Merger of Egos

Hugh McColl, Jr. remembers the first BofA he bought.

It was 1979 and the acquisitions added nine branches, 127 employees, and $104 million in assets to the bank that would eventually become NationsBank. “I thought it was the most important merger in banking history,” he says. This BofA was the Bank of Asheville, N.C., one of the first of 70 acquisitions that the Marine-turned-banker would complete for NationsBank.

On April 13, McColl pulled off what is being called banking’s most important merger: the creation of a $570 billion coast-to-coast Goliath with BankAmerica Corp. The deal will spawn the largest bank in the nation if you rule out the $697.5 billion Citigroup, a deal announced a week earlier combining Citicorp and Travelers Group Inc., an insurance and brokerage company.

McColl has said he wanted a coast-to-coast bank by the date of his planned retirement, the year 2000. By all accounts, it looks like he’ll get his wishu00e2u20ac” branches of the two behemoths reach from Florida to Washington State. With BankAmerica’s business in 38 foreign countriesu00e2u20ac”an international operation that NationsBank had lackedu00e2u20ac”the transaction brings with it a hefty international presence as well.

In short, the deal is huge. The merged institution will be larger than any of its American rivals, according to estimates released by the banks’ spokespersons, who boast that the company will emerge with the following attributes:

The combined bank will have the largest market share in six of the 10 fastest growing states in the nation: Florida, Washington, California, Nevada, Texas, and Georgia. “It will be the leading American bank in the 21st century,” McColl bragged when he announced the deal at the Waldorf-Astoria in New York.

Even the analysts seem to approve. “You’ve got a company that was trying to get to California, and people assumed they were going to do it with a premium and with dilution,” says Moshe Orenbuch of Sanford C. Bernstein & Co. The deal pays no premium, and the banks say they can earn $10 billion during the first year, up from a combined $8 billion.

More consolidation

“The industry is tremendously fragmented and Nations is one of the best consolidators in the business,” says Chip Dickson of Salomon Smith Barney Inc. Alongside the $70 billion Citigroup merger and the $30 billion Banc One/First Chicago NBD deal, the NationsBank/BankAmerica deal packs quite a punch. The country and the world are seeing the trimming down of a vastly inefficient banking system, says Frank Anderson, an independent analyst in Dallas. “The nation, and the world, is overbanked,” he says.

For his part, McColl agrees. Until the 1990s, federal laws discouraged interstate banking, requiring institutions like NationsBank, J.P. Morgan & Co., First Union Corp., and other banks that wanted operations outside their home states to establish separate charters. Those laws fed home-state banks, encouraging one-state banks like First Chicago Corp. to thrive.

The result was many more banks than the country needed. “Because the industry was protected with artificial barriers, it allowed too many units,” McColl says. “We had too many banks chasing too many deals.

“Inevitably, overcapacity forces management to look at whether it can compete,” he adds. That soul searching on the part of the nation’s CEOs, coupled with a headlong rush to technology, will bring even greater consolidation, he believes.

The upper hand

So why now? The two megabanks have tried to merge before. Insiders say in 1995, then-BankAmerica CEO Richard Rosenburg and McColl couldn’t agree on where the headquarters would be, despite the proposal that either Dallas or Chicago might serve as compromise locations. This time, the decision was apparently simple: It will remain in NationsBank’s hometown, Charlotte.

McColl says the possibility that Charlotte would not be the home to the combined banks halted negotiations with Rosenburg. It was either Charlotte or bust. “I don’t think there was a compromise city,” McColl flatly states. “This town has been good to me. I came here at an early age,” he says. “I have been unwillingu00e2u20ac”and remain unwillingu00e2u20ac”to do anything that would move this company from the place where it was born.”

There were other differences between the negotiations in 1995 and 1998. Put simply, NationsBank had the upper hand to guide the deal in 1998 because of the market power it now carries, which it lacked three years ago, according to McColl. “In 1995, we were the smaller company with the smaller market cap. In 1998, we’re the larger company by $50 billion with the larger market cap. If we had put the companies together then on a market-cap basis, Bank of America would have had about 52% of the market cap; we would have had 48%. Today, it’s 55% NationsBank, 45% BofA. So that’s a huge change.”

Still, Charlotte, the city that big banks, including No. 6 First Union Corp., built, watches the headquarters debate closely. The banks have adopted Uptown Charlotteu00e2u20ac”building skyscrapers, condominium complexes, and office buildings, funding artist colonies, and even taking over an urban renewal project in the city’s First Ward. So it’s understandable that the city is a wee bit concerned that when BankAmerica CEO David Coulter takes over for McColl as part of the deal’s succession plan, the headquarters might move to San Francisco. Not to worry, Coulter has said, no matter who’s in charge, Charlotte keeps the headquarters.

Balance of power

Bankers are calling the deal a merger of equals. But by all appearances, NationsBank is the surviving bank. As analyst Anderson puts it, “Someone has to have the upper hand.”

“It falls out of the first decision, and that is the CEO decision,” says NationsBank Chief Financial Officer Jim Hance. “It makes imminent sense to have it where the CEO is. Why pick up and move? We have enough challenges in merging the two companies without adding something to the challenge that makes no sense.”

Other indications that NationsBank is the acquiror and BankAmerica, the acquired: NationsBank tips the scales with 11 directors on the 20-member merged bank board.

The deal does not resemble either NationsBank’s or BankAmerica’s previous deals. One bank didn’t pay a premium for the other bank’s stock. Instead, shareholders will swap stock in each company in a near one-to-one exchange rate for stock in the new company. Wall Street loved that. Instead of the usual dip in the price of the buyer’s shares and a jump in the price of the target bank’s stock, each companies’ shares leaped to new highs on April 13, the first trading day after news of the merger. More than a week later, NationsBank stock was almost at $78 a share, still trading higher than before the announcement, and BankAmerica stock wasn’t much off all-time highs.

Coast to coast goals

Right from the beginning, both institutions had national aspirations, even in their names: NationsBank and Bank of America. But it was BankAmerica Chairman A.P. Giannini who first talked almost 70 years ago of a bank that would touch both the Atlantic and the Pacific. Asked by Congress in 1930 during hearings on a large bank merger, Giannini said simply: “It is coming, gentlemen, and there’s nothing you can do to stop it.”

“Both of our companies have believed in the idea of nationwide banking for a long time,” McColl says. “I’ve made no secret of my desire to create a nationwide franchise, and Dave’s [Coulter’s] company was founded by the man who had the idea before any of us were born.”

BankAmerica’s headstrong chief executive, Rosenburg, who couldn’t reach a deal with NationsBank three years ago, repeated Giannini’s prediction before leaving the office to Coulter. Rosenburg’s prediction had a time limit though. BankAmerica would be a coast-to-coast bank before the end of the decade, he predicted in 1993, when the bank merged with Los Angeles-based Security Pacific Corp., at that time the largest U.S. bank merger ever.

Sea to shining sea

One of the most-cited reasons for combining East Coast and West Coast banking: economic and geographic diversity. Since the 1970s, American recessions have been more regional than national, often called rolling recessions. In the early 1980s, troubles with the West’s oil fields followed the energy crisis and in the late 1980s, the collapse of the Massachusetts Miracle resulted in the New England recession.

A nationwide bank will span those regionalized recessions, McColl says. “We achieved diversification in geography, business, and customers that is unmatched in the history of U.S. banking. This will mitigate risks and stabilize earnings growth for the future,” he said during the April 13 announcement in New York.

“Diversification is a good thing,” says analyst Orenbuch. “That’s been the argument all along for interstate banking,” adds Anderson. If a regional recession rolls through an area, a national bank, strong from its ventures in other sections of the country, could help to soften the slowdown by making loans that banks in the region couldn’t. Thus, “when you have a shortfall in an area, you could use that opportunity to expand,” Anderson says. “You are going to get more geographic diversification with a national bank.”

Size has its limits

Even with all the advantages that size brings, this power deal isn’t without potential pitfalls. An 8.1% national market share puts the combined bank close to the national cap of 10% for any one bank. That means NationsBank-BankAmerica will have to pick and choose its next acquisition. “They’re going to be a lot more careful about how they buy,” notes Anderson. “They have to be highly strategic.”

In Texas, a 20% cap on market share of deposits may force more divestitures than the banks expected. With NationsBank at 24% now (after buying Republic Bank), the combined bank may have to shed $8 billion in deposits to fall under the Texas cap.

Another potential problem: concentration of economic power in too few hands. According to analyst Richard Bove of Raymond James & Associates, “You run the risk of having capital invested in areas of low return…The risk is, it takes you back to monolithic companies that take huge resources and put them into a limited number of places.”

The loser in the deal may be the city of San Francisco, which will forfeit its other major banking headquarters. Wells Fargo & Co. will stay in San Francisco, but its stock jumped in the days after the merger was announced on speculation that it would be the next big bank to be bought.

BankAmerica CEO Coulter, who will no longer lead an independent bank, might also be considered a loser, although not too many folks would probably see it that way. While he steps down from his elevated position at BankAmerica, he does so with the promise of becoming chief executive of the combined bank when McColl retires. Although, the time table on that event is not exactly set in stone.

In our interview with McColl, he seemed to take a step back from an earlier indication that he will retire after his 65th birthday in June 2000, thus abiding by NationsBank’s mandatory retirement age. “First, I never said that,” he states, when reminded of his planned retirement. “That is something y’all [the media] have said. I haven’t said it.” Then he repeated earlier statements that he works without a contract at the discretion of the banking company’s board of directors. “It will be the board’s decision as to when I leave, and there’s no magic to that. In other words, there’s no magic date.”

Immediate plans say the decision rests with Coulter and him, McColl continues. “It’s our joint goal that when … he and I determine that the bank is running well, I will step down,” he says.

A more perfect union

Before McColl leaves, though, the merged bank will have a name. But for now, that’s undecided. Insiders say the process could take more than a year, as the merged bank tries to combine two national names and maintain their shared corporate hues: red, white, and blue. “We will offer a single image to our customers, converging our two powerful brands after careful study,” McColl explains.

Of course, the real losers in the megamerger are the banks’ employees. The integration will include 5,000 to 8,000 job cuts, primarily in the two states, Texas and New Mexico, where the two banks’ territories overlap. “There are real efficiencies to be achieved,” Coulter says, noting the deal will allow trimming $2 billion in annual expenses from the two banks. Although somewhat encumbered by a 10% cap on its national market share, McColl says the converged bank will grow nonetheless, but with different products. “Would we like to have a large mutual fund business?” he asks rhetorically during the interview. “The answer is yes.”

The bank would like to grow in insurance and through international expansion as well. But don’t expect the bank to buy into the insurance market. “People expect us to buy an insurance company…We very much want to sell insurance products” McColl clarifies, not buy a company that writes insurance policies.

Coulter has been put in charge of planning and implementing an international policy for the merged bank. But, again, McColl doesn’t necessarily want to branch overseas. “Basically, my own philosophy has been…to be arrangers of finance offshore rather than furnishers of finance,” he says. “By that I mean we carry out investment banking business offshore, as opposed to commercial banking business offshore.”

Thus, by almost anyone’s view, the tentacles of this huge new institution will surely reach farther and wider than anything that has ever been witnessed in U.S. banking before. Aside from the size limitations in some states, the opportunities for a true national franchise are almost endless, and the colossal gutsu00e2u20ac”and imaginationsu00e2u20ac”of the leaders of the combined institution put them in a position to go where no bank has gone before. Despite all the hoopla, however, it is really too early to speculate about the ability of these two giants to successfully integrate their businessesu00e2u20ac”and do it profitably. Time, as always, will tell whether there was real intelligence behind the deal, or whether it was an ego-driven merger of minds.