CoreStates Financial Corp. of Philadelphia, one of the ripest big banks on the merger grapevine, announced a 10-year technology commitment Wednesday that a takeover target would not normally be expected to make.
Effective today, CoreStates is handing Andersen Consulting responsibility for about 40% of its technology tasks, including development and maintenance of software applications and efforts to avoid the feared year-2000 glitches.
Analysts said the duration and scope of the deal-its financial terms were not disclosed-belied the recent talk that CoreStates is in play. The $48 billion-asset holding company recently rebuffed a bid by Mellon Bank Corp. of Pittsburgh.
The Andersen arrangement "would seem to indicate the company is proceeding as if it is going to remain independent," said William Bradway, research director of Meridien Research, Needham, Mass. Neither CoreStates nor Andersen would "engage in this type of relationship unless it believed (independence) was the most likely outcome."
Noting that bank mergers depend heavily on operational savings, David S. Berry, director of research at Keefe, Bruyette & Woods Inc., said, "If you had any interest in doing a deal real soon, you wouldn't hang up about 40% of your technology in an alliance."
CoreStates has long prided itself on operations and technology competence. Despite considerable talk about operational setbacks stemming from its 1996 takeover of Meridian Bancorp of Reading, Pa., the company reported a third-quarter efficiency ratio of 53.07%, much better than that of the 30 top banking companies tracked by Keefe Bruyette. CoreStates said its return on equity of 24.53% was best among the top 25.
Mr. Berry said the bank's chairman and chief executive officer, Terrence A. Larsen, told him recently that he wants to regain the "top-tier" technological reputation that the Meridian integration may have sullied.
CoreStates' contract with Andersen is the latest example of a sizable banking company's outsourcing what were once considered functions best controlled in-house.
"It's an admission of humility by the banks," said M. Arthur Gillis, an independent consultant based in Dallas who follows the outsourcing industry. "They are admitting that there is a lot of stuff that can be handled just as well-or maybe better-by a specialist."
Another contributing factor is that traditional arm's-length relationships between banks and outside vendors have given way to closer partnerships and alliances. Perhaps the most striking example was J.P. Morgan & Co.'s formation last year of the Pinnacle Alliance-essentially a miniconsortium of vendors providing services exclusively to Morgan.
"Alliances and partnerships can make a huge difference in our future," said P. Sue Perrotty, CoreStates executive vice president and chief information officer.
She said Andersen is "a partner that sees and views the market with a different set of eyes than our own and can add value and perspective. But most important, we've brought in a partner that can really make it happen fast."
Andersen Consulting managing partner Stephen A. James said the alliance "will enable CoreStates to fulfill strategic objectives, not just address short-term tactical concerns. In addition, CoreStates will gain broad access to Andersen Consulting's research and development initiatives in technology."
Ms. Perrotty said Andersen would not be working on applications specifically for CoreStates' transaction processing unit, QuestPoint, but that some of the partnership's benefits could trickle down.
The Andersen deal is not expected to result in any layoffs at CoreStates. Following common outsourcing practice, some bank staff mmebers may become Andersen employees.
