Stock Market Signals That It Likes Pact

ATLANTA -- After years of expensive and heavily criticized acquisitions, First Union Corp. may finally have hit a home run with its purchase of Southeast Banking Corp.

First Union's stock was up $1.25, to $27, in heavy trading late Friday afternoon. The jump since Tuesday, when rumors surfaced that a deal was close, was 14%.

"This is going to be so favorably regarded that it will give the stock the kind of boost it just hasn't had for years," said Richard I. Stillinger, banking analyst with Keefe, Bruyette & Woods Inc. in New York.

A Break on the Cash Premium

First Union, based in Charlotte, N.C., is paying the Federal Deposit Insurance Corp. a cash premium of $81 million to acquire the failed Miami-based bank.

Although First Union will have to set aside $131 million in reserves to cover the assumption of Southeast's problem assets, the company expects the deal will boost its after-tax income by $60 million as early as next year and by as much as $150 million in 1994.

First Union said it will issue 7.5 million shares -- worth $187 million -- to help finance the acquisition, but the offering will result in only minimal shareholder dilution.

Market Reacts Favorably

The stock market's warm reception to First Union's purchase of $11.3 billion-asset Southeast is in stark contrast to the storm of criticism that greeted its January 1990 acquisition of Florida National Banks of Florida Inc., Jacksonville.

That deal, the biggest one First Union had engineered before Southeast, contributed $7.9 billion in assets, but boosted nonperforming assets by $215 million.

That, and industry problems, caused the value of First Union's shares to decline substantially. The stock began to recover only this year.

First Union chairman and chief executive Edward E. Crutchfield Jr. is getting much better response to the Southeast deal.

"To the extent that he didn't ask people to take a lot of dilution up front, and he didn't take a lot of asset quality risk or book a lot of intangibles, this is a hell of a lot better deal than Florida National," said Anthony R. Davis, banking analyst with Wheat, First, Butcher & Singer in Richmond.

Mr. Crutchfield, according to Mr. Davis, "has gotten the message: Dilution today is original sin. You just can't do it."

Limited Credit Losses Expected

Since the FDIC, in a novel cost-sharing arrangement, has agreed to assume 85% of Southeast's losses over a five-year period, First Union estimates that its annual credit losses will be no more than $150 million over that period.

First Union hopes to offset the losses through aggressive expense cutting and other savings that will result from the merger.

First Union estimates it will be able to reduce Southeast's operating expenses by about $260 million by 1993.

As well, merging Southeast into the company's own Florida operations will allow First Union to eliminate 119 branches and 2,800 jobs within a year. Since the combined companies have 13,800 employees in Florida, this represents a 20% cut in staff.

Ebert to Be Available

No details were available Friday on the bids offered by Barnett and Sun Trust, although regulatory sources have indicated First Union's offer was substantially better for the FDIC.

Meanwhile, Southeast president and chief executive Douglas E. Ebert said Friday he had not been offered a job by First Union and had no plans "other than getting reacquainted with my wife."

Mr. Ebert, formerly with Manufacturers Hanover, took charge of Southeast in July 1990. He said he never really expected the bank to fail and hoped for a capital infusion from private investors up until the very end. But he conceded that his hopes "really dimmed" when the New York investment firm Odyssey Partners LP broke off negotiations on Sept. 13.

"It's going to make me a believer in Friday the 13th," Mr. Ebert said. "That really took a lot of wind out of our sails. We just basically ran out of time."

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