Merger-weary Deposit Guaranty employees will endure yet another transition with the acquisition of parent First American Corp. by Birmingham-based AmSouth Bancorporation in an estimated $6.3-billion deal announced June 1 that will double AmSouth’s assets to about $40 billion.
Under the terms, First American shareholders will receive 1.871 shares of AmSouth common stock for each First American common share, valuing the Nashville-based bank at $53.09 a share, a 30% premium based on May 28 closing prices. The price also represents a multiple of 17.6 times consensus analyst estimates of First American’s 2000 earnings per share.
In a positive vein, the deal will yield a combined company with 680 branches in nine states with leading market positions in Tennessee, Florida, Alabama and Mississippi. Serving more than two million households, the company will also boast the largest automated teller machine network in the southeast. The deal, with a projected completion in the fourth quarter of this year, is expected to be immediately accretive to earnings. AmSouth officials say they anticipate accretion of about 2.5% in 2000 and 9% in 2001, based on conservative estimates of synergies. Headquarters will remain in Birmingham and the combined company will retain the AmSouth name.
Analysts who cover both companies say the alliance isn’t all that surprising for a host of reasons. While AmSouth, currently Alabama’s third largest bank, has been looking for prospective takeover candidates, First American has been vulnerable to a sale. Shares of First American have fallen around 20% since the Deposit Guaranty purchase was announced in late 1997, according to published reports. Moreover, much of 1998 has been defined by merger-related angst, as DG and First American combined systems and cut more than 900 jobs from the combined entity. While any merger assimilation is challenging, the DG/First American transition created attrition problems in Tennessee that ultimately impacted earnings.
“First American stock has been a dismal performer for the past year and a half,” said Sean Ryan, a Bear Stearns analyst upon the announcement of the AmSouth/First American deal. “Ever since the acquisition of Deposit Guaranty, they have struggled with the integration.”
“AmSouth has indicated its intent to be an acquirer and it certainly has the currency and ability to do so,” said Chris Kelley, a senior analyst at Morgan Keegan. “First American has had a rough last few quarters, but AmSouth saw potential in the company from the standpoint of First American’s strong presence in attractive economic markets, such as Nashville, as well as synergies in areas such as asset management.
Indeed, AmSouth officials said its own extensive fee-based business will be “significantly enhanced” by the addition of IFC Holdings — INVEST and Investment Centers of America — the country’s largest third-party marketer of investment and insurance products with $7 billion in product sales anticipated in 1999 and by First American’s $3 billion in mutual fund assets under management. According to Paul Brashier, an AmSouth investor relations vice president, these assets will nearly double AmSouth’s mutual fund assets and make it one of the Southeast’s largest bank mutual fund managers.
C. Dowd Ritter, AmSouth chairman and CEO, said in a prepared statement that the combination offered “compelling strategic and financialbenefits” by establishing a “premier Southeast financial services franchise with increased scale, leading positions in attractive markets through the mid-South and Florida’s west coast and increased fee-based revenues. Ritter also stated the transaction will push AmSouth’s “already strong return on equity even higher, ranking it among the top tiers of banks in the country.” AmSouth reported an impressive ROE of 18.56% in 1998 and an even better 20.06% in the first quarter of 1999. Analysts said that while AmSouth will have much to do throughout the next year, it enjoys a reputation of delivering what it promises.
From a deposit market-share perspective, Am South officials said the company will be first in Nashville, Chattanooga and the Tri-cities area of eastern Tennessee. It will be second in Birmingham and Jackson. From a management perspective, Ritter will remain president and CEO of the combined company and Dennis Bottorff, chairman and CEO of First American, will serve as chairman until Jan. 1, 2001, after which Ritter will become chairman. In addition to Bottorff, four other First American directors will join the AmSouth board, increasing its size from 12 to 17 members.
While jobs are a major concern in any merger arrangement, experts say there’s not much geographic overlap and that First American made significant cuts after the Deposit Guaranty merger. No specific job losses were announced at this time, but observers contend nothing is guaranteed in banking these days.