Update: Firstar to Buy U.S. Bancorp in $21.2 Billion Stock Deal

Updated from 8:40 a.m. EDT

In the latest in a series of high-profile mergers in the financial services industry, Firstar (FSR) said Wednesday that it had agreed to buy Minneapolis-based U.S. Bancorp (USB) for about $21.2 billion worth of stock.

The deal will also unite a family, as the top executives at Firstar and U.S. Bancorp are brothers Jerry and Jack Grundhofer, respectively. Jerry will be president and chief executive of the combined company, while his older brother will be chairman until his planned retirement at the end of 2002.

Firstar, a Milwaukee-based financial holding company, said it will exchange 1.265 shares of Firstar, or $28.30 based on Tuesday's closing price of $22.25, for each share of U.S. Bancorp. This represents a 22% premium for U.S. Bancorp shareholders, compared with the company's Tuesday close of $23.19.

Firstar finished Wednesday regular trading down $2.25, or 10%, at $20, while United Bancorp gained $1.81, or 8%, at $25.

Vincent Piazza, an analyst at Standard & Poor's Equity Group, dropped his rating for Firstar to hold from accumulate Wednesday, as the stock got battered. Piazza, whose firm does not do underwriting, praised the deal, however, as a necessary step to cut costs and compete in the quickly consolidating financial services industry.

"It is a step in the right direction for the need for scale," he said. "They need to grow their revenue stream."

From Firstar's vantage point, he said, the company will gain a strong foothold in the investment banking, asset management and brokerage business, which will account for about 19% of the combined company's revenues. It will have about $145 billion in assets under management, through U.S. Bancorp's Piper Jaffray investment banking and brokerage division.

Firstar said it will take an $800 million restructuring charge between the closing of the deal -- expected in the first quarter of 2001 -- and the end of 2002.

The new firm will take the U.S. Bancorp name and will be headquartered in Minneapolis. It will be the eighth-largest bank holding company in the U.S., with assets of more than $160 billion and deposits of $107 billion, and a market capitalization of approximately $40 billion. The franchise will span 24 Midwestern and Western states with 2,200 branches.

"By any standard, we've built a tremendous institution at U.S. Bancorp," said Jack Grundhofer, in a statement. "But as we considered how best to convert our potential into real value for our shareholders and our customers, it became clear that combining with Firstar was far and away the best course to follow."

The deal is expected to immediately pay off on the bottom line, and after the closing the company will consider setting a dividend payment of 75 cents a share annually. This would represent an 11% increase over U.S. Bancorp's current dividend and 15% above Firstar's dividend.

The companies expect to reduce their combined expenses by $266 million per year, before taxes. This amounts to 5% of the combined company's expense base. It will phase in the cost savings, with 25% in 2001, 80% by the end of 2002, and the full amount by the end of 2003.

The deal comes only two days after Boston's FleetBoston Financial's (FBF) agreement to buy Summit Bancorp (SUB), a financial holding company based in New Jersey, for approximately $7 billion.

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