Wachovia, one of America’s biggest banks, has agreed to purchase SouthTrust of Alabama, the US’s 31st largest bank, for $14.3bn, in an all-share takeover. The bank that will result from the acquisition will be the fourth biggest US bank by assets and a leading retail bank in some of the US’s fast-growing, south-eastern states, such as North Carolina, Virginia, Georgia, South Carolina, Alabama and Florida.

Wachovia will also reinforce its position in Texas, which is now an area of considerable interest among banks, due to its economic growth and rising population. But, despite all these advantages, Lehman Brothers analysts have suggested that Wachovia overpaid for SouthTrust.

Based on the closing prices before the deal was announced, Wachovia paid a 20% premium for SouthTrust’s Nasdaq-listed shares, which had already climbed in May due to takeover rumours. At the end of 2003, SouthTrust had total assets of $52.1bn.

However, Ken Thompson, chief executive of Wachovia, said the price paid was right for “one of the nation’s best performing, highest quality banks”.

There is considerable branch overlap, especially in Georgia and Florida. Wachovia intends to cut 4300 jobs as part of a plan to save $225m a year, equivalent to 36% of SouthTrust costs.

If this cost-cutting and savings are included, Wachovia’s payment for SouthTrust falls from 17 times its projected earnings to 12.6 times, which is less than the average for similar acquisitions in the last five years.

SouthTrust and Wachovia have not stayed on the sidelines. In May, SouthTrust bought Florida First, with 19 branches in Florida. In 2001, Wachovia merged with First Union, a bigger bank, and like Wachovia, North Carolina based.

Mr Thompson, has said he is interested in other acquisitions following SouthTrust’s, but only at a reasonable price and not overpaying for assets.

Merger activity by the two banks appears to have paid off. SouthTrust and Wachovia both announced record earnings in the first quarter of this year. In the case of Wachovia, it reported record results in all of its four main businesses: general banking, wealth management, corporate and investment banking and capital management.

Wachovia said it is in a strong position for the rise in US interest rates that are widely expected to lead to another round of acquisitions and mergers among US banks.

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