SAN FRANCISCO - Shareholders of Zions Bancorp. rejected by an overwhelming margin Friday the company's proposed union with First Security Corp., its Salt Lake City competitor.

The vote, in which only 33% of Zions shareholders approved the deal, capped a month of escalating tension between the two companies over what had been once been seen as a done deal.

Zions' board of directors gave little indication whether it would try to renegotiate terms of the merger or abandon the planned union altogether. The board met immediately following the shareholder vote, and no decisions they might have reached were made public.

Zions president and chief executive officer Harris H. Simmons made a brief statement Friday expressing regret for failing to win shareholder approval. He said Zions still believed the merger makes strategic sense. But he indicated that discussions with its would-be partner may be drawing to an end.

"We anticipate working closely with First Security officials&as we bring this matter to a conclusion,'' he said.

The terms agreed upon by Zions and First Security last June called for Zions stockholders to exchange each of their shares for one share in the post-merger company; First Security stockholders were to get 0.442 share in the combined company for each First Security share.

But an early March earnings warning by First Security caused its stock to plunge 40%, which in turn prompted Goldman Sachs Group Inc., the investment bank advising Zions, to withdraw its fairness of opinion on the deal. Upping the ante, First Security then indicated it would sue Zions for breach of contract if Zions shareholders rejected the deal.

Investors said a renegotiation of the merger terms is likely at this point, given the investments each company has already made in preparing for a union. But the price would have to be cut by about 10%.

"We would like to see the deal happen on favorable terms, but at this exchange ratio, it's dilutive to Zions stock," William Ruh, senior vice president and principal at Castle Creek Capital, a shareholder-firm that voted against the merger.

This is not a deal either company can walk away from easily. Both have struggled to clear a series of regulatory hurdles, including a request by the Securities and Exchange Commission that Zions restate three years of financial results, as well as an unexpected order by the Justice Department for additional branch sales in Utah and Idaho.

"Management spent over a year putting the merger together, with the company ready to be integrated at the push of a button," said Erick Reim, an analyst at U.S. Bancorp Piper Jaffray. "It's a tremendous loss if the deal doesn't go through."

It was unclear how Zions managers and their families voted their shares, which total 5% of those outstanding. Zions was under obligation to recommend approval, but the agreement did not require senior management to vote for it.

A merger, which would have created a regional heavyweight with $40 billion of assets, would also have protected both companies from immediate takeover by their acquisitive neighbors in the region, such as Wells Fargo & Co. or Bank One Corp.

"The reason Zions management wanted to do this deal in the first place was to get bigger and become a consolidator themselves," said a New York-based investor who asked not to be named. "Without a merger, Zions is just as much a takeover candidate as First Security," he said.

Besides Wells and Bank One, he named Minneapolis-based U.S. Bancorp and Cleveland's KeyCorp as companies with the clout and the regional presence to be interested in either Utah bank.

For that reason some support for the merger came from local investors hoping the deal would fend off out-of-state bidders. "Being a Utahan, it's important we have a local bank with some significant presence," said an executive at a local insurance company that voted for the merger. Still this vote was not driven purely by state loyalty - the company also held shares in First Security, which are expected to take a severe tumble now that the deal is terminated.

Zions shares, by contrast, were expected to rebound on the news, and indeed, they had gained 8.6% Friday, to close at $41.625 on a generally positive day for bank stocks. First Security's shares rose 25 cents to $12.

The death of the Zions-First Security merger also has repercussions for western expansion plans of the regional banking company BancWest Corp.

It had agreed to buy 68 branches from the two Utah companies last January in a transaction that would have made it the second-largest banking company in Utah.

Editor's Note: Each link opens a new browser window. We have no control over the content or availability of sites not part of American Banker Online.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.