First of five parts
Imagine if your company earned 20% of the banking industrys annual profits. That is Sanford I. Weills reality at Citigroup.
Already a premier dealmaker, Mr. Weill stunned competitors with the biggest merger in banking history, $74 billion for the venerable Citicorp in April 1998. We are creating the model financial institution of the future, the chairman of Travelers Group said. In a world thats changing very rapidly, we will be able to withstand the storms.
Three years later, few would argue with him. Citigroups assets have just topped $1 trillion, and it earned $13.5 billion of the industrys $71.1 billion last year.
But equity analysts warn it is too early to assess the deal that created Citigroup or any of the other megamergers done during that record year, including NationsBanks gutsy grab of BankAmerica, Norwests opportunistic redemption of Wells Fargo, and Banc Ones bungled takeover of First Chicago NBD.
Its still too soon to say whether or not these mergers will be successful, said Michael Mayo, an analyst at Prudential Securities in New York. We have yet to see how these new behemoths perform through an entire economic and market cycle.
Sean Ryan, a financial services analyst at Fulcrum Global Partners in New York, agreed.
Its still too soon to issue a final verdict because they havent been tested in a recession, he said, adding that diseconomies of scale are a real and pervasive cost often ignored in big-bank deals.
Today American Banker begins a five-part series assessing the megamergers of 1998, looking back at what has happened and forward to what lies ahead. This overview will be followed by a closer look at each of the years four biggest deals, starting with Bank One Corp. on Tuesday.
The 98 deals finally returned U.S. institutions to lists of the worlds very biggest and promised to create financial powerhouses with broad reach and diversified revenue sources. But they also led to disruptive layoffs, expensive writedowns, and institutions that are monsters to manage. Even the best combinations were a bear to pull off as management teams were fine-tuned, systems integrated, and brands realigned. Of the four companies, only Citigroups stock has outperformed the American Bankerindex.
The value of these mergers is likely to be debated for years, and it is impossible to tell whether a merged company is earning more than its parts would have on their own; too many variables exist other acquisitions, the economic slowdown, and a gusher of troubled loans.
HOW THEY FARED
Still, everyone has an opinion, and stock analysts interviewed for this series rank the deals, from best to worst: Citigroup, Wells Fargo, Bank of America, Bank One.
Citigroup is given credit for getting past a difficult integration and taking advantage of the natural link between Salomon Smith Barneys investment banking business and Citis corporate lenders. Many analysts consider this synergy and higher-than-expected cost savings to be the mergers unadvertised bonuses.
If you look at all the products and services that corporations and institutions buy, we have a leading position in every one of those products in every geography in the world: U.S., Europe, Latin America, emerging Asia, and Japan, said Michael A. Carpenter, chairman and CEO of Salomon Smith Barney and Citibank Global Relationship Bank. That is what we put together.
Wells gets high marks for delivering what every merger partnership promises: to pick the best of both companies and build a better bank.
Though analysts criticize Bank of America for taking too long to get its act together, most expect its wide geographic reach and diversified product mix to start paying off.
Banc Ones combination with First Chicago NBD was botched from the start, but it could still be salvaged by Jamie Dimon, who was hired in March 2000. Analysts like what the ex-Citi executive is doing, but most agree that Mr. Dimon has a near-impossible task in turning around the Chicago-based company.
The relative performance of the four companies stock prices also ranks the deals in this order. (See page 1 chart.) And looking at market price-book value per share data, investors are willing to pay more for both Citigroup and Wells Fargo than for the average large banking company, while Bank of America and Bank One fall below the average.
In interviews, the executives involved naturally insisted their deals make sense and that big is indeed better.
There is no doubt in my mind none, zero doubt, said Wells Fargo vice chairman Leslie Biller, that this was an outstanding decision to merge these two companies, that they complement each other extraordinarily well, that the combined talent is stronger, and that the shareholders, over time, will be warmly rewarded.
We have an unmatchable franchise, said Bank of America vice chairman James H. Hance Jr. This is the first full year that we havent been in some sort of integration. Were seeing the benefits of that franchise: Were seeing indigenous growth; were seeing additional customer success; were seeing nice growth in deposits.
Other competitors are still trying to get to a common system or a broader franchise or a common brand, so were ahead of the curve.
Even Mr. Dimon is sure the deal with First Chicago and earlier acquisitions of National Bank of Detroit and First USA were right on. I think that the deals that were done here will ultimately pay off, he said. I wish that they [his predecessors] had continued the consolidations. To a large extent, Im just doing the mergers that were done in 95 and 98.
OH, WHAT A YEAR!
For a sense of just how momentous the 98 deals were, consider that Norwest had never before bought a banking company with more than $5 billion of assets when it doubled its size in the deal for $100 billion-asset Wells.
In fact, before 1998 the biggest deal ever done in the industry had been First Union Corp.s $16.6 billion acquisition of CoreStates Financial Corp. in November 1997, but all four of 1998s megadeals eclipsed that benchmark. Travelers obliterated the record in April with its $74 billion Citicorp announcement. A week later, the Bank One ($30 billion) and Bank of America ($62 billion) deals were announced on the same day. The Norwest-Wells Fargo deal came in seven weeks later at $34.5 billion.
The four megamergers of 1998 accounted for roughly two-thirds of that years record dollar value: $303 billion spread across 544 announced bank deals.
Since the mid-90s when banks were finally permitted to merge without legal restriction, thousands of deals have been done, but consolidation crested in 1998. Other headline-grabbing deals that year included Deutsche Bank/Bankers Trust Corp., Washington Mutual Inc./H.F. Ahmanson & Co., Star Banc Corp./ Firstar Corp., SunTrust Banks Inc./Crestar Financial Corp., and First Union Corp./Money Store Inc.
The merger of equals euphemism was popular that year, but it soon became obvious which party in the four big deals had come out on top. Travelers Sanford I. Weill now rules the Citigroup empire; Norwests Dick Kovacevich drives the Wells Fargo stage coach; and NationsBanks Ken Lewis succeeded the legendary Hugh McColl to steer the new Bank of America. Neither Banc Ones John B. McCoy nor First Chicago NBDs Verne Istock lasted as the combined company turned to Mr. Dimon.
SIX LESSONS
Which brings us to the lessons learned from the 1998 mergers.
First, someone has to be in charge not two someones. But the more gently this fact is conveyed, the better.
The visible power struggle between Mr. Weill and Citicorps leader, John S. Reed, is now legend. Their 18 months of pulling and pushing delayed Citigroups integration. The turning point for Citi was when Sandy Weill became the sole CEO, said Mr. Mayo, the Prudential analyst.
The scene was similar at the new Bank One, where executives of Columbus, Ohio-based Banc One Corp. came in with a much different approach from that of their new colleagues in Chicago. Banc One was used to making decisions quickly. First Chicago preferred to study issues. The culture clash was debilitating.
And at Bank of America, it was clear from day one who was in charge, perhaps too clear.
Former BankAmerica Corp. chief David A. Coulter was dissed from the start and dumped a month after the deal closed. (Mr. Coulter has since joined J.P. Morgan Chase & Co. as a vice chairman and head of global consumer banking.)
Second, these mergers showed that two distinct cultures can be combined.
Eleanor Bloxham, president of Value Alliance, a consulting firm in Columbus that helps financial services companies build long-term shareholder value, said setting the right tone early and from the top is crucial. Some of the cultural issues come about because there is this attempt to divide up the territory rather than figure out how to meld the businesses and operate as one company, she said. More value is created when a holistic view is taken.
No one expected the old Wells Fargo, with its focus on efficient alternative delivery systems, to agree to a merger with Norwest, which was widely considered an overgrown community bank fixated on high-touch service. But this deal stands out as the class of 98s best in terms of smooth execution and integration, according to Ms. Bloxham, among many other sources.
Third, experts give all the acquirers credit for not overpaying a persistent problem in bank deals before 1998. A low-premium deal relieves pressure to cut costs, including people, right away.
A fourth lesson is simply that no deal is impossible, even the ones that are illegal.
The deal that brought the largest commercial banking company, Citicorp, together with Travelers Group to create a banking-insurance-securities giant came 18 months before Congress allowed such combinations. But creating a $700 billion-asset company ended up pushing lawmakers to finally approve legislation allowing the three pieces of the financial services puzzle to be assembled in a single company.
Fifth, Wells Fargo and Citigroup both proved that the focus on a merger transition does not have to be all-consuming.
Wells laid out the longest timeline of the four for its integration three years but managed to finish six months ahead of schedule while also doing 42 more deals for $45.6 billion of assets, including $23 billion-asset First Security Corp.
Citigroup has done several high-profile deals, including buying the nations largest subprime lender in Associates First Capital and Mexicos second-largest bank, Banamex.
And finally, though it is an obvious lesson, the bankers involved said the hard work that goes into combining two large banks should not be underestimated and that even a successful integration does not guarantee market acceptance.
I hope people will look at the execution risk in mergers and will be sober about it, said Mr. Biller of Wells. It is not just a one-way street to synergies and higher stock prices.
WHATS COMING
The industry is compressing into 20 years the early 1980s through the early 2000s consolidation that would have naturally occurred over the last 100 years if not for legal restrictions. But nationwide branching was permitted in the mid-1990s, and that coincided nicely with a raging stock market, giving bankers the opportunity and the means to do big deals.
Mergers were also fueled by peer pressure here and abroad. (In December 1997, for example, Union Bank of Switzerland and Swiss Bank Corp. combined to create one mighty European banking company.)
People were getting panicky, said Tanya Azarchs, managing director of the financial institutions ratings group at Standard & Poors. Bankers are afraid that the opportunities to form the kind of franchise that you want are disappearing in front of your eyes, so you make your decision rapidly, and you jump.
Another factor: the need to sew up deals in time to head off potential computer glitches associated with the year 2000. Finally, some bankers, facing expensive investments in technology and running out of ways to goose revenues, gave up and sold out.
The industrys leading merger lawyer, H. Rodgin Cohen, chairman and senior partner at Sullivan & Cromwell in New York, said the driving force is economics. Size and scale provide the resources to pay for expensive technology investments and branding campaigns. Theres an old boxing adage that a good big man will always beat a good little man, he said. Economic forces will continue to drive consolidation.
Mr. Dimon agreed.
I do believe that there will be a lot more bank mergers and that if the price is right and you execute well they will make a lot of sense, Mr. Dimon said. The economies of scale on branding, systems, diversification, etc. are enormous.
Since 1998, the industry has seen Fleet Financial Group Inc. swallow Bank of Boston Corp., J.P. Morgan & Co. sell out to Chase Manhattan Corp., and Wachovia Corp. select First Union as its partner.
I still think were very early in what is the continued, long-term, significant consolidation in financial services, said Todd S. Thomson, Citigroups chief financial officer. You are going to see significant continued consolidation in almost every part of financial services whether its credit cards, whether its private banking, whether its investment banking, corporate banking, whether its retail banking, or asset management.
Go down the list, and every one of those is far more fragmented than the economics of the industry would dictate they should be.
Minus Charles Schwab Corp.s picking up U.S. Trust, most consolidation in the financial services arena has continued to be among banks. Few companies have followed in Citigroups footsteps, using acquisitions to become financial conglomerates. But Prudentials Mr. Mayo said business lines are definitely blurring as companies like Morgan Stanley build a commercial bank internally and global firms like Credit Suisse Group and HSBC Holdings PLC remake themselves. In each case, they are trying to look more like Citigroup, he said.
Citing the slowed economy and the sagging stock market, analysts played down the likelihood that another wave of blockbuster deals will hit banking anytime soon.
The Street has dealt harshly with major acquisitions, said Frank Barkocy, executive vice president and director of research at Keefe Managers in New York. The market is still awfully frightened. The time frame for the benefits of consolidation has been stretched out and far less delivered than promised.
Mr. Barkocy forecast more mergers among banks in the Southeast and possibly in New York. Andrew Collins, an analyst at U.S. Bancorp Piper Jaffray Inc., said he expects more mergers among midsize banking companies. Ms. Azarchs at S&P predicted that financial companies will reshape themselves through portfolio and business line sales.
And Mr. Ryan of Fulcrum Global Partners is actually predicting a backlash.
I think were on the cusp of a very large wave of deconsolidation as some of these bloated giants come under economic pressure they havent seen in a decade and get dismantled, he said in an interview. I would rather own a synthetic Citigroup of maybe a half dozen individual companies in a portfolio than Citi. You would get the same kind of industry and market exposures, but you would have independent managements.
And those half dozen CEOs still wouldnt make what Sandy does.
Tuesday: Jamie Dimon takes on Bank One. 
