Citing the need to prepare for the interstate branching era, the fourth- and sixth-largest banking companies in North Carolina announced a $2.2 billion merger agreement on Monday.
When combined, the two companies - BB&T Financial Corp. and Southern National Corp. - will have $18.8 billion of assets and the largest deposit market share in the state.
The top executives of both companies said their "merger of equals" - under the Southern National corporate banner, but with "Branch Banking & Trust" on the branches - was largely a defensive move to discourage unfriendly takeover bids as larger companies set their interstate banking strategies.
Since no premium will be paid to either side, shareholder returns depend on effectively integrating the two companies.
"We believe shareholders will benefit from improved performance in the future," said John A. Allison 4th, BB&T's chairman and chief executive officer.
Stock Prices Rise
The stock market appeared to agree. Shares of BB&T rose 87.5 cents Monday to $31.875, and Southern National was up 50 cents to $21.625.
"In an environment of consolidation, this creates a much more powerful organization than either of the two were individually," said Richard I. Stillinger, of Keefe, Bruyette & Woods Inc.
The merger, approved Friday by both boards, will be accomplished as a pooling of interests in which BB&T shareholders receive 1.45 shares of stock in the "new" Southern National for each BB&T share, while Southern National shareholders get a one-for-one exchange.
Closing Set for Early '95
The transaction is scheduled to close in next year's second quarter. The indicated total value of $2.2 billion was based on Friday's closing share prices.
Mr. Allison and Southern National chairman and CEO L. Glenn Orr Jr. said they were motivated by recent North Carolina legislation that opens the state immediately to reciprocal, national interstate banking. The law, which became effective last month, allows banks in North Carolina to acquire, or be acquired by, banks in about 35 other states.
"It affected my thinking dramatically," said Mr. Orr. "I think both John [Allison] and I had anticipated at least another 'year, maybe two years, to continue to build our two franchises. Neither one of us had the clout that we wanted or felt like we needed to really control our destiny."
"It made both of us vulnerable to unfriendly offers," Mr. Allison added.
Familiar Pattern
The new Southern National resembles other mergers of equals in its careful division of power, indicated by the use of Southern National's name for the holding company but BB&T's Branch Banking and Trust for the offices.
The combined board will have 11 members from each side, and the eight-member executive management team will be evenly divided.
The company's headquarters will be in Winston-Salem, which is the base of Southern National's lead bank but not its holding company, which is in Lumberton. BB&T is based in Wilson.
Contrasting with some similar transactions, one person - Mr. Allison - will clearly be in charge. On completion of the merger, Mr. Allison, 45, will become chairman and CEO of the new Southern National, while Mr. Orr, 54, plans to retire from active management, although he will remain on the board.
Mr. Orr declined to discuss his future plans. H. Rodgin Cohen, a prominent New York-based banking attorney, said the clear CEO designation "will help a lot." Other mergers of equals have seen power rotated between the two top managers.
But Mr. Cohen, of the firm Sullivan & Cromwell, warned that the real issue in mergers of equals is extracting cost savings, which usually requires substantial employee layoffs.
Mr. Allison said he expects annualized pretax cost savings of more than $50 million within one year of the transaction's closing. Specifically, the combined company is slated to shed 10% of its 8,700 employees, either through attrition or layoffs, and close 70 of 535 branches.
An unspecified charge to earnings will be taken in some future quarter to cover these cuts.
Mr. Allison said the cost savings and increased market clout in North and South Carolina provide the potential for a 20% increase in shareholder value.
BB&T and Southern National were expected to earn about $240 million this year, before any cost savings.
While Mr. Allison will inherit the combined organization, it was Mr. Orr who initiated the discussions, on July 15.
"Glenn was the person that really had the vision to make this happen," Mr. Allison said. "He's been the driving force."
The deal was signed last Friday after two weeks of intensive negotiation.
Three Advisers
To determine an exchange ratio fair to both sides, both BB&T and Southern National used the services of Lehman Brothers.
BB&T then solicited a separate opinion from Merrill Lynch & Co. and Southern National got one from Wheat First Butcher & Singer to confirm the Lehman Brothers analysis.
The new company's common stock will be listed on the New York Stock Exchange under Southern National's name and symbol.
One factor that should help the merger is a general similarity in corporate cultures. Both BB&T, with $10.6 billion of assets, and Southern National, with $8.2 billion, are considered well-run and profitable.
BB&T earned $55 million in the first six months, for a 1.13% return on assets and 14.02% return on equity. The comparable figures at Southern National were $53 million, a 1.31% ROA, and 19.88% ROE.
'Grow or Die'
Both banks expanded rapidly during the 1980s by acquiring others, and particularly thrifts. "We've been in an environment where we knew it was either grow or die," Mr. Allison said.
BB&T was a pioneer in so-called merger-conversions, a process by which a mutual thrift is converted to stockholder ownership simultaneous with its acquisition. Southern National made the biggest acquisition in its history last year by agreeing to acquire a South Carolina thrift that added $2 billion in assets and boosted its market share rank in the Palmetto State to third from ninth......
