What’s Next if SunTrust Loses Wachovia Battle?

Votes at this week’s First Union Corp. and Wachovia Corp. shareholder meetings not only will determine whether the companies make it to the merger altar as planned but also affect the fate of SunTrust Banks Inc.

The stakes are high in the industry’s most contentious merger battle in five years. If First Union and Wachovia pull off their deal, it would create an East Coast banking giant with 19 million customers and $329 billion of assets. This prospect frightens SunTrust and other Southeast banking companies.

By announcing its $14.7 billion hostile bid for Wachovia May 14, SunTrust tied its future, at least in part, to that of its two North Carolina rivals. The Atlanta company sought at best to win its own merger with Wachovia or at least to block a threatening combination.

SunTrust continued to press its campaign over the weekend, with full-page advertisements in The Wall Street Journal, The New York Times, and the local Sunday papers. The ads showed a huge pile of currency and touted the $915 million premium it is offering over First Union’s bid.

But with shareholders expected to endorse the First Union deal, where will the road lead SunTrust?

Its spokesman, Barry Koling, was unwilling to concede defeat Friday but said: “We have from the outset understood that this was an uphill battle. We clearly want Wachovia, but we certainly don’t need Wachovia to achieve our own growth goals or to serve our shareholders.”

Mr. Koling acknowledged that the public relations battle over the deal has been bruising, at least in the short term. In full-page newspaper ads and investor presentations, First Union and Wachovia have attacked SunTrust’s capital levels, earnings prospects, and business model.

Analysts say those attacks, tossed out in the heat of battle, are unlikely to stick, and they say they believe SunTrust is positioned to survive the 10-week game of merger hardball. But it may not be able to go it completely alone, they say, and may have to consider more deals if it wants to keep growing and remain competitive with the new Wachovia.

Analyst Michael Mayo of Prudential Securities said he thinks SunTrust chairman and chief executive L. Phillip Humann and his colleagues will begin hunting for acquisitions in the Southeast. “They … could potentially string a few smaller transactions together,” he said.

He and other analysts also have batted around the possibility of SunTrust’s becoming involved in a large deal, though they believe that is more iffy. Some scenarios, though considered unlikely, have SunTrust being acquired by a large out-of-region player, such as Wells Fargo & Co. or Citigroup Inc.

But SunTrust could find targets within the Southeast, among them Wachovia’s corporate neighbor in Winston-Salem, N.C., BB&T Corp. BB&T would give SunTrust something it sorely lacks and which was a key motivation behind its Wachovia bid: a banking network in the Carolinas.

“It’s not likely, but a SunTrust-BB&T combination would certainly look interesting on paper,” Mr. Mayo said.

Meanwhile, SunTrust has also been mentioned as a possible bidder on bank branches coming up for sale in the Southeast, including the 139 Florida offices that Huntington Bancshares recently put on the market. SunTrust also would probably be interested in some of the 38 branches the new Wachovia would have to unload in the Carolinas, Virginia, and Georgia.

And finally, if First Union and Wachovia combine, SunTrust could strike back by doing what competitors always do after major bank deals: trawl for customers who flee Wachovia and First Union because of policy changes, customer service glitches, and other troubles that inevitably accompany mergers.

First Union investors, who meet Tuesday in Charlotte, are widely expected to support the merger engineered by chief executive and president G. Kennedy Thompson.

Though First Union’s offer is expected to win Wachovia shareholders’ approval Friday in Winston-Salem, analysts admit there is a hint of uncertainty.

Institutions, such as mutual funds and other investment groups, own about 53% of Wachovia’s 203 million shares outstanding. Wachovia insiders and the company itself own some shares, but retail investors hold the largest chunk of remaining shares. And proxy voting experts say retail investors are the least likely to cast votes. That could leave the decision in the hands of the top 10 institutional investors, including Wellington Management, State Street Corp., and the Vanguard Group. These companies have the most difficult decisions since they probably own shares in all three banking companies.

“My best guess is that Wachovia shareholders will vote in favor of the First Union deal because there’s not a big difference in value between it and the SunTrust offer,” said Ron Mandle, an analyst at Sanford C. Bernstein & Co.

Though the voting concludes Friday, Wachovia has said results may not be available for several weeks. Because both SunTrust and Wachovia have sent out their own proxy cards, it will take time to collect and tabulate the votes.

Wall Street already appears to have accepted that SunTrust is unlikely to win and has bid up its stock more than 5% since July 16, when executives strongly reiterated assertions that they would not raise their offer for Wachovia.