Kenneth D. Lewis, Bank of America Corp.'s chief executive, justified its $21 billion deal for LaSalle Bank Corp. by promising to ramp up revenue and wring out costs.
B of A is aiming for $800 million of after-tax savings, or roughly half of LaSalle's expense base, by the end of 2009 while recording $800 million of restructuring charges.
"We believe we can materially improve the performance at LaSalle through our broader and more sophisticated platform on both the commercial and retail side," Mr. Lewis said Monday on a conference call to explain his company's deal. "We believe the La-Salle retail franchise has materially underpenetrated Chicago and, to a lesser extent, Detroit. We intend to introduce our broader product suite into the entire regional franchise, including online banking, credit cards, and mortgages."
ABN Amro Holding NV plans to spin the $113 billion-asset LaSalle off before selling itself to Barclays PLC in a $90 billion deal unveiled Monday.
B of A said it is counting on $20 million of revenue synergies next year from LaSalle's retail bank. By 2012 the Charlotte company expects to generate $175 million of annual revenue from LaSalle.
Doing so would require B of A to move beyond its primary success in Chicago as a large corporate lender to become an aggressive consumer cross-selling machine in an already crowed market.
Its biggest competitor would be JPMorgan Chase & Co., which has the top deposit share there, $40.07 billion, or 15.3%, along with 339 branches, according to the Federal Deposit Insurance Corp. LaSalle has $39.96 billion of deposits, or a 14.11% share, and 143 branches in the Chicago market.
But LaSalle has hardly been at the top of ABN Amro's priority list in recent years. The unit "needed some repairs," Rijkman Groenink, ABN Amro's chairman, said Monday.
"The relative competitive position of the U.S. operation today is very good but is expected to deteriorate over time in the coming years, because of the strengthening of other superregionals and national players," he said. "So for us it was a matter of time whether we would sell LaSalle."
Nancy Bush, an analyst at NAB Research LLC, echoed those "repairs" comments.
"While a Chicago presence might be deemed essential to a bank wishing to fill in a geographic hole … we just don't see how this adds much" to B of A's growth profile, she wrote in a note issued Monday. "They will be buying a property that will need a deft touch in rejuvenating a franchise that has received scant resources in recent years."
In terms of business mix, LaSalle is hardly a retail banking force. It has just $20 billion of consumer loans, compared with a $43 billion commercial portfolio. About 90% of its consumer loans are residential mortgages, with small-business loans making up most of the rest.
Keith Horowitz, a Citigroup Inc.analyst , said LaSalle likely derives 75% of its revenue from commercial operations and 25% from retail. In a note issued Monday, he wrote that LaSalle's "approach to retail banking seems more centered on the affluent consumer rather than the mass market."
In contrast, consumer and small-business operations generated 61% of B of A's revenue and 51% of its earnings in the first quarter.
Mr. Lewis acknowledged LaSalle's strengths - and weaknesses.
"In the commercial and middle markets, LaSalle has always been very strong. They've always been a leader and had the right relationships and the right people to defend their turf," he said. "And they've been fairly strong in the higher-income retail markets. I don't know if they have penetrated the traditional retail markets at all, and I'm not sure why they haven't focused on that. But it should be something that B of A can capitalize on and improve."
B of A said it is too early to say whether those right people would be staying on, but it said that it has "a strong history of leveraging senior leaders from acquired companies," including Bruce Hammonds from MBNA Corp.
Mr. Lewis said his company's cost-cutting would target "allocated charges" in areas such as finance and legal operations that support LaSalle's client managers and other "customer-facing" employees. He also said he hopes to extract savings while limiting customer loss.
Jefferson Harralson, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., expressed concern about B of A's trying to build a consumer business at a time when consumer loan growth is slowing and credit quality is beginning to show cracks.
"A lot of their revenue synergies are likely to come from offering credit cards to LaSalle customers," he said. "But there is definitely a headwind in that business that is making it less profitable than three or four years ago."
Liam McGee, B of A's president of global consumer and small-business banking, said in a conference call Monday that the credit quality of LaSalle's mortgage book "is not quite as pristine" as his company's. (In January, ABN Amro agreed to sell its U.S. mortgage operations to Citi under a strategy to shed businesses that did not deal directly with customers.)
In an interview last week, Mr. Lewis said he remains confident in the consumer market's health, though he expects continued deterioration in the card business this quarter before it stabilizes. Mortgage and home equity chargeoffs "are almost nil, so the performance there is still very good."
Some analysts were more supportive of the LaSalle deal, saying B of A can promote its products and services effectively through LaSalle's branches. B of A reentered the Chicago market four years ago and has opened more than 50 branches there.
Gary Townsend, an analyst at Friedman, Billings, Ramsey Group Inc., touted the deal as making B of A "instantly large" in Chicago while giving it a well-regarded middle-market commercial lending platform. B of A should be able to focus on LaSalle in a way that ABN Amro, as a foreign company, cannot, he said.
ABN Amro executives said B of A had four days to prepare its offer. Mr. Lewis said his company is paying "full price … because you had others on the outside who would be competitors" if the deal were made at a discount. "We knew there were others lurking, and they still may be … so we made the deal with that knowledge."
Competitors have two weeks to make an offer, which B of A can counter. If is eligible for a $200 million fee if the deal falls through.
The Childrens Investment Fund, the hedge fund that nudged ABN Amro to explore a merger, said Monday that the LaSalle deal was unfair to Royal Bank of Scotland Group PLC, Fortis NV, and Banco Santander Central Hispano SA, which had hoped to bid on ABN Amro and then sell some operations. That consortium withdrew its interest Monday.
This is B of A's third big move in six months. It is in the process of buying a 24.9% stake in SLM Corp. for $2.2 billion and wrapping up its $3.3 billion acquisition of U.S. Trust Co.
Mr. Lewis said his company would sit on the merger sidelines for at least the next 14 months. "We will be out of any acquisitions of any size whatsoever through 2008."
The cash deal for LaSalle is expected to close late this year or early next year. B of A's shares fell 1.04% on Monday, to $50.51.
