The deal is not just simple addition, both parties agreed Friday. Equity Office Properties' third major merger since going public in 1997 makes billionaire Sam Zell's REIT the No. 1 office property owner in nine of the top 10 markets, the only exception being New York.

Looking at fast-growing Spieker's West Coast holdings, Equity Office Properties president and chief executive officer Timothy H. Callahan says the merger maintains the new company's No. 1 rankings in San Francisco and Seattle, catapults it from fifth to first in Silicon Valley and from fifth to second in Orange County. Equity Office Properties also becomes the No. 2 office property owner in Los Angeles.

Callahan concedes certain Northern California submarkets have seen rents start to drop from record highs achieved in 2000, but adds the markets are relatively balanced in terms of supply and demand. Spieker's portfolio includes prime properties in high-barrier markets with a large pool of knowledge workers, Callahan says. "We do believe the negative news has been disseminated in the marketplace and has been factored into the marketplace," Callahan says. "Office fundamentals in California will remain attractive. California has a diversified economy and higher GDP growth than the rest of the economy."

While the merger gives Equity Office Properties a bigger presence in California, the world's sixth largest economy, Spieker's motivation was to get a 25% share of an industry giant that only got stronger.

Spieker common shareholders will receive a fixed $13.50 in cash and 1.49586 shares of EOP for every share of Spieker common stock. This combination of cash and stock equates to a total price per share of $58.50 to Spieker shareholders, based on an agreed upon fixed stock price of $30.083 for each Equity Office share. Operating partnership unit holders will receive 1.94462 EOP Operating Partnership units, or will have the right to convert into Spieker common stock and receive the aforementioned proration of cash and stock in the merger.

"We believe this is a fair deal for our investors from a value standpoint," says chairman Ned Spieker, who will have a seat on EOP's new 16-member board.

The stock market immediately considered the merger a better deal for Spieker Properties, which saw its shares jump 5.9% to $55.17 with nearly 2.8 million shares traded, while shares of Equity Office fell 2.5% to $28.70 with more than 6 million shares traded.

"EOP will be the stand-alone leader in the commercial office business," Spieker adds. "This business is changing. It needs to get more powerful. It needs to have a fewer number of players. EOP has done a fabulous job, and we share their vision... We don't consider ourselves sellers, but long-term EOP investors."

In mergers with Cornerstone Properties Inc. in 2000 and Beacon Properties Corp. in 1997, EOP absorbed about 90% of those company's employees. Equity Office Properties chief financial officer Richard Kincaid says incentives will be offered to Spieker employees. Besides increasing the firm's talent pool, "we assume a pristine balance sheet from Spieker," Kincaid adds.

The merger agreement includes the assumption of approximately $2.1 billion in debt and $431 million in preferred stock. EOP will pay approximately $1.085 billion in cash and issue roughly 118.6 million new EOP common shares and operating partnership units in the transaction, which includes a $160-million break-up fee to EOP if the merger is not completed in certain specified circumstances.

Also part of the deal is Spieker's industrial portfolio of approximately 13.5 million sf and its development properties totaling 1.7 million sf. Spieker is already in the process of selling 8.3 million sf of its industrial portfolio to RREEF (on behalf of CalPERS) in a $400-million staged disposition that began last fall and will continue throughout 2001.

Joining Spieker on the expanded Equity Office Properties board will be co-chief executive officers Craig Vought and John Foster.

Morgan Stanley served as financial advisor to Equity Office. Goldman, Sachs & Co. acted as financial advisor to Spieker Properties.