Millions may be wasted on failed bank merger

Phil Levine

Monday, April 3, 2000 | 11:17 a.m.

The rejection of a merger between First Security Corp. and Nevada State Bank parent Zions Bancorporation may cost the companies millions of dollars and do little to stabilize the shifting sands of Nevada's banking industry.

Industry watchers agree that by rejecting the union, Zions' shareholders opened a pandora's box of unanswered questions about the future of the two Salt Lake City-based rivals.

The fallout from Friday's vote has already begun in earnest.

First Security announced today it will begin to repurchase up to 15 million shares of its outstanding common stock, with the cost determined by the prevailing market price. No time limit was set for the stock buyback.

Joe Morford, analyst with Dain Rauscher Wessels, said in buying back its shares the bank was simply making what it sees as a solid business decision.

"I think they feel the (recent) sell-off (of their stock) was an over-reaction, and they are looking at buying the shares as being a good business opportunity," he said.

On Saturday, First Security Chief Executive Officer Spencer Eccles said his banks' board of directors is now prepared to "end the long process we have undertaken with Zions."

Expressing disappointment at the outcome of Friday's vote, Eccles said "Zions' failure to complete the transaction necessitates First Security moving on separately."

Still, Morford cautioned that statement may not be as definitive as it seems.

"I think First Security is looking at all its options, and there is still a chance they may explore repricing the deal with Zions," he said. "I don't think they've ruled that out entirely."

In midday trading today, First Security stock was valued at $12 per share, unchanged from Friday's close.

However, Zions' shares were trading at $43.50, up $2 -- or 5 percent -- from Friday's closing price.

Zions'-owned Nevada State recently acquired Reno-based Pioneer Citizens Bank and has 58 Nevada branches. First Security has 22 offices statewide.

Less than 72 hours after the merger's rejection by Zions shareholders, George Hofmann announced today that as expected he would be leaving his position as Nevada State's chief executive officer. He will be replaced by Bill Martin, former chief executive officer of Pioneer Citizens.

After five years at the helm of Nevada's third largest bank, Hofmann is relocating to Salt Lake City to become Zions' head of retail banking in three states excluding Nevada.

"This is a great area, and both personally and professionally I will miss Southern Nevada," said Hofmann.

"But Zions is one of the best performing banks in the country, and we will now go back to doing what we do best."

By a margin of almost two to one, shareholders of Zions turned down the union between the two long-time rivals.

First Security shareholders voted earlier this month to accept the offer.

The big question now remains what the future holds for two of Nevada's largest banks.

In recent weeks, industry experts speculated that First Security's weaker financial status made it the more likely candidate for acquisition if the deal collapsed.

But Standard & Poors analyst Vincent Piazza said Zions' strong bottom line may also prove attractive to possible buyers.

"I think Zions may be a more compelling take-out candidate," said Piazza. "They may not look explicitly to find a new partner, but I wouldn't be surprised if you saw a midwestern-based bank as a possible buyer."

Other analysts agree as to Zions' strength.

George Baum, analyst with Donaldson Lufkin & Jenrette, today raised his rating on Zions' share to a buy from market perform.

Piazza said one of Zions' most attractive -- and often overlooked -- assets is its e-commerce division.

"Their e-business unit would be viewed as very desirable," he said. "If they spun that division off, it could trade like a regular technology company and be very profitable."

The deal's death Friday -- unless it is somehow resurrected -- comes at a cost of millions of dollars.

Industry experts estimate that Zions will incur a $100 million loss as a result of the deal's failure.

"Zions stands to lose about $100 million because of this (Friday's rejection of the deal)," said Morford.

"About $75 million of that amount is because of their holdings of First Security stock."

Lost business, layoffs and merger-related activities could end up costing both banks additional millions of dollars.

"One cost -- likely to be incurred by Zions since they rejected the deal -- is a $5 million payment to BancWest Corp., the company that was to have bought their divested holdings (in Utah and Idaho)," said Piazza.

The value of both bank stocks plummeted early last month after First Security revealed its quarterly earnings would be off by as much as 27 percent from the previous quarter.

Analysts believe that revelation was the turning point in sealing the fate of the doomed deal.

"The key event in recent weeks was when First Security announced their (earnings) shortfall," said Morford.

In the wake of that announcement, a deal once valued at $5.9 billion became a $3.9 billion transaction.

The original deal gave Zions shareholders one share of what would have been the new First Security Bank for each Zions share they held; First Security stockholders were to receive .442 a share in the new bank company for each of their shares.

But many Zions shareholders questioned the value of the deal following the steep decline in First Security's stock price.

"That caused many Zions' shareholders to stop and ask 'is this deal really worth doing,' " said Morford.

It's too early to assess what the ramifications of this deal's failure will be for Nevada's banking sector.

Nevada's two largest banks say -- at least for now -- they're not interested in acquiring any new partners.

But Bank of America Nevada President George Smith said one result might be a closer examination of future merger deals.

"I think you will still see consolidation continue in this industry, but (as a result of this deal's failure) you may find there will be a closer look given to future merger arrangements," he said.

Smith declined to comment on whether his bank might be interested in acquiring either Zions or First Security.

"The only thing I can say is that our bank is always looking to expand our opportunities to provide our shareholders with best possible retruns," he said.

Wells fargo Southern Nevada President Bryan Waters empathized with staff and management at both banks.

"I'm sure it is a tough situation for all of them to be in," he said. "We (at Wells) learned how important it is to keep morale up when doing a difficult merger during our experience with First Interstate Bank."

But Waters said that federal restrictions limit Wells' ability to consider any further acquisitions in Southern Nevada.

"We had to divest five branches when we did our merger with Norwest, so our ability to expand via acquisitions is currently limited," he said.