Analysts are stunned at a banking merger gone bad

Phil Levine

Thursday, March 16, 2000 | 11:25 a.m.

The war of words heated up Wednesday between Salt Lake City rivals -- and proposed partners -- Zions Bancorporation and First Security Corp.

Originally slated to merge later this month, the union was thrown into doubt following an advisory to Zions, parent of Nevada State Bank, by investment banker Goldman, Sachs & Co.

Goldman advised the bank last week "it could no longer rely" on its previous advice supporting the merger's stock exchange ratio.

Zions said in its proxy statement it requested Goldman take a second look at the deal following First Security's March 2 revelation of an earnings shortfall.

At that time, the bank revealed its fourth quarter earnings would be off as much as 27 percent from the previous quarter, sending the value of both bank stocks plummeting.

In a letter to shareholders, First Security Chief Executive Officer Spencer Eccles acknowledged publicly how deep the divide between the two banks has become in recent days.

"There is significant risk the actions that have been taken by Zions and its financial advisors in the past several days may make it difficult for Zions to obtain the requisite shareholder approval needed," he said.

"First Security believes that Zions is in breach of its obligations under the merger agreement to use reasonable best efforts to consummate the merger, and to refrain from taking actions which would be reasonably likely to cause the merger not to be consummated."

Zions officials quickly issued their response, denying Eccles' allegations.

In its statement, the bank said "(we are) disappointed by, and flatly deny, allegations contained in First Security's supplement suggesting that Zions has breached its agreement with First Security."

The statement goes on to say that in a letter dated March 12, Eccles "demanded the Zions board ... obtain the proper statement from Goldman that will enable the parties to obtain the requisite shareholder approval needed for consummation of the merger."

Zions labeled that demand as "inappropriate" and said the board has not withdrawn or qualified its merger recommendation, but fell short of reaffirming support for the deal as is.

In the proxy statement, Zions also noted that given the current value of First Security stock, of which it owns more than 9.4 million shares, it faces an after-tax loss of $75 million on those shares should the merger fall through and the First Security stock price not rebound.

Analysts were taken aback by the harshness of the corporate rhetoric.

"I was somewhat surprised by the hostility in First Security's letter," said Joe Morford, analyst with Dain Rauscher Wessels of San Francisco. "They want this deal to happen, and are clearly frustrated by the current situation."

Standard & Poors analyst Vincent Piazza said the banks' rhetoric likely signalled a "jockeying for position on the part of the (banks') boards."

"They're obviously giving themselves some leeway depending upon how their stockholders vote on this," he said. "This is really so unusual, and hasn't been seen before in the banking industry.

"They're really setting a precedent here."

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

The merger's failure would cause serious complications for the banking sectors of several Western states, including Nevada.

In December, both Nevada State and First Security revealed plans to close nine Las Vegas and Henderson branches; two other offices were slated to be closed in Northern Nevada.

In addition, the U.S. Justice Department ordered the two banks to divest 68 branches in Utah and Idaho.

"BankWest Corp., a partnership of First Hawaiian Bank and Bank of the West, agreed to buy most of those banks, but that divestiture is dependent on the success of this merger," said Morford.

If the merger falls apart, analysts believe First Security would likely be more anxious than Zions to find another partner.

"I'm not saying the merger won't succeed, but if it doesn't, First Security would likely want to try this again," said Piazza. "Consolidation will take place, but perhaps not this year.

"If you're looking at potential partners, it could include those beyond the banking sector. With the new Bank Modernization bill, a partner could also be either an insurance company or a securities firm."

Morford agrees.

"Zions doesn't really need this deal," he said. "That's why I think First Security is more likely to partner with someone else, perhaps another bank such as Wells Fargo, Bank of America or U.S. Bank."

In mid-day trading today, Zions stock was up about $2 to $40.50, while First Security was just slightly up to $11.50. Those numbers are dramatically lower than both banks' 52-week highs; in December, Zions stock reached $75 per share, while First Security traded for $31 per share.