Wachovia's merger with First Union was sweet for boss, sour for stockholders

By DAVID MOON, Moon Capital Management
September 9, 2001

In case anybody is left in doubt, genteel southern banking is dead. Last week, First Union completed its acquisition of Wachovia ' and proved the point.

Back in April, the announcement that First Union would be acquiring Wachovia for $13 billion set off all kinds of bells. For one thing, First Union was paying a tiny 6% premium for Wachovia. In a letter to his shareholders, Wachovia Chairman and CEO L.M. "Bud" Baker tried to explain the lack of the big capital gain they might have expected by describing the all stock transaction as a merger of equals, rather than an acquisition.

What he did not initially tell shareholders, however, was about an offer from Florida-based SunTrust, and that this bidder was prepared to pay $1.7 billion more than First Union.

So what tipped the scale in First Union's favor? A sweet goodbye for Baker couldn't have hurt. According to documents filed with the Securities and Exchange Commission, First Union agreed to pay the 58-year-old CEO a $2 million a year lifetime retirement package. If Baker's wife survives him, she would receive "no less than 60% of such benefit" over her lifetime. Baker was also promised $200,000 a year for lifetime office space, secretarial support, and other such trifles. The proposed deal created an outcry, but not enough to kill it. Instead, Baker, and First Union agreed to amend the retirement terms, reducing the annual pension by about $500,000, and stuck to the First Union offer.

Baker made no reference to this rich packet when he first tried to explain his preference for the First Union. Instead, he said that Wachovia's and SunTrust 's "inability to translate common values into working business strategies and operating models" argued against a happy marriage. Did SunTrust make any golden parachute offers to Baker? Nobody's saying.

The lone boardroom voice raised against the First Union offer was that of Wachovia director Morris Offit, a money manager and former Salomon Brothers executive, who very clearly identifies with other Wachovia shareholders. He owned 489,201 Wachovia shares at the time of the First Union offer, proceeds from the 1999 sale of his Offitbank Holdings to Wachovia. Baker has 498,645 shares.

Public pressure from SunTrust did prompt First Union and Wachovia to change some of the more egregious details of the planned transaction. For example, First Union agreed to create a special preferred stock for Wachovia shareholders to compensate for a decrease in dividends that the acquisition would cost them. The two banks backed down from an agreement that gave each of them the right to buy up to 19.9% of the other if the acquisition fell apart--and, should that happen, allowed First Union to pay for its Wachovia stock with real estate or distressed loans. This effectively created a poison pill that would deter anybody else from buying Wachovia.

SunTrust launched a campaign to expand the Wachovia board, hoping to get directors elected who would be sympathetic to its cause. This would require a special shareholder meeting, which should not be too difficult to set up. Or so SunTrust thought. Instead, apparently afraid some fer'ner was about to encroach on its banking turf, the North Carolina State Legislature jumped into the battle. In a matter of days, Governor Mike Easley signed off on a bill that said North Carolina companies could not have special shareholder meetings without changing their articles of incorporation, something that requires the approval of the board. Score one for the home team.

By the time of the Wachovia shareholder vote, the value of the First Union offer had increased, because of a sharp increase in the price of First Union's stock price. Who was buying First Union stock, driving up the price and putting a nail in the coffin of the SunTrust offer? In the three months prior to the shareholder vote, Wachovia (using its shareholders' money) bought over $550 million of First Union stock.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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