SAN FRANCISCO - First Security Corp. said has ended merger discussions with Zions Bancorp after Zions shareholders rejected the proposed union Friday afternoon.

The board of directors of First Security voted unanimously to "terminate" the merger agreement with Zions, First Security said in a statement released Saturday morning.

The language of the statement pointed the finger of blame at Zions.

"Zions' failure to complete the transaction necessitates First Security moving on separately," said Spencer F. Eccles, chairman and chief executive officer of First Security.

On Friday, only 33% of Zions shareholders approved the transaction, capping a month of escalating tension between the two companies over what had been once been seen as a done deal.

That evening, the Zions board issued a brief but open-ended statement that would still have allowed the companies to work out a revised deal.

Indeed, many investors were expecting some attempt at a renegotiation - which would have had to include a price cut of about 10% - given the investments each company had already made in preparing for the combination.

Expressing sorrow for failing to win shareholder approval, Zions president and chief executive officer Harris H. Simmons said in a statement that the company still believed in the strategic rationale and benefits to the merger.

But he, too, indicated that discussions are drawing to an end.

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

Many Zions shareholders viewed the deal as too expensive to Zions after First Security issued an earnings warning in early March. First Security's stock plunged 40% on the warning.

"We would like to see the deal happen on favorable terms, but at this exchange ratio, it's dilutive to Zions stock," said William Ruh, a senior vice president and principal at Castle Creek Capital, a private equity firm based in Rancho Santa Fe, Calif. It voted against the merger.

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 those terms came under scrutiny after First Security announced that downturns in two business lines would cause lower first-quarter earnings, prompting 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. First Security made no comment on a possible lawsuit Saturday.

Since then, Zions had frequently said it still supports the deal. But some local investors were clearly confused about Zions' on-going interest in the union, and bank executives spent a good part of the two-hour meeting Friday afternoon explaining the company's position to shareholders crammed into a room in Salt Lake City's Doubletree Hotel.

This is not a deal either company will 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," he said before the vote.

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.

BancWest chairman and chief executive officer Walter A. Dods, Jr. echoed First Security's comments on the vote, saying in a statement the company was "disappointed that the Zions-First Security transaction couldn't be completed as originally planned."

But the company, which counts Bank of the West and First Hawaiian Bank as its principal subsidiaries, "will continue to look for other acquisition alternatives," he said.

Mr. Dods also downplayed any negative impact on BancWest earnings resulting from its failure to buy the branches. Expenses spent on preparing for that acquisition have been covered by BancWest's agreement with the Utah banks, he said.

First Security and Zions are slated to owe BancWest a $5 million break-up fee if they can't sell the branches to BancWest.

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