WINSTON-SALEM, N.C. - SunTrust Banks Inc. sued Wachovia Corp. and First Union Corp. yesterday, trying to punch holes in their merger agreement as it presses forward with its own $13.9 billion hostile bid for Wachovia.
Wachovia directors urged SunTrust to abandon its takeover proposal after voting 14-1 Tuesday to stick to plans to sell the bank to Charlotte, N.C.-based First Union for $13.2 billion.
"SunTrust just sued everybody," said Marni Pont O'Doherty, an analyst at Keefe, Bruyette & Woods. "They're certainly not in the mindset where they're going to go away quietly."
SunTrust, which is based in Atlanta, is pursuing Wachovia, which has headquarters in Winston-Salem and Atlanta, to extend into North and South Carolina and bulk up in Florida, Georgia and Virginia. SunTrust brushed off the Wachovia board vote, saying nothing has changed. SunTrust will ask Wachovia shareholders for their proxy so that it can vote against the First Union proposal on their behalf.
"Wachovia's board has spoken. We now will take our case to the shareholders," said SunTrust Vice Chairman John Clay.
Based on current market prices, First Union has agreed to pay $62.92 per share for Wachovia, while SunTrust is offering $66.21. SunTrust's offer was 17 percent higher than First Union's, but share movements have cut that premium to 5.2 percent.
"Whoever loses Wachovia is probably in the better position," said Michael S. Morris of Delaware Investment Advisers. "The First Union issue is integration, where the track record is suspect at best. On the SunTrust side, the track record is not exactly rosy on unsolicited transactions."
SunTrust filed federal and state lawsuits against Wachovia and First Union, challenging the validity of the breakup fee to which they had agreed and arguing that the banks misled the market into believing that the fee could not exceed $780 million.
SunTrust said the break-up fee was "deliberately designed to have a minimum value of $780 million" when it actually has "a potential value materially in excess of $1 billion."
It also said the fee, even at $780 million, is "egregious" relative to First Union's purchase price, which through a swap of two of its shares for each Wachovia share, was $13.2 billion at the close of trading yesterday. SunTrust offered to pay 1.081 shares for each Wachovia share.
In a letter, the Wachovia board told SunTrust's board to respect its decision. "We acted in good faith last fall when we mutually explored a possible SunTrust/Wachovia transaction - a concept we have each explored on numerous occasions to no avail."
Wachovia shares fell 52 cents to $65.18 yesterday. First Union lost 21 cents to $31.49, and SunTrust slid 71 cents to $61.13.