First Union to Buy Rival Wachovia

First Union Corp. said Monday it will buy rival banking company Wachovia Corp. for about $13.1 billion in stock to form the nation’s fourth-largest bank and cut costs at both North Carolina-based banks, countering falling profits as the economy slows.

Investors greeted the deal with skepticism because First Union has a checkered record of integrating big acquisitions. First Union’s stock initially fell as much as 7.6% but bounced in late trading to close down 72 cents, or 2.3%, at $31.20 on the New York Stock Exchange. That cut the deal’s value to $13.1 billion from $13.4 billion when it was announced.

Both companies also announced lower earnings for the latest quarter.

With the purchase of Winston-Salem, N.C.-based Wachovia, First Union aims to create a bank with 19 million customers, $331 billion in assets and 90,000 employees. The combined company, to be called Wachovia Corp., expects to cut 7,000 jobs over the next three years, half through normal turnover and retirements.

The deal, expected to close in the third quarter, comes as both banks are fighting loan losses and declining revenues from nontraditional bank businesses such as securities brokerages.

First Union on Monday reported a 30% drop in first-quarter profit to $584 million, or 59 cents a share, citing lower profit in its main lending business and declines in brokerage and money management fees. The results were in line with expectations.

Wachovia, for its part, said its first-quarter earnings fell 5% to $252.5 million, or $1.22 a share as it put aside more money to deal with bad loans.

Charlotte, N.C.-based First Union is offering two of its shares for each share of Wachovia, valuing Wachovia at $62.40 a share.

Wachovia rose $1.85 to close at $62.05 on the NYSE. Both stocks are up year to date, while the average big bank stock has lost ground.

“I don’t think this deal makes a whole lot of sense,” said Jennifer Thompson, analyst with Putnam Lovell Securities Inc. “It seems this deal is going to be cost-driven as opposed to revenue growth-driven, which is what you like to see out of a merger.”

The companies expect to save $890 million a year through combining operations. They said they would take $1.45 billion in one-time charges for severance packages, employee retention plans and systems integration.

First Union, now the No. 6 U.S. bank holding company, has run into trouble in recent years as it had problems digesting several large acquisitions. Its earnings also have been hurt in past quarters by bad loans and losses on its investment portfolio.

The acquisition marks First Union’s first major deal since it announced a sweeping $3-billion restructuring plan last summer to work out problems with two big acquisitions in the late 1990s. The bank said it would shut the Money Store, the ailing consumer finance operation that lent to people with poor credit histories. First Union already had lost droves of customers after it bought Philadelphia-based bank CoreStates Financial.

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Biggest U.S. Banks

Here are the 10 biggest U.S.-based commercial banks, ranked by total assets as of Dec. 31. First Union’s position at No. 4 includes the assets and deposits of rival Wachovia, which First Union plans to acquire.

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Assets Deposits Bank Headquarters (billions) (billions) Citigroup New York $918 $311 J.P. Morgan Chase New York 715 279 Bank of America Charlotte, N.C. 642 364 First Union Charlotte, N.C. 331 143 Wells Fargo San Francisco 272 169 Bank One Chicago 269 167 FleetBoston Financial Boston 219 192 U.S. Bancorp Minneapolis 165 109 SunTrust Banks Atlanta 103 69 National City Cleveland 88 55

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Source: SNL Securities