Through its $1 billion agreement last week with Banque Nationale de Paris, the second-largest bank in Hawaii has moved to transform itself into a muscular Pacific Rim competitor with new international connections.
The combination of First Hawaiian Inc. with the Paris bank's California subsidiary, Bank of the West, would create a $14 billion-asset holding company-about the same size as its chief Hawaii-based rival, Pacific Century Financial Corp.
Both organizations would then compete from the United States to Asia and points in between but with different emphases.
The deal would give First Hawaiian a leg up in the coveted California market. Bank of the Westis now California's fifth-largest bank, with 105 branches and $5.8 billion of assets. First Hawaiian would be renamed Bancwest Corp.
Pacific Century, though it has branches on the mainland, has been more focused on an area that includes Polynesia, Micronesia, Hong Kong, and the Philippines.
"The future lies in the western mainland region" and not out in the Pacific, said Walter A. Dods Jr., chairman and chief executive officer of First Hawaiian, which has only small-scale operations in Guam and Saipan. "Those islands are small markets with different governments, different currencies, and different laws."
Bancwest, which overall would have 200 branches in five states and those two distant territories, has also moved to increase its survivability in the hot merger climate.
Mr. Dods, 57, who would be chairman and CEO of Bancwest, said the product of the merger will be "large enough to effectively compete in the modern, high-tech world of megabanks, yet small enough to emphasize individual service. It's an important next step in First Hawaiian's strategy to diversify geographically to the West Coast."
Mr. Dods termed it "truly a breakout transaction for First Hawaiian." The $8.2 billion-asset Honolulu company has been constrained by a stagnant home-state economy, and its stock price was off 9% this year.
"With this strong California presence added to the other mainland revenue derived from (38) Pacific Northwest branches, First Hawaiian will gain a short-term advantage over Pacific Century," said David H. Winton, an analyst at Keefe, Bruyette & Woods Inc. in New York. "It's a good deal for them in a very good market."
Pacific Century, the parent of Bank of Hawaii, also has been struggling with local economic conditions. It is undergoing a major cost-cutting campaign that entails reducing its work force by 11% and closing 25% of its branches.
Most observers agreed that First Hawaiian will start posting improved results faster than its rival. But many viewed Pacific Century as better off in the long term.
"The Asian problems will turn around, and when they do, Pacific Century has all its pieces together in the island nations," said Eric E. Rothman of Stephens Inc., Little Rock, Ark. "My long-term money is still with Pacific Century."
Mr. Dods estimated that his deal would double First Hawaiian's projected net income growth rate through 2000, to about 11%.
"This reduces economic risk," he said, because of a healthy diversification in the loan portfolio. The concentration of loans in Hawaii would fall to 39%, from 67%.
He declined to discuss the effects on competition with Pacific Century. "We'll be the largest financial institution in Hawaii in terms of market cap, and I'll leave it to the market to decide how to react to that," Mr. Dods said.
Pacific Century CEO Lawrence M. Johnson was unavailable for comment Friday.
Bank of the West president and CEO Don J. McGrath, 49, who would become president and chief operating officer of the merged company, said he approached Mr. Dods in February because he saw the businesses as complementary. "We will be much better together than apart."
First Hawaiian is billed as the surviving institution, but $300 billion- asset Banque Nationale de Paris agreed to restrict its ownership to 45% of the merged company for a "standstill period" of four years. After that, BNP could buy the rest or keep the status quo.
Mr. Dods declined to speculate but said, "We do not want creeping control."
BNP would receive nearly 26 million First Hawaiian shares when the deal closes, which is expected in the fourth quarter. The price equals nearly 18 times Bank of the West's 1997 net income and 2.4 times book value.
The companies said the deal would reduce operating expenses by 9%, or $41 million annually, by 2000. The savings will result in part from merging First Hawaiian's Pacific Northwest operations, called Pacific One Bank, into San Francisco-based Bank of the West. Additional cuts would come from data processing and back-office consolidations.
Eleven of the new company's 20 directors are to be elected by First Hawaiian stockholders. Goldman, Sachs & Co. advised First Hawaiian; Merril Lynch & Co. advised BNP and Bank of the West.
