Updated from 6:36 p.m. ET

First Union's

(FTU)

friendly bid for

Wachovia

(WB) - Get Report

got a bit friendlier today, as the would-be acquirer sweetened its offer by guaranteeing Wachovia's annual dividend. And Wachovia responded by saying it's sticking with First Union's offer.

First Union's move came as it tries to win support for its deal, as well as divert attention from a competing offer from Atlanta-based

SunTrust

(STI) - Get Report

. Last month, First Union and Wachovia surprised investors with their

decision to merge.

Last week, SunTrust jumped into the fray with its own bid, one which a number of shareholders and analysts quickly called superior.

Today Wachovia reiterated its desire to partner with Charlotte, N.C.-based First Union while shunning SunTrust.

"We looked long and hard, and on multiple occasions, at a combination with SunTrust and concluded it would not work," Wachovia CEO L.M. "Bud" Baker said in a statement. Talks fell apart due to an inability to translate "common values" into "working business strategies and operating models," Baker added. "Five months after our discussions broke down, SunTrust is back with a less appealing, hostile proposal to take over Wachovia, and our conclusion is the same: it will not work."

Counterpoint

SunTrust countered by saying it was "proceeding with its superior proposal to merge with Wachovia and will continue with its plan to solicit Wachovia shareholders to vote against the low-premium transaction proposed by First Union."

SunTrust's offer includes a provision to keep the Wachovia dividend at $2.40, whereas First Union's original deal offered a one-time dividend of 48 cents. So, today, First Union said it will offer Wachovia shareholders the choice of a one-time dividend or a new preferred stock, which would keep the Wachovia dividend at $2.40 a share. First Union Chairman and CEO Ken Thompson said in a statement: "We want to make it crystal clear to Wachovia shareholders that we will maintain their dividend."

Katrina Blecher, an analyst at

Sandler O'Neill

, said she was impressed by First Union's move. "It allows them to address some of the concerns by the

Wachovia shareholders who are seeking income, while at the same time not being financially onerous" to its own shareholders, she says. (Blecher rates First Union outperform and SunTrust and Wachovia market perform. Her firm has no underwriting relationship with the banks.)

First Union has offered two of its shares for each share of Wachovia, which makes its bid worth about $63.40 for each Wachovia share based on today's closing price. Wachovia closed today at $65.70. Meanwhile, SunTrust's offer of 1.081 of its shares for each Wachovia share makes its offer worth about $66.85 at today's close. At the time of SunTrust's bid last Monday, the offer represented about a 17% premium to the First Union proposal though subsequent stock price volatility has since narrowed the spread to a little over 5%.

Broken Promises

But not everyone was impressed by First Union's latest move. "First Union has a history that suggests not all promises are always kept," says Christopher Marinac, banks analyst at

Robinson Humphrey

. "I think its fair for Wachovia shareholders to be concerned that the dividend may not happen," he adds, pointing to the difference between First Union's somewhat complex dividend offer and SunTrust's more straightforward offer. (Marinac rates First Union and Wachovia holds and SunTrust outperform. His firm hasn't done underwriting for the banks)

One of the alternatives for Wachovia shareholders in First Union's revised offer is a one-time payment when the deal closes, of 48 cents a share, which is supposed to equal the difference between Wachovia's current dividend and expected dividends from the new company. The other choice investors have is receiving preferred shares that guarantee payment every quarter of the difference between Wachovia's current dividend and the common stock dividend of the new company.

For First Union, the offer marks a way for the bank to make its bid more attractive to Wachovia shareholders, without incurring extra costs that would risk angering its own shareholders.

Wachovia investors who opt for the alternative stock instead of the 48-cents-a-share dividend payout will get two shares of preferred stock for each share of Wachovia stock they own. Dividends on the preferred stock would be initially be set at 6 cents a share payable quarterly (based on First Union's current 24 cents-per-share dividend).

According to the release, dividends on the preferred stock would decline as the new institution's common dividend increases, but would be paid out indefinitely until the newly merged bank's common dividend equals or exceeds $1.20, or $2.40 per Wachovia share, adjusting for the two-for-one exchange ratio.