Filed by SunTrust Banks, Inc.
Pursuant to Rule 425 under the Securities
Act of 1933 and deemed filed pursuant to
Rule 14a-12 under the Securities Exchange
Act of 1934
Subject Company: Wachovia Corporation
Commission File No. 1-9021
Date: July 24, 2001
THE FOLLOWING PROXY ANALYSIS REPORT FROM INSTITUTIONAL SHAREHOLDER SERVICES MAY
BE FURNISHED TO SELECTED WACHOVIA SHAREHOLDERS FROM TIME TO TIME.
[THOMSON FINANCIAL LOGO]
--------------------------------------------------------------------------------
Proxy Analysis:
WACHOVIA CORP.
TICKER: WB
PROXY CONTEST MEETING: August 3, 2001
RECORD DATE: June 12, 2001
SECURITY ID: 2749293 (SEDOL), 2931744 (SEDOL), 4270092 (SEDOL), 5721607
(SEDOL), 929771103 (CUSIP), 929771AA1 (CUSIP), 929771AB9 (CUSIP), 929771AC7
(CUSIP), 929771AD5 (CUSIP), 929771AE3 (CUSIP), 929771AF0 (CUSIP), 929771AG8
(CUSIP), 929771AH6 (CUSIP), 929771AJ2 (CUSIP), 929771AK9 (CUSIP), 929771AL7
(CUSIP), 929771AM5 (CUSIP), 929771AN3 (CUSIP), 929771AP8 (CUSIP), 929771AQ6
(CUSIP), 929771AR4 (CUSIP), US9297711031 (ISIN), US929771AN34 (ISIN),
US929771AQ64 (ISIN), US929771AR48 (ISIN)
--------------------------------------------------------------------------------
MEETING AGENDA
--------------------------------------------------------------------------------
ITEM CODE PROPOSALS MGT. REC. ISS REC.
================================================================================
[ ]1 M0405 Approve Merger Agreement For FOR
[ ]2 M0201 Elect Directors For FOR
[ ]3 M0101 Ratify Auditors For FOR
--------------------------------------------------------------------------------
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 2
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
FINANCIAL SUMMARY
--------------------------------------------------------------------------------
INCOME STATEMENT SUMMARY (amounts in millions except per share data)
--------------------------------------------------------------------------------
1998 1999 2000 ACG*
---- ---- ---- ----
NET INTEREST INCOME $2,351.00 $2,470.00 $2,515.00 3.43%
NET INCOME 874.00 1,011.00 832.00 -2.43%
EPS (BASIC) 4.26 4.99 4.10 -1.90%
DIVIDEND 1.86 2.06 2.28 10.72%
--------------------------------------------------------------------------------
------------------------
* Annual Compound Growth
Fiscal Year Ended: December 31
Source: Special Proxy Statement
--------------------------------------------------------------------------------
PERFORMANCE SUMMARY
--------------------------------------------------------------------------------
1-YEAR 3-YEAR 5-YEAR
------ ------ ------
TOTAL SHAREHOLDER RETURNS, COMPANY -11.2% -7.9% 8.0%
TOTAL SHAREHOLDER RETURNS, INDEX -9.1% 12.3% 18.3%
TOTAL SHAREHOLDER RETURNS, PEER GROUP 20.1% 7.9% 21.0%
------------------------
Source: Special Proxy Statement
--------------------------------------------------------------------------------
BUSINESS: Interstate bank holding company
STATE OF INCORPORATION: North Carolina
ACCOUNTANTS: Ernst & Young LLP
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 3
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CORPORATE GOVERNANCE PROFILE
--------------------------------------------------------------------------------
GOVERNANCE PROVISIONS
================================================================================
Blank check preferred stock (Charter)
D&O indemnification and liability protection for acts made in good faith
Classified board (Charter)
Director term limits that provide for mandatory retirement at age 67 (Bylaw)
Restrictions on shareholders' ability to remove directors with cause (67%)
No shareholder right to call a special meeting
================================================================================
GOVERNANCE MILESTONES
================================================================================
Adoption of officer and director stock ownership requirements
================================================================================
SEVERANCE AGREEMENTS
================================================================================
Pension parachutes, which provide accelerated pension benefits, triggered by a
change in control
Golden parachute executive severance agreements triggered by a change-in-control
================================================================================
STATE STATUTES: NORTH CAROLINA
================================================================================
Control share acquisition
Fair price provision
Poison pill endorsement
--------------------------------------------------------------------------------
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 4
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIRECTOR PROFILES
--------------------------------------------------------------------------------
TERM DIR. NO
NAME CLASSIFICATION ENDS SINCE. STOCK
================================================================================
NOMINEES
James S. Balloun IO 2004 1997
Peter C. Browning IO 2004 1997
W. Hayne Hipp IO 2004 1991
Lloyd U. Noland III IO 2004 1997
Dona Davis Young IO 2004 2000
CONTINUING DIRECTORS
Leslie M. Baker, Jr. I 2002 1993
F. Duane Ackerman IO 2003 2000
Robert A. Ingram IO 2003 1997
George R. Lewis IO 2003 1997
Thomas K. Hearn, Jr. IO 2002 1990
Elizabeth Valk Long IO 2002 1999
Morris W. Offit I 2002 1999
John C. Whitaker, Jr. IO 2002 1996
John T. Casteen III IO 2003 1997
George W. Henderson III IO 2003 1997
--------------------------------------------------------------------------------
CLASSIFIED BOARD: Yes CEO AS CHAIRMAN: Yes
CURRENT NOMINEES: 5 RETIRED CEO ON BOARD: No
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 5
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
COMPOSITION OF COMMITTEES
-----------------------------------------------------------------------------------------------
AUDIT TYPE COMPENSATION TYPE NOMINATING TYPE
-----------------------------------------------------------------------------------------------
F. Duane Ackerman IO Peter C. Browning IO Peter C. Browning IO
Elizabeth Valk Long IO Robert A. Ingram IO Robert A. Ingram IO
John T. Casteen III IO John C. Whitaker, Jr. IO John C. Whitaker, Jr. IO
George W. Henderson III IO
-----------------------------------------------------------------------------------------------
COMMITTEE NAME ASSIGNED BY COMPANY:
AUDIT: Audit Committee
COMPENSATION: Management Resources and Compensation Committee
NOMINATING: Corporate Governance and Nominating Committee
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 6
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EQUITY CAPITAL
--------------------------------------------------------------------------------
TYPE VOTES PER SHARE ISSUED AUTHORIZED
Common stock 1.00 203,362,336 1,000,000,000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
OWNERSHIP - COMMON STOCK NUMBER OF SHARES % OF CLASS
--------------------------------------------------------------------------------
Officers & Directors 2,269,640 1.12
Institutions 109,897,006 54.04
--------------------------------------------------------------------------------
------------------------
As of: June 12, 2001
Sources: Special Proxy Statement, Bloomberg Business News
[ ] ITEM 1: APPROVE MERGER AGREEMENT
PROXY CONTEST
Wachovia Corp. has agreed to combine with First Union Corp. in a merger of
equals (MOE) that would create the fourth-largest bank in the nation. At
Wachovia's upcoming special meeting, shareholders are being asked to
approve the merger, which management touts as immediately accretive and
allowing shareholders to hold stock in a new entity that will be
well-poised to excel in the today's evolving financial services market.
In May, however, Wachovia's pending nuptials with First Union were
disrupted by an interloper in the form of longtime Wachovia suitor SunTrust
Banks, Inc. Long considered the most natural partner for Wachovia, SunTrust
held merger discussions with Wachovia as recently as December 2000,
although those talks ended without result. Following the surprise
announcement of the Wachovia-First Union transaction, SunTrust on May 14,
2001, made a competing proposal, offering to acquire Wachovia in a $14.7
billion stock swap. Based on the value of SunTrust's shares on the date of
SunTrust's hostile announcement, its offer represented a 16.7-percent
premium over the then-present value of the First Union transaction.
Wachovia's board and management have recommended the First Union merger to
shareholders, who will vote on the transaction at the company's special
meeting. SunTrust, however, is soliciting Wachovia shareholders to vote
against the merger. The
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 7
--------------------------------------------------------------------------------
transaction requires the approval of a majority of Wachovia's outstanding
common stock. As of June 12, 2001, Wachovia's officers and directors owned
1.2 percent of the shares entitled to vote.
BACKGROUND - DISCUSSIONS
The current merger results from a periodic review of Wachovia's strategic
alternatives that picked up steam in 2000. After years of periodic
discussions with SunTrust about a possible "Coke and smoke" deal (alluding
to Wachovia's and SunTrust's respective relationships with Philip Morris
Capital Corp. and Coca Cola Co., respectively), the board in 2000 decided
that while the company should continue to pursue its ongoing operating
strategy, it should also examine the possibilities relating to a possible
merger with either of First Union and SunTrust.
Unsurprisingly, given the companies' long familiarity with one another, the
SunTrust discussions appear to have enjoyed the early momentum. In December
2000, Wachovia and SunTrust engaged in serious discussions on a range of
issues relating to a possible MOE of those two companies. In that
transaction, SunTrust was to issue about 1.03 of its shares for each
Wachovia share outstanding. L.M. "Bud" Baker, Wachovia's CEO and chairman,
was to serve as the combined company's first CEO until 2002, and would have
remained chairman until 2003.
During the SunTrust discussions, Wachovia's management apparently made
periodic reports to and consulted with the Executive Committee of the
board, which consists of three independent directors and Mr. Baker himself.
In mid-December, however, Mr. Baker and executive management informed the
Executive Committee that they had terminated discussions with SunTrust.
Management states that it had become increasingly concerned about negative
trends in SunTrust's core earnings and, in particular, with SunTrust's
"decentralized" operational model, which stands in stark contrast to
Wachovia's own. The company's operating differences were particularly
meaningful in the wealth and asset management business, which Wachovia had
identified as a key driver for strategic growth. Whereas SunTrust's
business was organized along geographical divisions, Wachovia felt that
operations should be organized around particular products and services.
Wachovia management apparently began to feel that the MOE that the two
parties had originally contemplated was increasingly taking on the feel of
an acquisition that would subvert Wachovia's core strategic objectives;
therefore, on Dec. 14 Wachovia cancelled additional due diligence and ended
discussions. Mr. Baker and management subsequently communicated their
decision to Wachovia's board via telephone, and described their reasons for
terminating discussions.
The end of the SunTrust discussions gave added momentum to talks with First
Union that had begun in late 2000, and led to a progressively more involved
series of discussions
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 8
--------------------------------------------------------------------------------
through the early part of 2001. In the last stages of a restructuring that
involved shedding non-core and money-losing operations and that management
says is now complete, First Union offered Wachovia a tempting opportunity
to bolster its position in the high-margin, high-growth asset management
industry. In April, as the board was deliberating on final details of the
proposed First Union merger, Mr. Baker and his CFO, Robert McCoy, received
phone calls from their counterparts at SunTrust indicating that company's
continued interest in doing a deal with Wachovia. At Wachovia's board
meeting on April 15, 2001, Mr. Baker communicated the details of the
SunTrust contacts to his board, which then unanimously approved the First
Union merger agreement.
One month later, SunTrust announced its unsolicited acquisition proposal
and declared its intention to solicit proxies against the First Union
merger. Wachovia's board held another series of meetings to consider
SunTrust's offer, and on May 22, 2001, rejected the SunTrust proposal and
reaffirmed its commitment to the First Union offer. This time, however, the
vote was not unanimous. One director, Morris Offit, the CEO of Wachovia's
asset management subsidiary, voted in favor of the SunTrust transaction.
Mr. Offit contended that he and his fellow directors had lacked important
information about SunTrust's interest at the time of the April vote to
approve a merger with First Union.
AMENDMENTS TO THE MERGER AGREEMENT
With the announcement of SunTrust's active campaign to break up the
Wachovia-First Union merger, various aspects of the pending deal have come
under close scrutiny and, in some cases, criticism. To address certain
critiques leveled against their merger agreement, Wachovia and First Union
have announced three material amendments to their merger agreement over the
past two months:
On May 21, 2001, the companies adopted a change to the dividend payable to
Wachovia shareholders after the merger. The amendment retained the
provision for a one-time special dividend of $0.48 per Wachovia share to be
paid at closing, but added an alternative mechanism by which Wachovia
shareholders would receive special preferred shares in lieu of the one-time
dividend. The preferred shares are designed to preserve Wachovia's $2.40
per share current dividend.
The companies also announced that Mr. Baker had chosen to forego a planned
enhancement of his retirement package, which would have paid about an
additional $500,000 per year for life to Mr. Baker and his wife after his
retirement. Mr. Baker now will retain the same pension benefits as he has
at Wachovia, worth approximately $1.6 million per year for life.
Finally, on May 29, 2001, the companies amended certain lock-up options
they had exchanged to provide that the options could be exercised only with
cash, readily
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 9
--------------------------------------------------------------------------------
marketable debt securities, or preferred stock with a fair market value
equal to the exercise price of the options. SunTrust had argued that First
Union could pay the exercise price of its option with distressed assets
that could have had an adverse impact on Wachovia's value for another
buyer. The companies also clarified that the maximum value either could
realize via the exercise of the lock-up options is $780 million.
LITIGATION AND LEGISLATIVE ACTIVITY
Two other events in the history of this transaction bear attention. First,
on June 4, 2001, SunTrust submitted a proposal to amend Wachovia's bylaws
and allow shareholders to call special meetings. This was intended to open
the door to calling a special meeting and electing dissident nominees to
Wachovia's board if the First Union transaction was rejected and Wachovia
continued to spurn SunTrust's offer. However, First Union effectively
foreclosed the special meeting recourse by successfully lobbying the North
Carolina legislature to change the law governing special meetings. Now,
only a company's articles of incorporation may permit shareholders to call
special meetings. The articles cannot be amended except with the consent of
the board.
Second, the North Carolina business court was recently asked to adjudicate
the legality of the Wachovia-First Union lock-up options and the provision
that precludes Wachovia from entering another agreement until January 2002.
A key issue in the litigation was the question of whether Wachovia's board
was fully informed when it approved the First Union agreement. Recently,
the court affirmed the lock-up option but struck down the January 2002
lock-up period, opening the door for Wachovia to enter another agreement if
the First Union merger is defeated.
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 10
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TRANSACTION SUMMARY
ACQUIRER: First Union Corp.
TARGET: Wachovia Corp.
TERMS: 2.0 shares of First Union common stock per Wachovia share
VALUE OF TRANSACTION: Approximately $14.7 billion, or $70 per share based
on First Union's current price
FAIRNESS OPINION: Credit Suisse First Boston and Goldman Sachs
ACCOUNTING TREATMENT: Purchase
TAX STATUS: Tax-free to shareholders (see discussion below)
WALKAWAY RIGHTS: Either party may terminate the merger if the transaction
has not closed by Jan. 16, 2002. Although the original terms of the merger
agreement provided that Wachovia could not do another deal before that
time, even if its shareholders rejected the merger, a North Carolina court
has struck down that provision.
LOCK-UP PROVISION: The companies have exchanged stock options entitling
each company to purchase up to 19.9 percent of the other's outstanding
common stock at $59.482 per Wachovia share and $31.892 per First Union
share, respectively. The options are only exercisable under certain
circumstances and are intended to deter competing offers. The maximum
profit that either party may realize via the exercise of the options is
$780 million. At present, if First Union's option were triggered, it would
be entitled to receive the maximum profit of $780 million.
DISSENTERS' RIGHTS: Yes
--------------------------------------------------------------------------------
PRO FORMA OWNERSHIP: As a result of the merger, Wachovia shareholders will
in aggregate own approximately 30 percent of the combined company's common
stock, while First Union shareholders will retain the other 70 percent.
MANAGEMENT: The board will be evenly split between designees of the two
companies, with Wachovia and First Union each naming nine directors to an
18-member board. Ken Thompson, First Union's chairman and CEO, will serve
as CEO and president of the combined company. Mr. Baker, Wachovia's
chairman and CEO, will serve as the combined company's executive chairman
until 2004, when he step down in favor of Mr. Thompson.
PRO FORMA FINANCIAL SUMMARY: The combined company would have had net
interest income of $7.4 billion and net income of $92 million,
respectively, for the year ended Dec. 31, 2000. As of March 31, 2001, New
Wachovia would have had total assets of $245.5 billion, net assets of $15.8
billion, net loans of $119.9 billion, and deposits of $137.3 billion.
Management believes that the transaction will be accretive to cash
operating earnings per share beginning in 2002.
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 11
--------------------------------------------------------------------------------
The following table lists historical and pro forma financial information
for Wachovia. The pro forma data assume an exchange ratio of 2.0 shares of
First Union for each share of Wachovia
PRO FORMA
HISTORICAL EQUIVALENT
---------- ----------
EARNINGS PER SHARE:* $4.10 $0.52
DIVIDENDS PER SHARE:* $2.28 See below
BOOK VALUE PER SHARE:** 32.64 $30.89
*For the year ended Dec. 31, 2000
**As of March 31, 2001
Shareholders should note that the merger agreement provides two dividend
alternatives, designed to allow shareholders to preserve their existing
2001 dividend of $2.40 per Wachovia share. Under the first option,
shareholders will receive 2.0 shares of First Union common stock and will
receive the standard annual dividend on those shares, currently $0.96 per
share, plus a one-time special dividend of $0.48 per share, paid in cash at
the time of closing. Shareholders will therefore receive a total of $2.40
in dividends this year, and in ensuing years will receive standard
dividends on First Union's common stock. The special dividend will be
taxable to shareholders.
The second dividend option allows shareholders to receive shares of
"dividend equalization" preferred stock (DEPs) in addition to their First
Union common stock. The DEPs will pay a variable dividend sufficient to
make the total dividend paid to former Wachovia shareholders equal to $2.40
per Wachovia share until such time as the standard First Union common stock
dividend equals $1.20 per share (at a 2.0 exchange ratio, equivalent to
$2.40 per Wachovia share). At that time, the DEPs will retire.
VALUE OF OFFER: Based on First Union's current price, the offer price is
approximately $70.00 per share, or a premium of 16.3 percent over the
closing price of Wachovia's common stock on the last trading day prior to
the merger announcement. The offer price represents a 5.6-percent premium
based on Wachovia's average closing price for the five-day period beginning
60 days prior to the announcement.
FAIRNESS OPINION: Credit Suisse First Boston (CSFB)and Goldman Sachs,
Wachovia's financial advisors, determined that the transaction was fair to
shareholders from a financial point of view.
ANALYSES PERFORMED: Among other analyses, the advisors performed discounted
cash flow analysis, a review of merger premiums in comparable transactions,
comparable company analysis, contribution analysis, and precedent
transaction analysis.
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 12
--------------------------------------------------------------------------------
METHOD VALUE OFFER PRICE
Discounted cash flow - $ per Wachovia share
CSFB $59.47 to 67.29 within range
Goldman Sachs $51.82 to $81.47 within range
Contribution analysis - Implied exchange ratio
Goldman Sachs 1.50 to 2.24x within range
Comparable transactions (MOEs) - Implied premiums
CSFB -2% to 21% within range
Goldman Sachs 0% to 13% within range
ASSUMPTIONS: In conducting its discounted cash flow analysis, Goldman Sachs
used discount rates ranging from 11 to 13 percent and 2006 terminal price
to earnings multiples ranging from 9x to 13x. CSFB used an 11 percent
discount rate and terminal value multiples from 10 to 12x.
PAYMENT TO FINANCIAL ADVISOR: Wachovia has agreed to pay CSFB $30 million
for advisory services related to the merger, $20 million of which is
contingent upon consummation of the transaction. CSFB acted as Wachovia's
lead advisor in connection with the merger, and has provided paid advisory
services to the company in the past. Goldman Sachs was retained to provide
an additional opinion upon the receipt of SunTrust's unsolicited
acquisition proposal on May 14, 2001. Wachovia will pay Goldman Sachs an
opinion fee of $5 million, plus an additional fee of $15 million upon the
acquisition of any party of at least 50 percent of Wachovia's stock.
Goldman Sachs has provided investment banking services to both First Union
and Wachovia in the past.
CONFLICT OF INTERESTS OF OFFICERS AND DIRECTORS: Certain officers and
directors may receive benefits from the merger that could conflict with the
interests of shareholders, including contracts for continued employment
with the combined company, bonuses, or severance payments. Mr. Baker will
receive an annual salary of at least $1 million per year for the duration
of his service as chairman of the combined company. In addition, Wachovia
officers and directors will be eligible receive up to $70 million in
severance benefits and supplemental retirement payments upon consummation
of the merger. The severance benefits will become payable if the covered
officers' employment terminates within three years of closing.
COMPARATIVE SHAREHOLDER RIGHTS: If the merger is consummated, Wachovia
shareholders will receive First Union common stock and therefore will be
subject to that company's corporate governance provisions. Although both
institutions are incorporated in North Carolina, there are certain
differences in the charters and bylaws of the two
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 13
--------------------------------------------------------------------------------
companies that could have a significant impact on shareholders' rights. The
salient differences in shareholder rights between the two companies are
listed below:
CERTIFICATE AND BYLAW DIFFERENCES
WACHOVIA WACHOVIA - FIRST UNION COMBINED
-------- -------------------------------
o Covered by North Carolina's control share o Opts out of North Carolina's control share
acquisition statute, which denies voting rights to shares acquisition statute
acquired in excess of specified thresholds
o Fair price provision requiring supermajority o No fair price provision
approval of certain mergers with 10% shareholders
o Shareholders may remove directors only for cause and o Shareholders may remove directors only for cause,
with 66.7% shareholder vote requirement. by simple majority vote.
o No special director vote provisions o Supermajority (75%) board vote needed to remove Mr.
Baker from the chairmanship or Mr. Thomson from CEO
position, to modify Mr. Baker's or Mr. Thompson's employment
agreements, or to change director nominating procedures
o No poison pill o Poison pill with 10% threshold
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 14
--------------------------------------------------------------------------------
ANALYSIS
In evaluating the First Union-Wachovia position in this contest, ISS met
with Messrs. Baker and Thompson and their respective management teams. In
addition, we spoke with five of Wachovia's independent directors to assess
the board's role in approving the merger with First Union. On SunTrust's
side, we met with Phil Humann, chairman and CEO of the company, and the
senior management team of SunTrust.
On balance, we believe that Wachovia shareholders would be best served
voting in favor of the pending First Union transaction. In our judgment,
SunTrust has failed to make a sufficient case for rejecting the proposed
deal on any of the three substantive questions facing Wachovia
shareholders: First, is the short-term economic premium offered by the
SunTrust deal sufficiently attractive to reject the First Union merger? In
the alternative, is a Wachovia-SunTrust combination demonstrably more
attractive than the First Union merger from a longer-term, strategic
perspective? And finally, is the First Union deal irreparably tainted by
process irregularities or governance improprieties that require redress and
therefore compel the merger's rejection? Because we answer each of these
questions in the negative, we conclude that shareholders should affirm the
recommendation of Wachovia's board and management and support the MOE.
IMMEDIATE ECONOMIC PREMIUM
From day one, the central pillar of SunTrust's competing bid has been the
premium it offers Wachovia shareholders over and above the value of the
First Union MOE. Based on SunTrust and First Union's respective closing
prices on the last day of trading before SunTrust's May announcement,
SunTrust's offer represented a premium of 17 percent to the First Union
deal price (this figure excludes the one-time special dividend payable to
Wachovia shareholders in the MOE). This meant that on the day of closing,
SunTrust's proposed deal would have given Wachovia shareholders $10.02 more
per share than the First Union MOE, reflecting an aggregate difference of
$2.1 billion between the two transactions.
As both of the would-be mergers are all-stock affairs, however, the
difference, or "spread" between the two transactions has fluctuated on a
daily basis with the movements of the First Union and SunTrust stock
prices. SunTrust has not benefited from these movements--in the first week
after SunTrust's unsolicited proposal, the spread had narrowed to 6.5
percent (based on the average closing prices of First Union and SunTrust
shares during that week) as investors hedged against the expectation that
Mr. Humann would be compelled to sweeten his price in order to prevail.
Furthermore, this narrowed spread has proved hard to budge--notwithstanding
Mr. Human's periodic remonstrations
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 15
--------------------------------------------------------------------------------
that SunTrust will not add to the pot, the spread has lingered in the low
single digits for much of the past two months (during the five weeks from
June 11 through July 13, 2001, the average weekly spreads ranged from 1.0
percent to 2.1 percent). Only SunTrust's most recent proclamation that it
will stand pat, arriving a mere two weeks before Wachovia's meeting, has
finally compelled the market to react. After Mr. Humann emphatically
promised to stand firm in "read my lips" fashion on Monday, July 16,
SunTrust's stock enjoyed two up days, widening the spread to 6.6 percent by
the market's close on Wednesday.
As of July 20, the last day of trading prior to release of this report, the
spread stood at 6.2 percent. SunTrust maintains that this difference is
sufficient to compel voting against the MOE, so that Wachovia may field
higher premium offers from a host of interested parties that will
presumably continue to include both First Union and SunTrust. Based on two
factors, however, we are not convinced by SunTrust's argument. First, it is
not clear how sustainable even today's modest spread really is.
While SunTrust argues that recent strength in its stock price is the result
of investor confidence that the company will not "overpay" for Wachovia, it
is equally possible that investors have concluded that SunTrust will not
"pay" anything at all--that is, that SunTrust's failure to sweeten its
offer has doomed its bid for Wachovia. If the latter scenario is correct,
one can assume that SunTrust's stock (and, correspondingly, the premium)
will come under pressure again if the First Union deal is rejected and
SunTrust reemerges as an buyer. Indeed, given the bidding war that SunTrust
predicts would follow a vote against the MOE, it is hard to imagine how
SunTrust's stock would not suffer such pressure again.
While it is impossible to ascertain with certainty the reasons behind last
week's spread movements, SunTrust's recent stock price movements appear to
support the suggestion that shareholders have written SunTrust's proposal
off. On Tuesday, when the pending North Carolina ruling still proffered
hope for a SunTrust victory, SunTrust's price dipped, and by contrast,
after the Friday morning ruling rejected SunTrust's bid to strike down the
lock-up options, SunTrust's price rebounded. We believe it is fair to
conclude that a rejection of the First Union merger would likely push
SunTrust's stock price down, though the magnitude of any such change is not
determinable.
Is the uncertain prospect of a six- to seven-percent premium worth casting
away the "bird in the hand," then? If Wachovia were truly selling itself,
perhaps the answer would be yes--in a sale, dollars per share is (arguably)
the only important consideration, and even another $1.00 per share is worth
pursuing. The record of the last several months, however, confirms what
Wachovia told ISS directly--the bank is not "for sale," and the board does
not feel that an auction of the company is either necessary or warranted at
this time. Indeed, Wachovia's December 2000 negotiations with SunTrust
contemplated a MOE
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 16
--------------------------------------------------------------------------------
transaction, not an acquisition of one company by the other. In that
respect, the December 2000 transaction was similar to the present First
Union deal. While MOEs are notoriously hard to define--MOE is more a term
of art than a scientific description--it appears fair to conclude that
Wachovia has all along sought something more along the lines of a
"strategic partnership"--a transaction designed to enhance Wachovia's
market position, growth potential, and operating strategy, and thereby
generate long-range shareholder value--than a one-time sale designed to
maximize immediate shareholder returns. In this light, the board's decision
to demur on a SunTrust bid that offers marginally greater immediate value
but (in Wachovia's judgment) less long-term potential seems plainly
justifiable.
LONG-TERM STRATEGIC MERITS
Since the First Union and SunTrust deals are both denominated in stock,
Wachovia shareholders will continue to hold an equity stake in the combined
company. This fact occasions an additional evaluation of which possible
combination--Wachovia-First Union or Wachovia-SunTrust--offers more
attractive prospects as a continuing, long-term investment.
As an initial matter, SunTrust faces a difficult hurdle here. SunTrust has
taken upon itself the formidable task of arguing the strategic superiority
of Wachovia-SunTrust when all that we have to judge either deal is each
management team's respective (1) past results and (2) future projections.
Both of these measures are notoriously imperfect predictors of actual
future performance, so arriving at a definitive winner on this point is
difficult absent one party or the other's relying on grossly untenable
claims. The burden of proof is clearly SunTrust's, however; since there is
little reason for shareholders to reject the pending merger and disrupt the
progress made to date if SunTrust cannot demonstrate a material difference
between its merger and First Union's.
First Union and SunTrust trade broadsides on a myriad of points. Each
argues that integrating Wachovia will be problematic for the other. First
Union points out that Wachovia will be a huge acquisition for
SunTrust--bigger than any other buy in SunTrust history--and argues that
integration will be even more problematic in the wake of a "hostile"
acquisition in which Wachovia management would not be available to
significantly aid the process. Wachovia's board and management also note
that SunTrust plans to adopt Wachovia's computer and data systems rather
than retaining its own--this conversion process, Wachovia argues, would
entail additional risks. For its part, SunTrust points to First Union's
checkered acquisition history, most notably First Union's 1998 acquisition
of CoreStates Financial Corp. Continuing problems at CoreStates forced
First Union to repeatedly lower earnings expectations in 1999, cutting
First Union's stock price in half that year. SunTrust also points out that
a combined Wachovia-First Union would expect to close about 300 branches
and cut 7,000 positions--numbers about double what
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 17
--------------------------------------------------------------------------------
SunTrust projects should it prevail. The size and scope of such cuts, in
SunTrust's view, are proportionate to the risks involved.
The combatants also exchange a fusillade of financial data, ratios, and
projections, each striving to land the GAAP equivalent of a knockout blow
to the other's transaction. First Union and Wachovia point to the higher
cost savings they project from their combination ($890 million annually
beginning in 2004, versus SunTrust's $500 million projection for its
proposed deal) to argue the superiority of their offer. This is the
flip-side of the integration issue that cuts SunTrust's way--because First
Union and Wachovia have much more geographic overlap, there is more room to
close branches, decrease staffing, and cut costs. Wachovia also avers that
First Union offers greater strength in the high-growth asset management
business that Wachovia's board has identified as a key to future growth.
First Union's trust and asset management business has grown revenues at a
compound annual rate of 28 percent since 1999, according to Wachovia's
calculations, versus a 1.2-percent decline in SunTrust's comparable
businesses over the same span. SunTrust rejoins by pointing to First
Union's uneven history--over the last five years, First Union has taken
over $7 billion in special charges, primarily due to the company's recent
restructuring efforts. SunTrust's stock has crushed First Union's in
shareholder returns, yielding a five-year return of over 100 percent versus
First Union's 35 percent.
At the end of the day, it is hard to pick a winner and a loser from the
respective sides in the strategic synergies debate. Neither company's
projections of earnings growth, dividends, and cost savings are clearly
untenable, and reasonable investors can fairly believe either or both
parties' projections. Furthermore, while First Union's experience with
CoreStates is sobering, First Union has since undergone a restructuring
under its new CEO, Ken Thomson, and appears to have learned from the
lessons of the previous transaction. Indeed, First Union repeatedly
stressed to ISS the difference between its purchase of CoreStates, which
was consummated at too high a price, and the low-premium merger of equals
with Wachovia. First Union plans to integrate Wachovia over three years, in
contrast with the accelerated timetable that was forced on the company in
the CoreStates example.
In sum, both Wachovia-First Union and Wachovia-SunTrust would have unique
strengths and weaknesses, but it is far from clear that one transaction is
a "sure thing" and the other a sure loser. How to choose between the two
transactions, then? Traditionally, such tough decisions are made by the
board and management, who generally know far more about the company than
most shareholders and who spend far more of their time preparing to make
such a decision. Indeed, one of the fundamental reasons for hiring
professional management and retaining experienced directors is to retain on
shareholders' behalf the expertise to help choose among various strategic
alternatives, more than one of which may have merit. According to Wachovia
and First Union, it is exactly such a decision that
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 18
--------------------------------------------------------------------------------
Wachovia's board has made--after exhaustively considering the pros and cons
of deals with both SunTrust and First Union, the board decided on the
latter.
CORPORATE GOVERNANCE AND PROCEDURAL ISSUES
The third prong of SunTrust's argument attacks exactly on this front--the
determination first by Wachovia's management, then by the board, that the
company should merge with First Union rather than SunTrust. Maintaining
that Wachovia's decision-making process was irreparably tainted, first by
management's conflicts of interest, then by the board's ignorance of or
indifference to material facts, SunTrust argues that Wachovia's
shareholders should veto the MOE and remand the issue for reconsideration
by the board.
The most significant of SunTrust's contentions--certainly, the allegation
that, if confirmed, would almost single-handedly compel shareholders to
reject the First Union merger, whatever its merits--is the assertion that
Wachovia's board was denied important facts that would have influenced its
decision to merge with First Union had such facts been disclosed. SunTrust
relies substantially on the testimony of Mr. Offit, the only Wachovia
director who dissented from the board's May rejection of SunTrust's
unsolicited bid. In deposition testimony offered at the North Carolina
judicial proceeding last week, Mr. Offit maintained that neither he nor
most of the other independent directors were ever made aware of the
financial terms of the SunTrust deal that was discussed in December 2000.
Nor, for that matter, were any board members other than a select coterie of
directors comprising Wachovia's Executive Committee, and perhaps one or two
others, given any forewarning of the pending termination of discussions
with SunTrust in December. Instead, they were given only after-the fact
notice that talks had been ended by Mr. Baker for reasons relating to basic
incompatibilities of the two institutions' operating strategies. SunTrust
also points out that the independent directors were never shown certain
reports, prepared by Wachovia's investment bankers, which weighed the
relative strengths and weaknesses of combinations with SunTrust and First
Union and whose conclusions, SunTrust maintains, would have caused the
board to regard a combination with SunTrust more favorably.
Operating without material knowledge of the value of SunTrust's December
2000 offer, then, Wachovia's board was physically incapable of making an
informed decision when it approved the First Union deal in April 2001.
SunTrust avers that although Wachovia's directors were informed of Mr.
Humann's phone call to Mr. Baker on the day before they met to approve the
deal, the directors could not properly interpret that call absent the
proper context in which to place it. Specifically, if SunTrust had made an
offer in December, been rejected, and subsequently called Mr. Baker seeking
to reopen discussions in April, it stands to reason that SunTrust would be
willing to add value to its original proposal. Without knowing the terms of
the December deal, however, Wachovia's board
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 19
--------------------------------------------------------------------------------
was unaware of the potential value of the SunTrust alternative when it
signed off on the First Union merger in April 2001.
SunTrust also argues that Wachovia's board was not adequately informed of
Mr. Baker's compensation arrangements under the First Union deal, including
the since-retracted package of retirement benefits, nor of the operation of
the lock-up options, which translated to a break-up fee substantially above
the industry norm that would become payable to First Union if Wachovia
backed out of the MOE. Based on these factors, SunTrust maintains that
Wachovia's board cannot have made a reasoned choice between SunTrust and
First Union, and its decision deserves no deference from shareholders
accustomed to relying on directors' best judgment.
Because of the significance we attach to the questions of what the board
knew and when it knew it, ISS waited for the North Carolina court's ruling
to inform our evaluation of this issue. Based on its review of deposition
transcripts and other factual records that were not available to ISS, the
court found that Wachovia's board was "an informed, independent, fully
functional, intelligent, engaged and knowledgeable board." This conforms
with what we were told by the five independent Wachovia directors we were
able to interview, all of whom assured us that they were aware of the
"financial terms" contemplated by the December 2000 transaction and of the
material provisions of the First Union merger agreement executed in April
of this year. Therefore, we are unable to conclude that Wachovia's board
was as starved for information as SunTrust alleges, solely on the basis of
the testimony of one dissenting director.
SunTrust urges that shareholders hold Wachovia's board to a higher standard
than did the court. Even if the board acted "legally," in the court's view,
it may not have acted with enough information or sufficient diligence to
warrant knee-jerk support by Wachovia's shareholders. We are sympathetic to
this argument--certainly, many practices that are decidedly adverse from a
corporate governance standpoint are nonetheless legal. However, we
ultimately cannot conclude that Wachovia's board was so uninformed as to
call its judgment into question. Although Mr. Baker and his board may not
have lived up to the ideal of "perfect governance" over the past several
months (prudence may have counseled the appointment of an independent
committee of directors to consider the company's alternatives, and it
certainly would not have hurt to engage the directors more actively during
the December discussions with SunTrust instead of merely providing an
"after-the-fact" accounting of the talks) it appears clear that Wachovia's
board had at hand enough of the facts to make a reasoned decision to
proceed with First Union in April 2001. The board knew that management had
held in-depth talks with SunTrust in December, knew the reasons for the
cancellation of those talks, and knew that Mr. Humann had called Mr. Baker,
obviously in the hopes of renewing merger discussions, the day before it
approved the First Union combination. Furthermore, given Mr. Baker's
reasons for ending the SunTrust discussions, it is not surprising that the
board may have regarded even the
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 20
--------------------------------------------------------------------------------
prospect of a mildly sweetened price as not sufficiently attractive to
warrant delaying the deal with First Union and renegotiating with an
inferior strategic partner. We conclude that Wachovia's board was
adequately informed when it made its decision, and that its decision
appears supportable given the fact that the company was seeking a long-term
strategic partner rather than a one-time sale at a moderate premium.
Finally, SunTrust takes aim at several other facets of the First Union
transaction that may cause concern from a governance perspective. Most
provocatively, Wachovia commiserated with First Union in lobbying the North
Carolina legislature to bar bylaw provisions allowing shareholders to call
special meetings. This successful effort not only made it impossible for
Wachovia's shareholders to call a special meeting if the present merger is
rejected, thereby denying SunTrust an important recourse if Wachovia's
board adopted a "just say no" defense to its bid, but also expropriated the
rights of shareholders of every company in the state of North Carolina.
SunTrust also points to the value of the lock-up option Wachovia gave to
First Union, which at $780 million, or about six percent of the deal value,
represents perhaps an all-time high for banking mergers. The value of such
an option must be effectively paid by any third-party acquirer of Wachovia,
and therefore reduces a third party bidder's offer by a corresponding
amount. Other targets of SunTrust's ire include a lock-up provision that
prohibited Wachovia from doing a deal with another party, even if the
merger is rejected, until January 2002 (which was struck down by the North
Carolina court last week), a provision that originally allowed the exercise
price of the option to be paid in the form of distressed loans or other
undesirable assets (this provision was subsequently amended by Wachovia and
First Union after criticism from the street), and a boost to Mr. Baker's
retirement package that was also repealed after investor complaints.
While we share SunTrust's dissatisfaction with the North Carolina law
change and sympathize with its suspicion of overly severe lock-up
arrangements, we do not believe that these governance transgressions
warrant rejecting the First Union merger. While the management of Wachovia
and First Union arguably deserve their share of finger wagging, it is not
in shareholders' best interests to vote down an important strategic
transaction--likely, the most important strategic transaction in Wachovia's
history--merely in order to signal displeasure with certain governance
missteps that have had no evident impact on shareholders' ability to vote
on the current deal (notwithstanding the value of the lock-up option, for
instance, SunTrust is still at the table with its bid today). Furthermore,
Wachovia has taken steps, albeit belatedly, to redress some of the problems
listed above, amending Mr. Baker's retirement package and the terms of the
lock-up option. Wachovia and First Union have also committed to provide
shareholders of the combined company the right to call special meetings,
and Wachovia has promised to amend its certificate to confer such a right
on shareholders at next year's annual meeting if the First Union merger is
rejected. While only half-steps, these measures offer some hope that the
board's more aggressive efforts to "lock up" the First Union deal were
merely the product of temporary
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 21
--------------------------------------------------------------------------------
over-enthusiasm for a combination First Union rather than a reflection of a
more enduring indifference to principles of good governance.
CONCLUSION
We conclude that the merger agreement executed by Wachovia and First Union
deserves shareholder support. While the competing SunTrust offer represents
a modest premium to the value of a merger with First Union, we do not
believe that a mere six percent extra per share paid in stock, a far more
volatile currency than cash, can offset the compelling strategic rationale
cited by Wachovia's management for combining with First Union. Furthermore,
the weight of the evidence suggests that Wachovia's board was adequately
informed when it approved the MOE agreement. In the absence of a proposal
that offers a substantial short-term premium or a clearly more compelling
strategic position than does the First Union deal, therefore, we believe
that shareholders are best served trusting the judgment of their directors,
of whom 13 (of 15) are independent.
We recommend a vote FOR Item 1.
[ ] ITEM 2: ELECT DIRECTORS
Wachovia Corp. classifies its 15 directors into three director classes.
This proposal seeks election of five directors for three-year terms
expiring in 2004. Dona Davis Young is a new director nominee.
The full board comprises two insiders and 13 independent outsiders. The
Audit Committee comprises four independent outsiders. The Management
Resources and Compensation Committee comprises three independent outsiders.
The Corporate Governance and Nominating Committee comprises three
independent outsiders. Thomas Hearn, Jr., and W. Hayne Hipp, independent
outside directors, have served on the board for a period of ten years or
more.
- We support the independent nature of the key board committees, which
include no insiders or affiliated outsiders.
We recommend a vote FOR Item 2.
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 22
--------------------------------------------------------------------------------
[ ] ITEM 3: RATIFY AUDITORS
The board recommends that Ernst & Young LLP be approved as the company's
independent accounting firm for the coming year.
We recommend a vote FOR Item 3.
-------------------------
COMPANY SOLICITOR: MacKenzie Partners, Inc. (212) 929-5500
SHAREHOLDER PROPOSAL DEADLINE: November 19, 2001
This proxy analysis has not been submitted to, or received approval from,
the Securities and Exchange Commission. While ISS exercised due care in
compiling this analysis, we make no warranty, express or implied, regarding
the accuracy, completeness, or usefulness of this information and assume no
liability with respect to the consequences of relying on this information
for investment or other purposes.
================================================================================
Wachovia Corp. o July 23, 2001 (Copyright) 2001, Institutional Shareholder
Ram Kumar, Senior Analyst Services
Phone: 301/545-4555
INSTITUTIONAL
SHAREHOLDER
SERVICES PAGE 23
--------------------------------------------------------------------------------
Vote Record Form:
WACHOVIA CORP.
TICKER: WB, WB (NONE)
PROXY CONTEST MEETING: August 3, 2001 RECORD DATE: June 12, 2001
ACCOUNT ID CODE: SHARES HELD ON RECORD DATE:
SHARES VOTED: DATE VOTED:
--------------------------------------------------------------------------------
MEETING AGENDA
--------------------------------------------------------------------------------
ITEM CODE PROPOSALS MGT. REC. ISS REC. VOTE CAST
================================================================================
[ ]1 M0405 Approve Merger Agreement For FOR
--------------------------------------------------------------------------------
[ ]2 M0201 Elect Directors For FOR
--------------------------------------------------------------------------------
[ ]3 M0101 Ratify Auditors For FOR
--------------------------------------------------------------------------------