With the announcement of their merger agreement Monday, First Union Corp. and First Fidelity Bancorp. broke new ground in at least two ways: transaction value and geographic coverage.

The $5.4 billion indicated value, an exchange of First Union stock equal to 1.9 times First Fidelity's book value, is the highest in U.S. banking history, exceeding by some $700 million the price BankAmerica Corp. paid in 1992 for Security Pacific Corp.

And the result will be the first superregional banking company that spans most of the Eastern Seaboard, introducing a consumer marketing power house - First Union - into the Northeast and raising the likelihood of a host of countermoves.

The announcement generated a flurry of stock-market interest in potential target banks (see back page) and forced analysts to assess the benefits of a market-extension merger, as opposed to the more common in- market deals that are usually justified by cost cutting (see page 16).

"This deal, on top of the Shawmut-Fleet merger ($3.7 billion, announced in February), has opened the floodgates in terms of the Northeast," said Thomas Hanley, banking analyst at CS First Boston. "Corporate boards at medium-sized or larger banks have to be sitting down and asking what are they going to do next."

In contrast to Fleet-Shawmut and other combinations with overlapping operations, First Union anticipates only a 5% cost reduction from its acquisition of First Fidelity. The deal relies much more on product synergies, including First Union's ability to sell its capital markets expertise to First Fidelity's commercial customers and its investment products to First Fidelity's retail base.

First Union, which is based in Charlotte, N.C., said it would exchange 1.35 shares of its common stock for each one of First Fidelity. The exchange value of $64.29 a share, based on last Friday's share prices, was 32% above First Fidelity's market value.

The combination, including about $11 billion of pending First Union acquisitions, would create the sixth-largest U.S. bank holding company, at $124 billion of assets. Its 1,972 branches - a high for U.S. banks - would span 12 states from Florida to Connecticut, plus the District of Columbia.

The companies said they expect to complete the deal by yearned, pending regulator and shareholder approvals.

It is the biggest of what could be a barrage of bank mergers in the wake of Congress' lowering of barriers to interstate banking. As of Sept. 30, banks can make acquisitions in any state that does not specifically opt out of the national law.

Mr. Hanley at First Boston predicted that mergers will come a lot faster than many bankers expected. Immediate prospects, he said, include Midlantic Corp. and UJB Financial Corp. of New Jersey and Meridian Bancorp and Integra Financial Corp. of Pennsylvania.

"Their fate has been sealed," Mr. Hanley said. "It's no longer a matter of whether they'll sell, only when."

In a press conference Monday, First Fidelity chairman and chief executive officer Anthony Terracciano said his company had decided that industry consolidation required a larger partner. Under Mr. Terracciano's leadership, First Fidelity recovered from credit problems dating back to the 1980s and attracted as a 30% shareholder Banco Santander of Spain, which would have 11.4% of First Union after the merger.

But First Fidelity was still lagging in terms of technology investment, Mr. Terracciano conceded. Looking ahead five to 10 years, "we decided in the interests of shareholders that we needed a partner that had far greater capacity to invest and prepare for the change than we would have by ourselves," Mr. Terracciano said.

In the short run, the deal seemed mainly a boon for Santander and other First Fidelity shareholders. First Fidelity's share price jumped Monday by $10.75, or 21%, to $59.

First Union's price was down $1.75, to $45.875.

"If you ask which shareholders are better off today, there's no question," said Moshe Orenbuch of Sanford C. Bernstein in New York. "But in the scheme of things, as these deals tend to go, this is okay. It's strategically a very good deal and ultimately will be a good one financially."

First Union estimated the combined company would earn $6.31 a share next year - a 5% dilution from its previous standalone estimate of $6.55. Wall Street consensus estimates had pegged First Union's 1996 earnings at a lower $6.17 a share.

First Union's chairman and CEO, Edward E. Crutchfield, said the deal passed the company's internal benchmark of earning back dilution within 12 to 18 months. He said the $6.31 estimate assumes "substantial new fee income" from running First Union products through First Fidelity distribution channels.

First Union, which announced a six-cent increase in its quarterly dividend, to 52 cents a share, estimated the combined company will earn $5.29 a share this year, excluding an after-tax restructuring charge of $140 million, or 50 cents a share, for merger-related expenses.

Analysts generally had not expected First Union to make a bid for First Fidelity. Though First Fidelity had made no secret of its interest in being acquired, the name most often associated with a potential deal was First Union's Charlotte-based rival, NationsBank Corp.

Mr. Terracciano indicated on Monday that First Fidelity had negotiated exclusively with First Union over the past two weeks. A source close to First Union said First Fidelity had had limited conversations with NationsBank and a few others.

Once the companies merge, they expect to have a three-man "office of the chairman" consisting of Mr. Crutchfield as chairman and CEO, Mr. Terracciano as president, and First Union president John R. Georgius as vice chairman.

Analysts noted that the apparent strong chemistry between Mr. Crutchfield, Mr. Terracciano, and Mr. Georgius - much in evidence at the Monday press conference - suggests they can avoid the bickering and confusion that has afflicted other complex mergers.

Mr. Crutchfield said First Union would not have undertaken the acquisition without Mr. Terracciano's agreement to stay on. The former Chase Manhattan Corp. executive is to take responsibility for the northeastern region plus First Union's Charlotte-based capital markets group, which specializes in derivatives and other sophisticated financial products for the commercial middle market.

The entire First Union and First Fidelity territory, which will be served under the First Union name, contains 37% of all U.S. middle-market companies, according to First Union estimates.

The two banks also played up the high level of affluence in First Fidelity's territory, which includes four of the five wealthiest states. First Union owns the Evergreen family of mutual funds and has made investment products one of its major strategic initiatives.

Because the Northeast has been one of the country's slower-growing regions since the 1990-91 recession, "it's going to be incumbent on First Union to follow through," said Thomas F. Theurkauf Jr. of Keefe, Bruyette & Woods Inc.

Noting that revenue growth is a challenge for all banks, he added, "I'm not ruling it out, but I think it will be a challenge."

The revenue imperative has banks "revamping their entire approach to marketing," said James McCormick, president of First Manhattan Consulting Group in New York.

"The best regionals are building data bases which will enable some of them to gain profitable market share," Mr. McCormick said.

He said he expects to see more consolidations that will "achieve short- run cost reductions and earnings growth and build a larger platform to launch more sophisticated marketing initiatives."

Stephen Willard, a partner in the Washington law firm of Gibson, Dunn & Crutcher, expressed surprise at the premium First Fidelity accepted, observing that it was well below the 100% IBM offered Lotus in an all-cash deal. He suggested another buyer could emerge with a higher offer.

Other analysts pointed out that while slow revenue growth and the need to trim costs were key considerations, the larger data bases that these companies can assemble will help them target specific markets and customers more exactly and aggressively.

This, they added, will replace the ineffective random marketing and cross-selling banks have used until now."

Michael Sullivan, a former marketing director at First Union, guessed that after an initial phase of consolidation, First Union will probably move quickly to absorb First Fidelity's operations.

"One of the powers operating in favor of the North Carolina banks has been their ability to deal with customers long-distance," said Mr. Sullivan, now an independent marketing consultant based in Charlotte.

"They learned how to manage that way faster than many other banks," he said, and have really refined techniques for communicating both their data and their culture."

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