CHARLOTTE, N.C. — Last summer, Wachovia Corp. chief L.M. “Bud” Baker Jr. concluded that the best way for his company to stay competitive in a consolidation wave was to join it.

And it has become apparent that in searching for a merger partner, the chairman, chief executive, and president of the Winston-Salem, N.C., company was talking with First Union Corp. and SunTrust Banks Inc. at the same time, though each of the two certainly had to think it alone had Mr. Baker’s ear. Now First Union and SunTrust are in the industry’s biggest merger row in years. And Mr. Baker, having accepted a $13.4 billion offer from First Union, finds himself fending off a higher bid from SunTrust.

Things came to a head Tuesday afternoon as Wachovia’s board prepared to consider SunTrust’s $14.7 billion offer, which included a slightly sweetened dividend package offered up by First Union on Tuesday morning. Mr. Baker’s two-track courtship, which nearly resulted in a deal with SunTrust last December, has triggered a war of words between the two would-be partners. First Union, of Charlotte, and Atlanta-based Sun Trust have been dueling in full-page newspaper advertisements and in private meetings with institutional investors and public statements by chief executives.

Mr. Baker, 59, has kept a low profile but in private has criticized SunTrust’s advertisements and news coverage of the rival bid. In an angry memo to Wachovia senior executives Friday, he said news reports of SunTrust’s bid “slanted” toward SunTrust and “have been unsettling and disturbing to all of us and our customers.”

First Union shot back Tuesday in a response one analyst described as “guns blazing.” The company tweaked its bid, offering a new class of preferred stock that would let Wachovia shareholders keep the dividends they now receive. And it bought ads in The Wall Street Journal and 30 East Coast newspapers rebutting SunTrust’s bid point by point.

First Union offered the revised dividend proposal in hopes of satisfying Wachovia shareholders unhappy over the prospect of having their dividends cut after a First Union-Wachovia merger.

A person familiar with the new proposal said the original 48-cent special dividend was designed to equalize the dividends, but “it was not easily understood by retail investors,” so the Charlotte company offered the alternative. (See box.)

First Union’s Tuesday newspaper ads argued that SunTrust would “gut” Wachovia by eliminating its name, management, and culture. A combined First Union-Wachovia, they said, would have faster earnings growth, generate capital more quickly, and be positioned better in businesses such as brokerage, wealth management, and insurance.

SunTrust spokesman Barry Koling declined to discuss the First Union ads item by item. In an interview Tuesday, he called the ads “ an attempt to divert attention from a simple positive message that ours, at the end of the day, is a superior transaction. It’s a better price” and would be “a less disruptive merger.”

Mr. Baker has made it clear he will fight to preserve the First Union deal. Last Friday, he sought to placate shareholders by announcing he would give up a $500,000 increase in annual retirement pay negotiated as part of the First Union merger agreement.

But he defended the merger plan, which would keep the Wachovia name: “For shareholders, Wachovia’s merger with First Union is a unique opportunity to own an exceptional company with significant potential to build greater shareholder value.’’

Some analysts said that, regardless of Wachovia’s board vote, the fight could drag on for months or longer and could turn into a proxy battle.

Other scenarios include an outright rejection of SunTrust’s bid, though under its merger with First Union, Wachovia could discuss a merger with SunTrust for up to five days without violating the contract.

“There’s the just-say-no defense, but there’s also a fiduciary duty they need to exercise” to get the best deal for shareholders, said Marni Pont O’Doherty, an analyst with Keefe, Bruyette & Woods Inc. in New York. Wachovia “could talk to SunTrust for two days and decide, ‘You know, we were right in December,’ ” when Wachovia executives halted a planned merger with SunTrust.

Ms. O’Doherty believes the odds are 50-50 that the original First Union deal will go ahead as planned, and that SunTrust has only a 1 in 3 chance of breaking up the deal and winning Wachovia for itself. Even then, she said she thinks SunTrust would need to make another, higher offer.

And SunTrust is pursuing the deal with a vengeance, citing its higher premium and arguing that it is a better fit. SunTrust chairman and chief executive L. Phillip Humann has vowed to take his offer directly to shareholders this summer.

First Union and Wachovia announced their $13.4 billion merger-of-equals agreement April 16. At the time, many analysts scoffed at the proposal, questioning whether First Union had really completed a major restructuring announced last summer and pointing to the company’s repeated insistence that it was not interested in another big deal.

SunTrust examined the agreement for several weeks before topping First Union’s offer with a $14.7 billion rival bid May 14, arguing that its bid was a better deal for shareholders and that the companies were more compatible culturally than Wachovia and First Union.

SunTrust executives said the Wachovia-First Union agreement caught them by surprise, coming about four months after they had nearly completed a similar merger of equals with Wachovia. That deal, which was nearly completed Dec. 15, also would have preserved the Wachovia name and would have paid Wachovia shareholders a 12% premium. The two companies would have split board seats 50-50, boosted their dividend to match Wachovia’s, and named Mr. Baker chairman and CEO.

A crucial detail missing in the avalanche of regulatory filings and press statements in the past two weeks is what drove SunTrust and Wachovia apart. Was it a squabble over the reporting structure of one unit, as Wachovia executives have insisted? Or was it the existence of a second bidder — one SunTrust executives say they knew nothing about?

At least publicly, Wachovia and SunTrust have blamed the split on a disagreement over management and reporting structure of the combined company’s wealth management division. But Mr. Humann has said he was not sure why Mr. Baker walked away from the deal. And he said he was taken aback when he learned Easter weekend that Mr. Baker was wrapping up a deal with First Union.

First Union chief G. Kennedy Thompson said in an interview Friday that he began talking to Mr. Baker about a possible merger last August, not long after taking over as chairman and chief executive from Edward Crutchfield, who had retired. When asked whether he knew whether Wachovia was in discussions with SunTrust, Mr. Thompson told American Banker that he did not.

It seems that SunTrust chairman and chief executive Mr. Humann was just as unaware that Mr. Baker was talking with Mr. Thompson. “As far as we knew, there was only one merger with Wachovia that was being discussed late in December, and that was SunTrust,” SunTrust spokesman Barry Koling said this week.

So why was Mr. Baker so eager to sell Wachovia? Mr. Baker has repeatedly said he wants to create a company large and strong enough to compete against other large financial services firms offering a variety of banking and nonbanking products, from brokerage services to insurance.

Analysts interviewed this week said Mr. Baker may have felt that Wachovia could no longer stay competitive while remaining independent. “I think Wachovia recognized that the new financial services landscape requires more scale and product breadth,” said Michael Mayo, a Prudential Securities analyst. “Given that backdrop, they thought they needed to perhaps evolve the business model faster than they could internally.”

Another acquisition, like the dozens that helped Wachovia become one of the nation’s largest banking companies, wouldn’t be enough. And Mr. Baker also would not agree to a deal that would fail to preserve his company’s 112-year-old name and history.

So in the past year, he renewed talks with Mr. Humann that nearly led to a deal with SunTrust in December. And he also began conversations with Mr. Thompson that resulted in the Easter Sunday merger agreement.

And while many analysts agree that SunTrust’s offer sounds better financially, they say Mr. Baker’s bet on First Union may also make sense. “What Bud was doing was looking around for a partner that could not only leverage what they had already done, but also add products and services,” said John Wimsatt, an analyst at Friedman Billings Ramsey in Arlington, Va. “The obvious suitors were SunTrust and First Union. For what he was probably trying to do, the First Union deal makes more sense over the long term."


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