After sitting on the sidelines for years, SunTrust Banks Inc. jumped into the merger fray Monday with an announcement it plans to buy Crestar Financial Corp. of Richmond, Va., for $9.5 billion.
The deal would bring together two stalwarts of southeastern banking that have been the subject of much merger speculation. Crestar has watched its Virginia rivals sell to larger competitors, while Atlanta-based SunTrust has not done a major bank acquisition since 1986.
"We didn't need to do a deal but this one improves SunTrust," said L. Phillip Humann, its chairman, president, and chief executive officer.
"It's an attractive deal for both of us," added James B. Williams, the former SunTrust chairman who is now chairman of its executive committee. "We've loved (Crestar) for a long time. The moon and the stars hadn't lined up just right till now."
Expected to close in the fourth quarter, the pooling of interests would create an $88 billion-asset banking company serving 3.3 million customers in six states from Maryland to Florida, plus the District of Columbia.
Crestar would become a wholly owned subsidiary of SunTrust, with its name and management intact, at least for the near term.
While Mr. Humann would run the combined company, Crestar chairman and CEO Richard G. Tilghman would retain those posts and join the SunTrust board along with three other Crestar directors.
"The opportunity to continue to run the Crestar franchise relatively autonomously as part of the SunTrust umbrella was quite attractive," said Edward J. Najarian, an analyst with Wheat First Union. Crestar can "continue to make the point that there will be very few disruptions" after the transaction is done.
SunTrust agreed to pay a hefty 31% premium over Crestar's market value and 27 times its estimated earnings.
Crestar's share price rose Monday by $9.3125, to $73.3125. SunTrust's stock tumbled $8.4375, or 9.7%, to $79.
"They're buying a trophy and they have to pay accordingly," said John W. Coffey, an analyst with Robinson-Humphrey Inc. The move represents "a grand departure from the SunTrust of old," he added.
SunTrust had steadfastly avoided the consolidation game even as rivals like Wachovia Corp., NationsBank Corp., and First Union Corp. grew through acquisition. Its last deal sizable was its 1986 purchase of $5 billion- asset Third National Corp. of Nashville.
Since then, SunTrust has focused on technology and gaining efficiencies. It also boosted revenue in a few key business lines, including credit cards, mortgages, and corporate and retail banking.
"We've turned down certain opportunities because of the high premiums being sought and our unwillingness to dilute shareholders' value," said SunTrust controller William P. O'Halloran.
Mr. Humann, who took SunTrust's reins in March, said Crestar was simply too good to pass up. Its culture is compatible with SunTrust's, he said, and Crestar's markets in northern Virginia, Maryland, and Washington are seen as attractive.
SunTrust is said to have outbid Wachovia and BB&T Corp. for Crestar. SunTrust expects to take a $250 million restructuring charge and cut the combined company's costs by $130 million, which analysts said is about 17% of Crestar's expenses.
Crestar has been an active acquirer, most recently in the Washington area. In November, Crestar agreed to buy Am National Bancorp, a $505 million-asset company in Baltimore.
Mr. Tilghman said Crestar "could have stayed independent" for a while longer but was unable to spend its growing excess capital on acquisitions it desired.
In recent months, rivals like BB&T of Winston-Salem, N.C., have been winning Washington-area bank auctions and "the capital problem was getting worse, not better," Mr. Tilghman said.
Crestar suffered setbacks in a national credit card strategy and recently agreed to sell much of its "noncore" portfolio to Fleet Financial Group. It has focused successfully on boosting fee income, with trust and mortgage banking leading the way.
Crestar's decision to sell comes as it has been devoting significant resources to marketing its homegrown and independent virtues, in contrast to Virginia interlopers like NationsBank, First Union, and Wachovia.
Though this deal might make that positioning more difficult, some observers said SunTrust would allow that strategy to continue.
"It's one thing to be courted by someone who may rape, pillage, and plunder," said T. Stephen Johnson, an Atlanta bank consultant. "Once somebody comes calling who doesn't have that kind of reputation-someone who isn't going to cut jobs and close offices-you make a different decision."
Mr. Najarian of Wheat First Union said investors might rethink SunTrust's lofty price-earnings multiple of 23, due in part to its big stake in Coca-Cola Co. SunTrust seems to have valued Crestar's stock, which normally trades at 18 times earnings, as highly as its own in preparing its $84 per-share bid.
"SunTrust should have paid about $74 for Crestar," Mr. Najarian said.
For the future, an entrance into the Carolinas would make sense for SunTrust, some observers said. A likely partner there is seen in the $31.5 billion-asset BB&T Corp.
Others believe that SunTrust will ultimately forge an alliance with Wachovia, a long-rumored partner. In light of the Crestar deal, a merger with Wachovia-which last year bought two large Virginia banks-would be even more attractive now, some say.
