How the war for wachovia was won: Last year's high-stakes bank takeover battle offers important lessons on how to overcome negative impressions and win approval for a deal even when a rival's bid is valued higher. (Cover Story).

Despite merger mania's prolific pace in recent years, the task of selling a deal to investors is far from easy. Burned by the sins of mergers past - botched integrations, disgruntled clients and, most importantly, unfulfilled financial promises - investors have learned the hard way that bigger isn't always better. Add to the mix a slowing, skittish economy, and it's clear that growth-through-acquisition strategies carry a heavy burden of proof.

Today, even friendly alliances have become a tough sell to discerning investors, regardless of the industry. Merger marketing is a high-stakes game even under the best of circumstances. So what happens when a hostile bid emerges? Do uninvited suitors mean unexpected trouble? Does uncertainty breed investor unrest? And do unsolicited, higher-premium offers ultimately prevail?

These were just a few of the issues facing financial executives last year at two major North Carolina banks - Wachovia Corp., headquartered in Winston-Salem, and First Union Corp., based in Charlotte. In April 2001, the two long-time financial services industry competitors announced their intended linkage -- specifically, a merger of equals -- to create the nation's fourth largest bank holding company, one with a powerful East Coast franchise. Executives boasted that the match would enhance national brokerage, asset management and wealth management capabilities, while reinforcing corporate and investment bank activities with scale and a strong middle-market focus.

But just when the glow from the announcement was starting to fade, Atlanta-based SunTrust Banks Inc. launched its own bid for Wachovia. Its May 2001 offer, SunTrust said, represented at announcement a 17 percent premium over the implied value of the Wachovia/First Union deal. SunTrust contended its combination with Wachovia would create the premier franchise in the Southeast, with "a strong presence in seven contiguous, high-growth states with 20 percent of the U.S. population."

SunTrust's bid didn't come out of the blue. It had been talking for years with Wachovia about a merger, and many in the banking community had long assumed the two would eventually combine. Both were conservatively run, profitable banks that had shied from the pell-mell merger rush that many rivals were involved in.

In a press release announcing SunTrust's proposal, its chairman and CEO, L. Phillip Humann, dubbed the SunTrust/Wachovia alliance "...a compelling strategic combination of companies" that represented a "substantially better deal for Wachovia's shareholders than the First Union transaction." Importantly, SunTrust also argued that its transaction would involve a simpler integration process -- a thorny issue for First Union in its acquisition several years ago of Philadelphia's CoreStates Financial Corp. -- and that a SunTrust/Wachovia merger would mean fewer job losses, branch closings and customer disruptions. Moreover, Humann said, Wachovia shareholders would own 44 percent of the combined SunTrust/Wachovia, compared to 30 percent of the combined First Union/Wachovia.

What followed was a kind of investor relations Stalingrad -- a siege by SunTrust and a robust counterattack by Wachovia and First Union. It was played out for months in warring full-page newspaper ads in The Wall Street Journal and other major publications, as well as in phone calls and meetings with prominent investors. The campaign cost all the banks millions and demanded huge chunks of management's time.

Finally, in August, Wachovia shareholders lined up behind the $14.0 billion merger with First Union, approving it in a decisive vote. SunTrust conceded and said it was moving on. In September, the deal was sealed and the new Wachovia emerged.

No Shortage of Lessons

While only time will tell whether the First Union and Wachovia alliance was indeed the most prudent and ultimately beneficial choice, there is value in studying the First Union/Wachovia investor relations story. While some of the lessons to be gleaned are pretty obvious -- such as the importance of tenacity and preparation in researching and marketing your strengths -- others are more obscure.

Critically, the First Union/Wachovia experience speaks to the importance of admitting to weaknesses -- and hopefully remediating them -- before a competitor impales you with them. First Union! Wachovia's success is also a primer in the value of the "basics," like good old-fashioned face time and networking in an age of high-tech and often impersonal communications.

"I don't know if you can ever fully plan in advance to the degree that you would want to in the event of a hostile situation," says Robert McCoy, then Wachovia's chief financial officer and a key trooper in the negotiations alongside Wachovia CEO Leslie "Bud" Baker, who now serves as chairman. "But I'd say we got prepared pretty quick."

Baker's strong support of the First Union deal, and his confidence ia the leadership skills of First Union CEO G. Kennedy Thompson, who had replaced former First Union head Edward Crutchfield in 2000, were also key elements in securing investor endorsement. Says Second Curve Capital CEO Thomas K. Brown, a high-profile and often biting critic of Crutchfield's acquisition track record, "They [First Union! Wachovial correctly figured out that they needed to get Ken Thompson -- who represented a new way of doing things at First Union -- out in front of as many shareholders as possible."

While no one doubts that money talks -- SunTrust's stock price premium at bid announcement time represented a big hurdle for First Union and Wachovia -- it can also be argued that pitching an alliance to shareholders is both a science and an art. Obviously, the short-term financials of any proposed merger must be justified, satisfying the concerns of a host of individual and institutional investor audiences and sub-groups.

But important, too, are issues such as leadership and executives impact on longer-term performance; the dynamics of the combined company's business mix and opportunities for growth; and integration skills and the ability to build revenues from the newly formed franchise. Executives from First Union! Wachovia knew that if these arguments could be addressed in ways that answered individual and institutional investor concerns, shareholder votes would follow.

But as is often the case in business, perception is reality. Two particular images were especially challenging, recalls David Carroll, a First Union executive vice president who now co-chairs the combined Wachovia's transition initiative with McCoy. One was a long-time rumored "Coke and Smoke" alliance -- a reference to what many saw as a logical melding of SunTrust's Coca-Cola holdings and Wachovia's tobacco ties. The other challenge centered around First Union's tarnished merger reputation, the result chiefly of its CoreStates integration debacle, where too much was cut too soon, at the expense of customer relationships.

First Union and Wachovia developed a multi-faceted investor communications campaign that included face-to-face investor communications, mailings and phone calls, as well as the newspaper ad blitz. Executives prepared a range of statistics, pro formas and management/transition responses to prove their case. Carroll and McCoy say they took shareholder lists and stratified them to develop a manageable plan for making contact, sometimes two and three times. While advisors in several investor relations disciplines consulted with First Union and Wachovia, top executives took a hands-on approach to getting out and promoting their story personally, says McCoy.

Some of the 'hard" facts were easy to document -- such as past and projected growth in core businesses, projected mix of business lines and revenues, combined market shares and/or market leadership, combined capital positions, asset-quality issues and so forth. But First Union and Wachovia leaders also tackled the fuzzier human relations and corporate culture issues. An overriding one, notes Carroll, was the assumption that SunTrust/Wachovia was a hand-in-glove fit.

"A Wachovia/SunTrust marriage was rumored for so long by so many people that there was a presumption that Wachovia and SunTrust had a great deal in common in terms of corporate cultures and the manner in which they conducted business," Carroll says. "We had to find a way to change the mode of thinking on that and prove that we had a lot in common, if not more in common, with Wachovia.

"Shareholders began to look more at the bigger picture of the benefits of a low/no premium combination in comparison to a hostile offer," Carroll adds. "Given this, and the fact that we addressed integration risk head-on, we tried to prove that we were more realistic in our assessments, had more in common and therefore had less to change with a First Union/Wachovia combination."

While industry pundits certainly don't speak for SunTrust, some speculate that the Atlanta company may have been less aggressive in touting the premium edge because of differing opinions about premiums and contention over the broader issue of acquisition pricing in recent years. Some media reports also indicated that Wachovia's purchase of about $552 million of First Union stock during the takeover fight helped drive up First Union's share price, narrowing the differential and helping determine the outcome.

First Union made a variety of concessions to Wachovia -- such as keeping the Wachovia name -- and First Union was sensitive to phasing in expense reductions over a three-year integration period. A critical cog in the First Union/Wachovia cultural assimilation, however, was the friendly nature of the deal. Despite the years of Wachovia/SunTrust merger gossip, observers say there really wasn't an "inside track" in terms of long-standing or close loyalties among top executives. Others say the preliminary questioning of a Wachovia/First Union alliance may have sprung from the fact that First Union wasn't pursuing its traditional takeover strategy.

"Initially, I think there was some skepticism that the proposed Wachovia was simply a takeover of the former Wachovia by First Union," McCoy states. "But it was our goal to show that this was an example of both companies coming together in a true partnership." Baker and Thompson had formed a professional friendship from their community/educational leadership positions and were comfortable in their shared view of what a financial services company could and should be.

"The more they [Baker and Thompson] got together, the more they felt that they shared in common in terms of the challenges facing financial services providers in our competitive environment and what it takes to do business effectively," McCoy says.

Experts say the hostile nature of SunTrust's bid can't be overstated in banking's normally gentlemanly environment. "I think it can be said that hostile deals aren't wildly successful in the banking industry," says Bert Ely, an Alexandria, Va.-based financial services consultant. Second Curve's Brown puts it more bluntly. "Hostile bank deals simply don't work. Too many key people want out of the door too quickly and leave organizational chaos and huge knowledge gaps behind. If you doubt it, just look at the old Wells Fargo's acquisition of First Interstate," referring to a troubled California acquisition from the mid-1990s.

First Union/Wachovia honed in on Wells Fargo's unhappy experience in their communication with investors. They cited the "substantial customer disruptions and deposit run-off" "substantial attrition of acquired senior management" and "significant earnings shortfalls" from that hostile merger to justify a lose-lose case for hostile deals.

Brown's own research revealed the hostile-deal uneasiness among employees. His firm polled Wachovia workers, and "fully 80 percent of Wachovia employees who responded to our survey said they preferred the First Union deal," he noted. This is significant, since SunTrust proposed about 4,000 post-merger job cuts, while First Union estimated about 7,000.

First Union and Wachovia also went to great lengths to reiterate the combined company's commitment to managing through transition. They outlined how merger integration would he well organized from the very top levels of the company, with an executive committee led by Baker and Thompson approving key decisions, Moreover, experienced managers such as McCoy and Carroll would be heading up the merger steering committee to set overall policies, guiding project management offices, customer integration teams and cultural integration teams and conversion task forces. Overriding priorities included expanding the customer base, focusing on the customer experience and improving customer perceptions of the combined organization throughout the transition.

Carroll adds that First Union also had to rebuild confidence in its integration skills. While critics were quick to point to operational and customer snafus associated with the CoreStates deal, First Union could document extensive integration experience. The hank had completed 81 mergers since 1985, encompassing about 4,000 branches and 2,000 computer systems. Twenty-seven of these mergers involved banks with more than $1 billion in assets, and 13 acquired banks had more than $5 billion in assets. Additionally, First Union had completed 10 broker-dealer/ investment management acquisitions, bringing in more than than 3 million customers.

"While we had a particular experience that was tough, we also had several successes," Carroll says. "We had to show that we learned from that experience and that we were dedicated to rebuilding our credibility in merger integration."

Some industry observers assert that SunTrust may have relied too much on these perceptions to work in its favor. "I think there was perhaps an attitude of arrogance on the part of SunTrust going into it -- that, of course, they would win because their bid was higher and that they would focus on First Union's merger integration woes," says Second Curve Capital's Brown. "In retrospect, SunTrust may have relied on the merger integration card too heavily -- all Ken Thompson had to do was acknowledge that mistakes had been made in the past under previous management and stress that there was a new team in place, which is what he did,"

And while those close to the situation say Thompson is a persuasive speaker, it was determined that he could trump much of SunTrust's argument simply by pointing out that he wasn't the First Union CEO who had conceived of the CoreStates merger. "Yes, for years First Union has been known as a gun-slinging serial acquirer," Brown says. "And yes, there have been some notable disasters, such as the CoreStates deal.

"But many of First Union's problems with acquisitions came about because First Union overpaid in the first place. Ken Thompson made a sincere effort to show how things would be different, and he came across to investors as a very believable guy. When we look back on this, I think this situation will show us that investors will listen to a story that says the future will be different from the past."

Karen Kahler Holliday is a freelance business writer in Belden, Miss.