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.

• Author: Holliday, Karen Kahler
• Position: 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...