Daily Deal (New York, NY)

April 16, 2001 Monday

Acquisition of Wachovia could be long and bloody

By Jaret Seiberg in Washington

HIGHLIGHT:
The $12.7 billion merger between Wachovia and First Union isexpected to face community opposition and antitrust hurdles.

BODY:
First Union Corp.'s acquisition of Wachovia Corp. is expected toresult in a long and bloody battle with community activists,though banking experts predict the deal will eventually winregulatory approval.

Before the deal was even formally unveiled Monday morning, theBronx, N.Y.,-based Inner City Press-Community on the Move wasquestioning if the Federal Reserve Board should let First Unionbuy Wachovia. This is significant because Inner City Pressfounder Matthew Lee is one of the most litigious communityreinvestment activists.

Lee will not be alone in the fight. Other activists also worryabout the $12.7 billion merger, objecting particularly to FirstUnion's record of meeting the Community Reinvestment Act, itshistory of troubled acquisitions and the prospect of thousands oflayoffs.

"They have the ability to demand hearings and documents," saidGilbert T. Schwartz, a partner in the Washington law firm ofSchwartz & Ballen. "That slows things down. It adds time andexpense."

"There is no question that community group opposition is anissue no one can take lightly," agreed a second Washingtonbanking lawyer. "The activists will be a real factor in thetiming of this transaction."

The deal also could encounter antitrust troubles. The bankssaid they anticipate divesting branches with as much as $2billion of deposits to satisfy the Department of Justice.Antitrust regulators have previously allowed large in-market bankmergers, including Fleet Financial Group's 1999 acquisition ofBankBoston Corp., requiring only that the bulk of deposits besold to a single buyer that is not already in the givenmarket.

"There is no way this will be stopped on antitrust grounds,"Schwartz said. "It is just a question of how much they will haveto divest. To me, $2 billion seems like a small figure."

One source said the antitrust problems are centered inAsheville, N.C., and Roanoke, Va. The banks may have to engage ina clean sweep in those markets, which means they would selleither all of Wachovia's or all of First Union's deposits andbranches in the communities. The rest of the divestitures willinvolve smaller branch sales to resolve local competitionproblems.

The source noted that Bank of America Corp. of Charlotte,N.C., and SunTrust Banks Inc. of Atlanta also have operations inall the markets at issue. That means at least three major banks -and other regional and community banks - will remain in eachmarket.

Activists have two major avenues to try to stop the deal. Theycan argue that First Union has failed to extend sufficient creditin areas where they accept deposits. This is known as a CommunityReinvestment Act challenge. Drawing on the Bank Holding CompanyAct, they also can contend that the bank lacks the financialresources or managerial expertise to execute the merger.

The Federal Reserve Board rarely stops bank mergers on CRA orBank Holding Company Act grounds. It is even rarer for the agencyto halt a mega-bank deal on any grounds. Yet regulators do takesuch complaints seriously, often demanding detailed rebuttalsfrom banks as part of an ongoing dialogue that can extend formonths.

Bruce Marks, CEO of the Boston-based Neighborhood AssistanceCorporation of America, said his group plans to attack thecompetence of First Union's management. "They bought the MoneyStore and lost $2 billion on that when everyone could have toldthem that it was a predatory lender and the deal would be adisaster," he said.

First Union took a $3.8 billion charge on the Money Store,which it acquired in 1998, after closing the subprime home loanlender last year.

NACA expects dozens of other groups to joined in the attack onthe merger. "The people in North Carolina are going to be up inarms over this," Marks said. "The only reason to do this deal isto lay off thousands of employees."

First Union and Wachovia expect to eliminate 7,000 shops as aresult of the merger, half through attrition.

Inner City Press raised more traditional CRA concerns. Itnoted that First Union routinely rejects minorities more oftenthan whites for home mortgages. For instance, it said, inPhiladelphia the bank rejected Latinos nearly four times moreoften than whites. ICP based its claims on Home MortgageDisclosure Act data, which is often criticized because it doesnot include information on the creditworthiness of prospectiveapplicants. The Federal Reserve, however, does consider HMDA datawhen evaluating mergers.

"The Fed is not blind," Lee said. "They run the numbers."

Lee said First Union should not be surprised activists want tostop the deal, saying the bank has done less than other largeinstitutions to smooth relations with community groups. "There isa lot of ill will out there," Lee said. "There is a sense thatFirst Union does not live up to its commitments."

A First Union spokeswoman said the charges raised by activistsare off base. The bank has met or exceeded all of the CRAcommitments it made as part of the CoreStates deal, she said. "Weare very proud of what we contributed to that community," shesaid.

She also said First Union's HMDA record is either as good orbetter than the industry's average. "We have a very activelending and outreach program in all of our markets," she said,noting that the banks all have outstanding or satisfactory CRAgrades. Those are the top two scores regulators award for CRAcompliance.

Many activists are still upset over First Union's 1998acquisition of CoreStates Financial Corp. That deal sparkedhordes of protests from community and city leaders, whocomplained about the loss of bank branches, lack of communitydevelopment funding and job cuts.

The Federal Reserve Board held a hearing in Philadelphia onthe deal. The meeting turned raucous at times, with Sen. ArlenSpecter and several other Pennsylvania lawmakers threateninglegislation to stop big bank mergers.

Two banking experts said First Union never recovered inPhiladelphia from the discord created during the merger, and theCoreStates deal is widely considered a failure.

So far, congressional reaction to the deal with Wachovia hasbeen muted because lawmakers were traveling during the Easterrecess. But representatives for several North Carolina lawmakerspredicted their bosses would speak out on the deal in the comingdays.

Merrill Lynch & Co. and the law firm Sullivan &Cromwell represented First Union, while Wachovia used CreditSuisse First Boston and the law firm Simpson, Thacher &Bartlett.

This article is reprinted here for non-commercial,educational, fair use purposes only.