Shareholders in First Security Corp.(Nasdaq: FSCO) , a Salt Lake City-based financial services firm, could be heard singing "Hallelujah!" today after the company agreed to merge with Wells Fargo & Co.(NYSE: WFC) , the country's seventh-largest bank holding company.
The deal calls for First Security stockholders to receive 0.355 of a share of Wells Fargo stock in exchange for each share of First Security. Based on Wells Fargo's closing stock price of $43.69 on April 3, the transaction values each First Security share at $15.50 for a total transaction value of approximately $3.2 billion. That's a 27% premium to Friday's closing price of $12.19.
On the other hand, it's a 31% discount from First Security's closing price of $22.50 on March 2. That was the day before a storm descended on the company after it announced that its earnings for this quarter would drop around 25% on an 8% decline in revenue.
That little faux pas led directly to the rejection of the merger that First Security had in the works with Zions Bancorporation(Nasdaq: ZION) . Zions' management remained committed to the deal, but Zions' shareholders voted down the merger on March 31. It seems that even institutional holders, who own 47% of Zions' stock compared to 15% for company insiders, didn't like the idea of trading their Zions shares for First Security. This chart may explain why -- shares of Zions had already taken a 40% beating since the deal was announced on June 6.
Now, only a few days later, Wells Fargo has waded into the wake of this flood to scoop up some First Security flotsam. The San Francisco-based financial services firm has been on a buying spree of late. After announcing its merger with Norwest in June 1998, the company took a year off from acquisitions. Since last July, however, Wells has forged no fewer than 10 deals with public and private financial firms. The First Security merger is the largest of the bunch, three times bigger than the $907 million Wells intends to pay for National Bancorp of Alaska(Nasdaq: NBAK) .
Wells may be stepping into this deal at just the right time. First Security comes pretty cheap at 11x earnings, which is lower than it has been in many years. Its 7.1% asset turnover ranks with Wells ahead of the Citibank division of Citigroup (NYSE: C) , Chase Manhattan(NYSE: CMB) , Bank of America(NYSE: BAC) , and Mellon Financial Corp(NYSE: MEL) . Most importantly, it increases by a factor of five Wells' presence in the fast-growing states of Idaho and Utah.
Still, First Security has its issues. Not only will its first-quarter earnings fall short of last year's, but previous results weren't all that great. Its sales growth slowed to 11% in 1999. Its 17% net margin for the year was lower than most regional banks, which resulted in a disappointing return on assets (ROA) of 1.2%, despite its high asset turnover.
For First Security shareholders, the deal provides a mixed blessing. The $15.50 price, while a 27% premium on Friday's price, would have been a three-year low on March 1. Still, considering the troubles that have descended upon the bank, it must be nice to have some security. Wells' management is one of the best in the business (note that Berkshire Hathaway(NYSE: BRK.A) , under Chairman Warren Buffett, owns about 59 million shares of Wells), and the stock has been a solid long-term performer.
The clouds that have been hanging over Utah for the last month have started to clear.
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