Wachovia (NYSE:WB) shares lost a little ground in trading, even though the company announced a deal that would increase its presence in the Southeast U.S. and allow it to trump rival Bank of America (NYSE:BAC) in that region. Today, Wachovia said it will purchase SouthTrust (NASDAQ:SOTR) in a stock deal valued at $14.3 billion, representing a 20% premium to SouthTrust's stock price last Friday.
It's not surprising that investors would fear that it represents too high a price to pay for SouthTrust. However, on the bright side, the deal will give Wachovia an enhanced presence in what are perceived as high-growth areas in the Southeast U.S., as well as accelerate its planned growth into Texas, a market it finds attractive.
Wachovia said that if the companies were combined today, the resulting entity would have total deposits of $267 billion, with 98,000 employees, 3,200 branches, and 5,300 ATMs serving 14 million households.
Although the deal is expected to lower earnings for 2005, in a conference call regarding the merger (transcript courtesy of CCBN StreetEvents; registration required), management said that the deal should add to earnings in two years (with expectations to close in early November) and said that its policy is to give conservative guidance, which "assume[s] zero revenue synergies, although we are convinced there will be many."
Hand in hand with increased productivity and cost savings comes the possibility that 4,300 jobs could be cut as a result of the merger. Also, 130 to 150 branches may be closed due to overlap in some areas, with Georgia and Florida indicated as two places where the two banks have a great deal of overlap.
Right now, major banks are heightening merger and acquisition activity as they try to gain footholds in growing, lucrative areas. Not long ago, SunTrust (NYSE:STI) acquiredNational Commerce Financial (NYSE:NCF) in a bid to expand its own Southern presence -- the first acquisition SunTrust had tried since First Union beat it out for Wachovia.
For now, it seems Wachovia investors have a legitimate concern that perhaps the company is paying too dearly for this acquisition. At this purchase price, there's a lot riding on whether the southeastern growth prospects and the combined companies' ability to compete in the region can live up to expectations.
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Alyce Lomax does not own shares of any of the companies mentioned.
