Technology a Key Factor - but Not the Decisive One

The battle over First Interstate Bancorp. has focused fresh attention on the role technology can play in mergers and acquisitions.

In pressing its case for a deal, First Bank System Inc., the "white knight" potential buyer of the Los Angeles bank has argued that common data systems and a common outlook on technology would work to its advantage, letting it wring substantial cost savings in a merger where there would be little opportunity for traditional savings from overlapping branches.

In response, Wells Fargo & Co., First Interstate's uninvited suitor, says First Bank' technology claims are "irrelevant," but at the same time it cites its own technology expertise as a plus in its rival bid for First Interstate.

That technology is the focus of such heated discussion reveals how important it has become as banks try to cut costs to the bone, relying more heavily on automated bank services, and consolidating back-office resources to achieve economies of scale.

And this is only the latest role for technology in a contested acquisition. It was said in 1987 that a major reason for Bank of New York Co.'s hostile pursuit of Irving Bank Corp. was that chairman J. Carter Bacot coveted Irving's state-of-the-art data center.

The role of technology in merger activity is complex. In some cases, it is clearly the driving force behind a bank's offer. More frequently, it's one of several major factors but not the decisive one.

Technology also plays a significant part in price negotiations, where combining banks need to weigh the technology a bank has - and the costs of merging technology - very carefully.

Once a merger or acquisition is approved by shareholders and regulators, technology can reemerge as an issue. And if it's mishandled during the consolidation period, it can alienate customers and investors, too.

One of the most striking recent examples of an acquiring bank driven by technology concerns is Bank of New York, which has acquired over a dozen securities processing and custody businesses over the last two years.

The sellers - CoreStates Financial, J.P. Morgan & Co., Bank America, NationsBank, and others - decided they either could not or were not willing to make the investments in technology necessary to keep them competitive in these high-tech businesses.

Bank of New York, by contrast, felt it could add these portfolios to its already efficient processing systems at little expense. State Street Boston Corp., Bank of New York's biggest competitor, has made acquisitions for similar reasons.

In other cases, banks have formed joint ventures to achieve economies of scale for highly automated businesses such as check processing or automated teller machines.

But beyond such important niche businesses, banks seldom decide to merge or buy another bank primarily because of its technology, bankers and analysts said.

"Technology makes a huge difference in terms of how easy or how difficult a merger is," said Daniel Eitingon, executive vice president and head of technology banking at First Interstate. "But technology is never the deciding factor."

"To the extent that you can wring cost savings out by eliminating duplicate technology, it's an important factor," said David Berry, managing director of research at Keefe Bruyette & Woods.

"But as far as one bank trying to acquire someone else's technology, I don't think that really happens," he said. One exception, of sorts, is Bank of Boston's recent decision to acquire BayBanks Inc.

But BayBanks' high-tech reputation was more concept than reality, Mr. Berry said. What Bank of Boston bought was BayBanks' "image and its marketing machine," he said.

One place where technology does play a crucial role is in out-of-market mergers.

In out-of-market deals, such as First Union Corp.'s acquisition of First Fidelity Bancorp., the bulk of cost savings come from data processing and back-office consolidations. First Union claimed it could save 5% of the combined banks' costs, but it said the driving force for the merger was the ability to cross-sell products to new markets.

The most aggressive claims for cost savings that can be achieved through technology reductions have been made by First Bank and Wells Fargo in their pursuit of First Interstate.

Minneapolis-based First Bank says that even without significant branch overlaps it could reduce costs by $500,000 over the first 18 months of a merger, with data processing and operations accounting for $200,000.

Wells claims it can cut costs by $1 million, with $233,000 from data processing and operations.

Such claims, especially by First Bank Systems for an out-of-market merger, are "amazing," Mr. Berry said.

"That shows the extent to which expenses are migrating out of the branches and into centralized facilities," he said. "It shows starkly there are savings to be had where there's no overlap in facilities." That's because companies like First Bank have grown adept at acquiring and integrating banks.

"The big acquirers have pretty much gotten the technology conversion down," said William F. Spinard, managing director of Furash & Co. "The good banks have already laid the groundwork for the conversion while the government and the shareholders are still deciding on the merger."

First of America Bank Corp., Kalamazoo, Mich., is one of those banks, having made over 100 acquisitions since 1982. A staff of about 100 technologists is dedicated to integrating acquisitions.

"In my opinion, technology is the easy part," said Adrian Horton, senior vice president, technology division, at First of America. He is responsible for mergers and conversions."The cultural and human issues are the big problem," he says.

However, human and technical issues are often inextricably entwined. The stock of Detroit's Comerica Inc. took a beating on Wall Street in 1993, falling 17% when it failed to make good on projected cost savings from its in-market merger with Manufacturers National Corp.

The problem? Comerica blamed difficulties training staff to handle new computer systems.

There was a human dimension as well to Chemical Banking Corp.'s problems in the spring of 1993. For several months, customers of Chemical and the former Manufacturers Hanover Corp. had difficulty withdrawing money from cash machines because of systems glitches related to the conversion of Hanover's machines.

During that time, some $350,000 was stolen from Chemical ATMs by people who discovered a way to exploit the glitches by fraudulently obtaining cash using nonexistent credit card numbers.

Chemical's stock price was not affected by the glitches, which Wall Street decided to view as minor.

Many small glitches do occur in the normal course of events. While they may not be widely publicized, they can still be harmful. One acquiring bank neglected sending loan coupon books to 300 new customers in one small town. Word got around the small town, damaging the acquirer's reputation.

Technology problems stemming from a merger or acquisition "can have a severe impact from a financial, morale, and image standpoint," Mr. Horton said.

Problems such as Comerica's or Chemical's would be unlikely at a bank experienced at merging or acquiring other banks, he declared. Still, new problems continually crop up as mergers get larger and as technology gets more complex.

In large bank mergers, such as Chemical and Hanover, or Chemical and Chase, the sheer size of the merger presents a technological problem. Software programs are written to accommodate a certain, finite number of records.

If a bank's business doubles overnight, those programs can run out of capacity and must be modified. That can be time-consuming and complex, Mr. Horton said.

When negotiating a price, banks need to take into account technology contracts held by the target bank. Outsourcing or software licensing contracts often have exclusivity clauses.

Technology vendors often insist on guaranteed payment streams even if the client bank is bought. The cost of getting out of these contracts can be substantial and must be factored into a bank's price.

The physical task of merging systems has grown more complex. Banks are acquiring businesses such as money managers or insurance companies for the first time - and these companies have their own processes and technology. They use systems unfamiliar to bankers.

Many banks have sophisticated systems that track the profitability of products or branches. But no two banks have exactly the same way of tracking profitability. When two banks merge, they need to convert the data - "normalize" it - or the systems can be useless to the combined bank.

Banks that have only recently begun using networks of personal computers, rather than mainframes and dumb terminals, are faced with the task of integrating these complex networks when two banks come together.

"We simply don't have a lot of experience with this kind of thing," said Mr. Horton.

But the biggest shocks have nothing to do with technology at all, according to several bankers.

That is when a management team that has cooperated all through the negotiation process suddenly turns on its merger partner once the deal has gone through, criticizing the partner to employees and customers.

"The technology is so important that we've got that buttoned down," said Dan Eitingon of First Interstate. "What you don't know is who's going to stay, who's going to leave, and will they take business with them."

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