SAN FRANCISCO - The merger agreement between Zions Bancorp. and First Security Corp. took another step toward dissolution on Monday when the investment bank advising Zions said it no longer considered the deal's exchange ratio to be fair.

Zions finds itself the likely target of lawsuits no matter what it does next - First Security hinted Monday that it might launch a legal battle if Zions wavers in its commitment to the deal. Zions was noticeably guarded in its response, opting to delay its shareholder vote and give investors a chance to change their minds on their proxy vote.

Both banks moved quickly Monday morning to address a retraction by Goldman Sachs of its fairness opinion on the deal - a move analysts described as extremely unusual.

Observers said Goldman's move, which followed a March 3 profit warning by First Security and subsequent outcry by Zions shareholders against the deal, left little chance the Salt Lake City banks would combine under the terms originally laid out in their merger agreement.

"It seems to be increasingly likely that the deal won't go through," said Joseph K. Morford 3d, a vice president and analyst at Dain Rauscher Wessels in San Francisco.

Under the terms of the merger agreement, neither Zions nor its board may use Goldman's withdrawal of its fairness opinion as grounds to cancel the deal. In fact, to avoid being in breach of the contract, Zions and its board must continue to recommend the deal to the banking company's shareholders, even if senior management - which collectively holds 20% of the stock - plans to vote against the merger.

Suggesting that management had those restrictions in mind, Zions on Monday released a notably bare-bones statement, which relayed the information that Goldman had advised the banking company last Saturday that its previous opinion on the merger was no longer valid.

Zions did not explicitly reiterate its commitment to the merger in the statement, except to say that a shareholders' meeting, scheduled for March 22, would be postponed to March 31 to allow shareholders to consider supplemental information.

In contrast, First Security released a statement two hours later, which said that a board meeting convened Sunday night "unanimously reaffirmed its recommendation of the pending merger with Zions." In what amounted to a pre-emptive shot in Zions' direction, First Security also said it believed Zions was "obligated to honor its commitments under our merger agreement and take all appropriate steps to consummate the transaction.''

Language aside, the message of the morning statements was clear to one Zions shareholder who welcomed Monday's turn of events as a sign that the deal was only a few legal steps away from being dead.

"I can't imagine any self-respecting Zions shareholder wanting to have anything to do with this deal," said Phil Carter, a director at Bain Capital in Boston.

Zions' stock has lost 28% of its value since First Security's surprise announcement March 3 that its fourth-quarter revenues would be 8% lower than the previous quarter's.

This development caused Goldman to conclude that the original exchange ratio is no longer fair to Zions' shareholders, according to the Zions statement.

The one option that analysts and investors suggest could save the merger would be a renegotiation of the original terms of the agreement to ones that are vastly more favorable to Zions.

With the right exchange ratio, "I think there's still some argument for why the two banks should get together," Mr. Morford said.

But though this has bandied about by Wall Street as a potential solution, so far neither bank has said it is considering new terms.

Mr. Gibbons said "there has been no renegotiation," and declined to comment on future discussions. And First Security spokeswoman Jackelin Slack said, "At this time, we don't have plans to renegotiate."

It was clear that after Monday's news, executives at both banking companies were aware that the focus was shifting from keeping the merger alive, to positioning the institutions if a lawsuit arises.

If the deal is voted down on March 31, First Security has hinted it could bring Zions to court.

"We will take all necessary steps to hold Zions accountable for the events and actions leading to nonapproval" if the deal falls through, said Brad Hardy, general counsel and chief financial officer, and Scott Ulbrich, executive vice president of capital markets, treasury, and investment management, in a statement prepared for the media.

Zions' board, for its part, stuck by the merger. "The board's commitment to support the merger has not changed," Mr. Gibbons said in an interview.

"They don't want to be sued for breach of contract, so they're probably being very careful and will let the shareholders vote down the merger," said Victor Lewkow, a partner in the mergers and acquisition group at Cleary, Gottlieb, Steen & Hamilton.

Failing to complete the merger with First Security does not necessarily mean bad news for Zions, which analysts and investors say is very attractive as a stand-alone entity.

"I don't think Zions needs to merge with anyone," Mr. Carter said. "This was a fairly unique deal, in terms of in-market overlap." If Zions remains independent, it would have a very weak competitor in First Security, he said.


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