A Standard & Poor’s Corp. analyst said Wachovia Corp. and First Union Corp. could have “a tough road ahead of them” after their planned $13.4 billion merger.

In a quarterly conference call Tuesday on the financial industry’s outlook, Charles Rauch, a director in S&P’s financial services ratings group, said the deal offers clear benefits, including improved market position and cost savings. But the two Southeast regionals “are quite different institutions,” First Union being more aggressive and Wachovia more conservative, he said.

In addition, “both organizations have been disrupted over the past year, because they both had major restructurings,” Mr. Rauch said. “And earnings are under pressure at both institutions, so it’s going to be a very complicated integration that could take some time.”

Shortly after the deal was announced S&P issued a negative ratings alert on Wachovia’s long-term debt, which currently is rated slightly higher than that of First Union, the buyer in the merger deal. For instance, Wachovia’s subordinated debt is rated A, while First Union’s is rated A-minus.

Mr. Rauch said Tuesday that he expects First Union, which would adopt Wachovia’s name, to retain the lower rating.

The deal was unexpected, because both companies had said publicly that they were focusing on internal execution and not looking for deals, Mr. Rauch said. First Union in particular had sworn off big acquisitions “after it stumbled badly on CoreStates Financial and The Money Store,” he said.

Most analysts agree that First Union is paying too much for those companies and aiming for unrealistic returns. The Charlotte, N.C., company has since shut Money Store, and last fall it wrote off $1.7 billion of goodwill related to that acquisition.

G. Kennedy Thompson, First Union’s chairman and chief executive officer, has said that he would have preferred to wait a year before another big deal, but that he and his Wachovia counterpart, L.M. “Bud” Baker Jr., decided the two companies were such a good fit that it made no sense to wait.

People involved in the negotiations say the two men have similar philosophies and styles. “There is enormous chemistry between the two CEOs,” said a person who worked on the deal. “They think alike. They act alike. They have similar objectives. They are both self-effacing, private, and not flamboyant.”

Mr. Thompson said there are cultural differences between the two institutions, but by using their honesty and integrity, he and Mr. Baker will guide a smooth integration.

“I think if he and I can lead from the top with those kinds of values, then I think these two different cultures that people talk about will be no problem.” Mr. Thompson said last week in a videotaped message to employees.

Mr. Rauch said that as a result of the deal, “First Union will enhance its market position and could generate some substantial cost savings, because there is a lot of overlap in terms of both their businesses and their territories.”

Nonetheless, “our outlook on First Union still remains negative,” Mr. Rauch said. “We think it’s still kind of early for this company to be making such a massive undertaking so soon after their wholesale restructuring last June.”

First Union has yet to establish an “earnings foundation” that it can build on, he said.

Also, both companies will face eroding commercial loan quality, both before and after the deal is completed this fall, “so they’ve got a tough road ahead of them,” Mr. Rauch said.


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