, N.C. - Mergers of equals have not enjoyed a good reputation in the banking industry. These deals in which neither side pays a premium to the other have often foundered on ego conflicts and poor financial performance.

John A. Allison 4th, chairman and CEO of BB&T Financial Corp., wants to prove to a skeptical world that the pending union of BB&T and Southern National Corp. will be the one that really pays off.

"Our goal is to show people how it ought to be done," says Mr. Allison, who is 46. "I really believe it's a very rational strategy in a consolidating industry."

One thing Mr. Allison has going for him is that the deal is a "merger of equals" only in a financial sense. The new company, which retains Southern National's name for the holding company but BB&T's logo in the branches, will be run by Mr. Allison, use BB&T's operating systems, and adopt BB&T's more decentralized branch structure. It will be Southern National employees who must adjust to BB&T's way of doing things, not the other way around.

Having already settled the leadership and systems problems that have bedeviled so many similar deals, Mr. Allison makes his case, in a recent interview with American Banker, that this one will be different. Based on his successful five-year career running BB&T, when assets and profits both increased sharply, he probably deserves the benefit of the doubt.

Q.: With the merger scheduled to close Feb. 28, what benefits do you expect from this combination?

ALLISON: Economically, the merger has three potential synergies. The clearest opportunity is improving efficiency. We have overlapping branch distribution systems; we have overlapping operations functions; and we have overlapping administrative functions. We plan to close about 90 locations, basically where we're across the street from each other.

Our projected annual cost savings are $63 million a year. And when we get through with those savings, our efficiency ratio will be about 53%, which is for banks our size probably in the top 10%.

We don't get too many of the savings until we do the systems conversion, which is expected in June. So the full benefit is really in 1996, although we'll get a partial benefit in 1995.

The second synergy is revenue enhancements. Each one of us has businesses that we're better in than the other. For example, Southern National has a very strong lease operation. BB&T's insurance and trust operations are a good bit bigger. We're both big in mortgages, but we're stronger in North Carolina, and they're stronger in South Carolina.

The third synergy is around the management process. You've got to put the team together, which is both an opportunity and a challenge in a merger of equals.

The economics - I'm not going to say they're easy - but they're analytically definable. It's fairly easy to figure out which branches are to be closed and which operating systems need to be integrated together. The real task is on the human systems side.

If you look at mergers of equals, the problems usually aren't mathematical. They're human issues. How employees and customers feel about this process will determine our success.

Q.: Southern National was more centralized in its branch network than BB&T. How will you reconcile the two styles?

ALLISON: What we did, at BB&T, is we grew up as a statewide network and centralized all our functions. Then we woke up one day and found we looked a lot like NationsBank, First Union, and Wachovia, which is not a very good place to be in a market dominated by them.

So we said, "O.K., what we want to do is keep local decision-making but also get the advantages of scale." So six years ago, we centralized the back room but installed in the branches what we call "community bank presidents." Those people have dramatically more real authority than is typical in the banks we compete against.

Q.: So you'll convert Southern National to that system?

ALLISON: We've already done it, and it's worked great. The Southern National branches are really fired up. This is like liberation in the branch network. The feedback I'm getting is very, very positive.

But we still have a centralized back room. That's how you can get to a 53% efficiency ratio while operating autonomously. And keeping this community bank concept should help with the customer.

Q.: Any danger of your competitors' muscling into your business this year while you're still focused on the merger?

ALLISON: That's the tradeoff. You probably aren't making some of the investments you might have been making during this period. But I do think we'll protect our customer base.

Both banks have done lots and lots of mergers, and we, at BB&T, have been fortunate to actually grow customers from the merger process. Now, this is of a much greater magnitude. But we're in the same markets. It's not like we're going to Florida or Texas or something, where you're really dealing with a different kind of cultural environment.

Q.: Did you get together at the suggestion of L. Glenn Orr Jr., Southern National's CEO?

ALLISON: Yeah, it was his initiative. I think he saw - we all saw - the challenges we face from big bank competitors and nonbank competitors.

Q.: Mr. Orr's compensation package, $1.7 million a year for life, stirred up a lot of controversy. Should it have been smaller?

ALLISON: Basically, the compensation package was really a settlement for an existing contract Glenn had with Southern National. It was a legal obligation that Southern National had to Glenn. You can argue about whether that should have existed, but frankly, you have to look at the performance of Southern National when Glenn took over and today. He had a performance- based contract, and in the free market, that's the way it works.

Q.: Analysts have noted that mergers of equals rarely pay off for shareholders, at least in the first few years. How can you make sure shareholders do well in this deal?

ALLISON: I think mergers of equals are a mixed bag. And I think there are four unique characteristics in this case.

Number one, and by far the most important, is we settled the leadership problem. Nothing happens until you get that problem settled.

The second issue, as we said, is systems. You can't get the economies until you get the systems problem worked out.

The third thing is, the economics in this merger of equals are probably better in the sense that we have overlapping distribution. You see mergers of equals that just didn't have any economic basis.

Fourth is the history and cultures of the two companies. They're more alike than in other mergers of equals.

Q.: Before the merger, BB&T had a foothold in Virginia. Does the new Southern National plan to expand that?

ALLISON: When we made our merger announcement, last Aug. 1, we said we expected to take 18 months to two years to integrate the acquisition. During that period, we didn't expect to do any material bank or thrift acquisitions.

After that, however, we still think there are some opportunities for acquisition. In North and South Carolina there are a few in-market possibilities. But our particular focus would be to build a statewide franchise in Virginia.

Q.: There are only three independent statewide franchises left in Virginia - Crestar, Signet, and Central Fidelity. Would you buy one of them?

ALLISON: No. I think we would buy small banks and put a franchise together, which is how we built in the Carolinas. And when I say "statewide franchise," we probably wouldn't go into Washington, D.C. We would probably build in the Richmond-Lynchburg-Roanoke corridor. There are a number of community banks left in that corridor.

Q.: You've given Wall Street some mixed signals. On one hand, you've said the BB&T/Southern National merger was motivated by a desire to remain independent. But you've also pointed out the attractiveness of the combined franchise to someone from outside the region. Are you an acquirer or an acquiree?

ALLISON: We're walking what I call "the razor's edge" on that issue. This merger wasn't about keeping us from being acquired because there were logical economic reasons to do it. But what we think we've done is create a franchise that is still acquirable. From a shareholders' perspective, we think that's good. You can make an argument that the franchise is just intrinsically more valuable.

On the other hand, and where I'm personally at, is we're also going to have an extremely high performance company and an extremely high stock price to make our shareholders happy anyway. Frankly, nobody will be able to afford to acquire us, even if they might want to, because the dilution will be horrendous.

Our goal is simply to create such a desirable franchise that nobody can buy us. Wachovia has done that, SunTrust has done that, and that's where we want to be.

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