Shareholders and Management in a Battle of Banks

The job of top corporate managers, we're always being reminded, is to do the best thing for their shareholders—period. Everyone else (employees, for instance) has to take a back seat. That certainly seems like a clear enough concept. What can make it a little murkier is sorting out management's actions when its own interests and those of shareholders may not line up perfectly.

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Consider the merger battle now flaring up in the banking sector. About a month ago Wachovia, the Southeastern bank with headquarters in Winston-Salem, N.C., and Atlanta, accepted an offer to be acquired by First Union of Charlotte, N.C. The offer valued Wachovia at around $63.80 a share. It was noted at the time that this was a surprisingly mild premium, considering that Wachovia was already trading at around $60. (First Union shares were around $32.)

Wachovia's willingness to take such a small premium seems even odder now because now we know that the bank actually turned away a merger approach for a richer premium of a reported 12 percent or so, back in December, from SunTrust Banks of Atlanta. Followers of the banking sector had apparently long expected those two to merge, and it's still not clear what it is that made SunTrust's December bid a worse deal for Wachovia shareholders than the subsequent, lower bid from First Union.

In any case, now SunTrust has re-emerged with a hostile offer that seems likely to set off a long and complicated battle. First Union has reiterated its intention to carry out the merger, and both suitors are aggressively spinning their cases in the business press.

Each side makes reasonable arguments as to which merger outcome would ultimately be better for shareholders. But by now it's pretty clear that Wachovia CEO L.M. "Bud" Baker, along with his fellow top managers and the bank's directors, have an extremely strong incentive to convince those shareholders that the First Union deal is the better one. This is because if First Union prevails, Baker will remain employed: He'll be chairman of the merged bank—which will be called Wachovia, even though First Union is much larger—and the number of board seats will be split equally.

SunTrust was reportedly similarly generous on such issues before this new deal was hatched, although the December proposal is said to have specified that Baker would run the show for two years, then step aside for SunTrust's chief executive. Now, of course, SunTrust is feeling a bit less courtly about the whole thing and would almost certainly give Baker the boot and dominate the merged bank's board and top management.

So while you can debate what's the better outcome for holders of Wachovia stock (a debate made more complicated not just by stock fluctuations but by the anti-breakup provisions built into the First Union agreement), there's no question which is the worse outcome for Wachovia management. Of course, that shouldn't matter since it's the shareholders' interests that Baker and company are supposed to protect—period. But I'll bet they conclude that the interests of Wachovia's shareholders are best served by a scenario that lets its managers hold on to as much power as possible. Not so murky after all! Of course, whether shareholders end up agreeing with that conclusion will take a little longer to figure out.

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