Stocks: Wall St. Gives Mixed Reviews To 1st Union-1st Fidelity Deal

The record-breaking deal by First Union Corp. to acquire First Fidelity Bancorp. is generating strong pro and con opinions among Wall Street analysts.

Some regard the pairing of the North Carolina and New Jersey superregionals as a winning combination likely to have important ripple effects across the rest of the industry.

Others, however, expressed doubts about the potential for growth in some of the new markets First Union is entering, and blanched at the $5.4 billion price tag.

Strongly in favor of the deal is Anthony Davis, regional bank analyst at Dean Witter Reynolds. "The heads of retailing banking at Chemical (Banking Corp.) and Chase (Manhattan Corp.) and some other places ought to be quaking in their boots," he said. "The major banks in the Northeast are going to get a lesson in the correct way to conduct retail banking. And I expect that to have powerful implications."

Mr. Davis dismissed doubts surrounding First Union's stock, which fell to $44.625 at the close of trading Wednesday, from $47.625 before deal was announced on Monday - a 6.3% drop at a time when bank stocks were surging.

"I am not that concerned about the revenue challenge," he said. If First Union can pump up the average revenues at First Fidelity's 650 branches from $973,000 in the first quarter to the $1,325,000 average at its own branches, incremental revenues of $180 million will be generated, he noted.

In a presentation to analysts, First Union and First Fidelity managers said they hope to generate incremental revenues of $79 million next year and reduce costs by $106 million.

Other analysts who view the deal positively also focus on revenue. "Wall Street admonishes First Union and First Fidelity for not enough cost savings, but I see the deal as being driven by potential revenue enhancements more than by cost savings," said Frank W. Anderson of Stephens Inc., Little Rock.

The deal gives First Union "a whole new avenue of revenue generation and a competitive situation a bit more fragmented than the crowded and oligopolistic Southeast," said Nancy A. Bush of Brown Brothers Harriman & Co., New York.

Market concerns about clashing corporate cultures were also minimized.

"This is not C&S/Sovran redux," said Ms. Bush. "There's little overlap, meaning less politics and less chance of (top managers) bumping into each other," said Mr. Anderson.

"You've got three chain-smoking, get-it-done yesterday managers running the company," said Mr. Davis, referring to First Union chief executive Edward Crutchfield and president John Georgius and First Fidelity chief executive Anthony Terracciano.

But other analysts took a decidedly less charitable view of the transaction.

"First Union is entering a slower-growth market, buying an efficient and high-performing franchise, and taking permanent dilution," said Francis X. Suozzo of S.G. Warburg & Co. "I don't believe they will get their money back in this deal."

The analyst said the managements of the two banks seemed to be saying they intend to introduce new products while cutting costs at the same time. "I don't think that's doable," he said.

Mr. Suozzo pointed out that the three worst-performing stocks this year among regional banks he follows all belong to banks that have announced major acquisitions, First Union, Fleet Financial Group, and U.S. Bancorp.

One investment banker said the deal was too pricey. Although officials have said the price equals 1.9 times book value, on a tangible basis the price is 2.75 times book value, this banker said.

George M. Salem of Gerard Klauer Mattison & Co. said First Union shares will likely be held back by earnings dilution until 1998. "They bought a great franchise and excellent management, but at a steep price," he said.

Daniel Kaplan contributed to this article.

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