Salivating after a raft of big bank deals, the merger and acquisition matchmakers are now chattering about a Wells Fargo (WFC) - Get Report pairing with First Union.

Two Tales
Wells tracks the banks index, but First Union lags behind

But such a tie-up probably won't happen any time soon, if at all. A person familiar with First Union's affairs says the bank isn't in negotiations with San Francisco-based Wells, which is tipped to be the acquirer. Even on paper, this deal looks unlikely.

The Wells-First Union rumor gained prominence after the Oct. 2 edition of the newsletter

Wall Street Letter

reported that First Union personnel were saying that "senior brass" at Wells and First Union were meeting to discuss an acquisition.

Wells didn't comment and Charlotte, N.C.-based First Union declined to comment, citing a policy of not remarking upon rumors. Wells' stock rose 56 cents, or 1.2%, to $47.69 Thursday, while First Union's plunged $1.38, or 4%, to $32.75.

They're Back

To be sure, big bank mergers are back with a vengeance after a two-year lull.

Chase

(CMB)

recently announced its intention to

merge with

J.P. Morgan

(JPM) - Get Report

,

Fleet's

making a

bid for

Summit

(SUB) - Get Report

, and

Firstar

TST Recommends

(FSR)

said Wednesday it wants to

buy

U.S. Bancorp

(USB) - Get Report

.

Most rumors contain something credible. And the strongest argument in favor of a merger would be that Wells would immediately get a big East Coast franchise to add to its large Southwest presence. It'd also get some sizable nonbanking businesses -- like investment banking and asset management -- that it could do with. But that's about it.

It's hard to envision Dick Kovacevich, Wells' chief exec, flying east to Charlotte to pitch First Union.

Wrong Signals

Tellingly, the banks' stocks aren't saying a deal's being mulled. First Union's up only 1.7% since the beginning of the week. Remember that banks that have been acquired recently have seen their stocks soar before the deal is made public. In addition, Wells' stock has been rising, and the acquirer's paper normally slumps, or at least stays flat in the lead up.

Most importantly, Kovacevich is renowned for being a savvy tightwad with his bank's stock -- and it's hard to see how he'd get First Union at a price he'd like. If First Union got bought at a 20% premium to today's closing price, it'd go for around $40. That would value the bank at 14 times the $2.80 in per-share earnings forecast by

First Call/Thomson Financial

. A midteens P/E ratio may seem attractive in this highly priced market, but it's relatively dear for a bank -- especially one that is in the midst of a

deep restructuring and is expected to post a 6% decline in operating earnings in 2001. The execution risk could be steep: Wells would be hard-pressed to absorb and then transform an institution the size of First Union, which has a market value of $32 billion and $258 billion in assets, compared with Wells' $78 billion market value and $234 billion in assets.

Quitters Never Win

Moreover, why would First Union's new chief executive, Ken Thompson, want to give up this soon into his revamp effort? "I don't think they want to sell this quickly," says Chris Marinac, analyst at

Robinson-Humphrey

in Atlanta. He adds that it would've made more sense for Wells to buy First Union before it had announced its most recent restructuring, because Wells then would've been able to rearrange things there in its own manner. (Marinac rates First Union a hold, but doesn't cover Wells. His firm has done underwriting for neither.)

Instead, Wells will continue "following its strategy of making small to midsized acquisitions" centered in the Western states, reckons Frank Barkocy, an analyst with the New York hedge fund,

Keefe Managers

, which holds Wells shares and has no position in First Union. This way, the bank can make cheap, manageable buys in fast-growing markets. This tack was well illustrated by Wells' $3.2 billion

purchase of

First Security

in April.

The matchmakers need to find a better partner for Wells, and a more enthusiastic one for First Union.