First American to acquire deposit guaranty for 32.2 times earnings

Weekly Corporate Growth Report, Dec 15, 1997

The Deal: First American Corp. has agreed to acquire Deposit Guaranty in a stock swap valued at $269 billion, or $6406/share. First American won a bidding war involving several larger rivals to make what will be the seventh-largest bank acquisition this year Terms of the deal call for Deposit Guaranty shareholders to receive, in a tax-free exchange, 1.17 shares of First American common stock for each Deposit Guaranty common share. The merger will be accounted for as a pooling of interests and First American plans to take a one-time pretax charge of $102 million related to merger expenses. Concerns regarding the high price of the deal, combined with the fact that it is being paid to enter markets that are not growing as fast as those in some surrounding states, pushed First American down $5.1875, or 9.5%, to $49.5625/ share. Meanwhile, Deposit Guaranty soared $4.625, or 8.8%, to $57/ share.

Discussion: The deal will expand First American's reach into Mississippi, Louisiana and Arkansas, three states where it had no presence before. It will also enlarge its asset base by close to two-thirds. Upon completion of the deal, First American will have $17.4 billion in assets, placing it ahead of such regional competitors as Union Planters Corp. and First Tennessee National Corp., both based in Memphis. The deal will also make First American less vulnerable as a takeover target

Some analysts were surprised by the announcement Dealmaking has not been a vital part of First American's growth strategy. It's last acquisition was announced over a year ago and it was for a Tennessee bank only 1% as large as Deposit Guaranty. Instead, executives have been concentrating on increasing the company's profitability through a series of internal initiatives.

Since the two banks have very few overlapping operations, no more than 900, or 12%, of the total jobs are going to be eliminated in the combined company. Additionally, First American has pledged to establish a $15 million foundation to support Deposit Guaranty's existing markets.