National City to acquire First of America in merger worth 22.2 times earnings

Weekly Corporate Growth Report, Dec 8, 1997

The Deal: National City Corp. has agreed to acquire First of America Bank Corp. in a stock swap valued at $6.78 billion, or $75.375/ share. The move will position National City ahead of regional rivals as the nation's 13th-largest bank Terms call for First of America shareholders to receive, in a tax-free exchange, 1.2 National City common shares for each First of America common share outstanding. The merger will be accounted for as a pooling of interests. National City expects the combined company to take a one-time charge of $350 million related to merger expenses in the second or third quarter of next year. The company also expects to slash $243 million, or 30%, of First of America's annual operating expenses. On the news, concerns regarding the high price of the deal sent National City down $3.9375, or 5.9%, to $628125/ share. First America soared $14, or 24%, to $72.75/share.

Discussion: The deal is the fourth-largest bank acquisition this year. It will expand National City's reach into Michigan and Illinois, and boost its customer base to more than 8 million households.

The cost-cutting through branch consolidation will be limited, since the two banks only overlap in Indianapolis and several other areas in Indiana. Analysts are unsure as to whether National City can meet its aggressive cost-cutting targets, due to the lack of overlapping branches that can be cut They are, however, positive about the underlying strategy of the deal.

National City's plan for First of America will be to slash costs while bringing in a host of new products, including auto loans for consumers, asset-based lending for middle-market commercial borrowers and investment management for their affluent executives. Particular attention will be paid to middle market companies with annual sales between $2 million and $100 million, as well as the executives who run them.