Magazine article American Banker

S&P Pans 1st Union-Wachovia

Magazine article American Banker

S&P Pans 1st Union-Wachovia

Article excerpt

A Standard & Poor's Corp. analyst said Wachovia Corp. and First Union Corp. could have "a tough road ahead of them" after their planned $13.4 billion merger.

In a quarterly conference call Tuesday on the financial industry's outlook, Charles Rauch, a director in S&P's financial services ratings group, said the deal offers clear benefits, including improved market position and cost savings. But the two Southeast regionals "are quite different institutions," First Union being more aggressive and Wachovia more conservative, he said.

In addition, "both organizations have been disrupted over the past year, because they both had major restructurings," Mr. Rauch said. "And earnings are under pressure at both institutions, so it's going to be a very complicated integration that could take some time."

Shortly after the deal was announced S&P issued a negative ratings alert on Wachovia's long-term debt, which currently is rated slightly higher than that of First Union, the buyer in the merger deal. For instance, Wachovia's subordinated debt is rated A, while First Union's is rated A-minus.

Mr. Rauch said Tuesday that he expects First Union, which would adopt Wachovia's name, to retain the lower rating.

The deal was unexpected, because both companies had said publicly that they were focusing on internal execution and not looking for deals, Mr. Rauch said. First Union in particular had sworn off big acquisitions "after it stumbled badly on CoreStates Financial and The Money Store," he said.

Most analysts agree that First Union is paying too much for those companies and aiming for unrealistic returns. The Charlotte, N.C., company has since shut Money Store, and last fall it wrote off $1.7 billion of goodwill related to that acquisition.

G. Kennedy Thompson, First Union's chairman and chief executive officer, has said that he would have preferred to wait a year before another big deal, but that he and his Wachovia counterpart, L. …

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