DEAL WATCH: NEW YORK IS HOLE IN THE BAGEL AS FIRST UNION MARCHES NORTH: WILL FLEET BE SWIFT ENOUGH TO STAY INDEPENDENT IN FACE OF MERGER MACHINE?

The map of First Union Corp.’s territory forms a crescent running from Connecticut to Florida. There’s just one notable gap – New York City and Long Island.

With more than 50 acquisitions in the last 10 years, the Charlotte, N.C., bank has become a consumer banking giant, with the largest share of deposits on the East Coast. Its latest deal, to acquire Union, N.J.-based Money Store Inc. for $2.1 billion, gives it a Middle-American brand name and the nation’s largest Small Business Administration lender.

Its previous bank purchase, the $17.1 billion blockbuster deal for Philadelphia-based CoreStates Financial Corp., would give it the lead in New Jersey business lending, but that purchase has run into a host of objections from officials and consumers in Pennsylvania and New Jersey, and the Federal Reserve Board has extended its review period. A spokesman for the bank says the extension was anticipated, and First Union officials still expect the deal to close April 30 as planned.

That would still leave it to fill in the missing piece of the puzzle with a major New York acquisition. Its debut in the city would create a major competitor to the city’s banking giants, in consumer services as well as in the middle-market sector now dominated by Chase Manhattan Bank. Many believe a logical target for First Union would be Fleet Financial Group, the Boston bank that entered New York with its own purchase two years ago. Other potential candidates could be a business-oriented bank such as Bank of New York Co. or even a major thrift like Dime Bancorp.

“This is a merger machine,” says Eli Salzmann, director of research for Lord Abbett & Co., one of the bank’s 25 largest institutional shareholders, with 3.4 million shares. “They have to digest a little bit right now, but after digestion, sure, they’ll be in New York. Remember, this is an economy-of-scale industry.”

stock slipping

A history of paying top dollar for acquisitions has left First Union with much to swallow, and its stock is no
t performing as well as its competitors’. Its Money Store acquisition is still in the early stages, the CoreStates deal drags on and its apparently insatiable appetite had led it to buy even relatively small firms like Bowles Hallowell Connor & Co., a Charlotte investment bank.

Many believe First Union’s stock could stay depressed for much of the year, hampering its next big deal. But Edward Crutchfield Jr., the bank’s chairman and chief executive, hasn’t been one to wait when pursuing targets. Although First Union would not comment on its plans for New York, Mr. Crutchfield said at the time of the CoreStates deal: “When you’re in an industry that is consolidating, the time to do your consolidating is when you can.”

First Union already has New York City and Long Island surrounded with a strong franchise, much stronger than other superregional banks that might be eyeing the area. The bank has the second-largest share of deposits in New Jersey, according to SNL Securities, and is No. 4 and No. 3, respectively, in suburban Westchester, N.Y., and Fairfield, Conn., counties.

But more than just amassing deposits, First Union is looking to become the dominant player in serving middle-market business customers.

In January, it completed its $491 million purchase of Richmond, Va., investment banking firm Wheat First Butcher Singer Inc., giving it greater equity underwriting and capital market capabilities for those business clients. CoreStates’ strength with commercial customers is what attracted First Union.

Fleet officials won’t comment on speculation that it is the next logical target for First Union, a deal that would allow it not only to enter New York but also to continue expanding along the East Coast all the way to Maine.

tops in suburbs

With Fleet, First Union also would become either No. 1 or No. 2 in deposit market share in each of the city’s suburban markets, according to SNL. Fleet would also boost First Union’s automated clearing house business. It ranks fourth nationally, while Fleet
is ninth, with a 25% increase over last year.

Many investors believe that the advantages of joining the two banks would outweigh the high cost of such a deal. But First Union probably won’t have an easy time of it, especially if its stock stays weaker than its peers’.

“I think that if Fleet ever decides to sell itself,” says Mr. Schroeder, “First Union would have several competitors.”

Crain News Service