Merger in New England: Fleet-BankBoston Merger Built On Cutting Jobs

The planned merger of Fleet Financial Group and BankBoston Corp. sets the stage for a massive divestiture of deposits and a cost-cutting drive that may eliminate 5,000 jobs, more than 8% of the companies' total.

Fleet and BankBoston are projecting cost savings of $600 million by 2001 as they create Fleet Boston Corp.-a $180 billion-asset banking company with a virtual lock on the New England market.

The $16 billion deal, which would be the first major in-market merger since 1996, is built largely on layoffs, deposit divestitures, and systems integrations. The transaction is expected to close in the fourth quarter.

Job cuts are to make up half the cost savings, the companies said, with the bulk of them in support and administrative functions and in retail banking. Another $100 million would come from branch sales, as Fleet and BankBoston said they would divest $13 billion of deposits, mostly in Massachusetts.

To be sure, cost cutting alone would not guarantee the long-term success of the proposed Fleet Boston, which would have $118.2 billion of deposits and 5,750 retail outlets.

"Over the long term they have to be able to get revenue growth," said Charles Wendel, president of Financial Institutions Consulting in New York. "If it's just all cost cutting, they may not be able to survive."

But the merger partners have significant experience with in-market deals-a fact that analysts said bodes well for this combination. Fleet bought Bank of New England in 1991 and Shawmut National Corp. of Hartford, Conn., in 1995. BankBoston bought BayBanks Inc. of Boston in 1996.

"If we haven't learned from our experiences, shame on us," said Terrence Murray, chairman and chief executive officer of Fleet, who would take the same title at the new company. "Were there mistakes and glitches in those deals? Yes. But you don't do something of this magnitude without them."

"We looked at where we were strong and what we needed to do," Mr. Murray added in an interview Monday. "We've both done conceptual models of combinations with other banks, but no other combination was as compelling."

In addition to the cost savings, executives from both companies stressed the complementary strengths of their businesses and greater earnings diversity as the prime motivators of the combination, which was unveiled late Sunday.

"With a larger balance sheet we can more effectively grow the businesses," added Charles K. Gifford, BankBoston's chairman and chief executive officer, who would be president and chief operating officer at the new company.

The merger comes as BankBoston struggles to control expenses while aggressively expanding in Latin America and in U.S. capital markets. Capital freed up from branch sales is expected to be reinvested in those businesses.

"The first year we will be concentrating on the consolidation," Mr. Murray said. "But we will free up about $4 billion in capital that can get deployed after that. We are going to grow."

Before any divestitures it would make, Fleet Boston would have 38% of the deposits in Massachusetts and 27% in Connecticut. In Rhode Island, Fleet Boston would control more than 50% of the market, according to Sheshunoff Information Services.

As a result, antitrust experts said the deal would attract more regulatory scrutiny than previous transactions have.

"If there was ever a merger where the Department of Justice would say 'enough is enough,' this would be it," said a banking lawyer who declined to be identified."There is no competition in sight for these guys and there never will be."

"These are two of the most important banks in the Northeast. I can't see this deal going forward without significant divestiture,"added Robert Litan, director of economic studies at the Brookings Institution. Mr. Litan was a deputy assistant attorney general in Justice's antitrust division.

"Most of the mergers we've seen have been market extension mergers," Mr. Litan added.

Analyst Frank J. Barkocy from Josephthal & Co. said that Fleet and Bank Boston estimated that their divested deposits would fetch a premium of 10% to 12%. The sales would likely occur over time instead of in one big batch to a single competitor, he said.

"It is fair to say they would prefer the sale to go to smaller companies in the area," Mr. Barkocy said.

Potential bidders include Citizens Financial Group in Providence, R.I., and Peoples Heritage Bancorp in Portland, Maine, both of which have expressed interest in expanding in Massachusetts, analysts said.

"Massachusetts is our No. 1 target market for expansion," said Brian Arsenault, vice president at Peoples Heritage. "We are certainly keeping an eye open for opportunities."

Two companies that have benefited from divestitures in the past also expressed an interest. Webster Financial Corp., Waterbury, Conn., bought 20 branches after Fleet's purchase of Shawmut National Corp. UST Corp. in Boston bought 20 branches in 1996 after the merger of Bank of Boston Corp. with BayBanks Inc. that created BankBoston Corp.

"It remains to be seen what is offered, but we would be interested in seeing what will become available," said Neal F. Finnegan, president and chief executive officer of $6 billion-asset UST.

Sales of business lines are not as likely because both companies have pared back underperforming units in recent years, said Robert J. Higgins, Fleet's president and chief operating officer.

"Both banks have done a very good job exiting businesses," Mr. Higgins said. "There will be no more business line divestitures."

Analysts said the new company should benefit from Fleet's culture, which emphasizes cost controls.Indeed, Fleet's chief financial officer, Eugene McQuade, is to take that title at the new company.

BankBoston, meanwhile, began a reengineering project one year ago to wring more costs out of operations, particularly in the New England retail business.

"This is a management play on the retail side," said Michael Mayo, an analyst at Credit Suisse First Boston. "Instead of taking two years to get the retail bank in shape, BankBoston can start implementing changes now."

Neither Mr. Murray nor Mr. Gifford offered projections for revenue enhancements with the combination. But they pointed to a number of businesses where cross-selling potential runs high.

Fleet's Quick & Reilly Group Inc. retail brokerage customers would have access to research from Robertson Stephens Inc., BankBoston's investment banking arm, for example.

And BankBoston's burgeoning Latin American operations would have access to more investment management capabilities through Fleet.

Analysts said Monday they expect a new wave of in-market mergers among like-sized banks to follow this year as institutions struggle with sluggish revenue growth and the prospect of year-2000 technology glitches.

"This is just the beginning of a tidal wave of mergers and acquisitions activity, and we will continue to see the regionals combine with one another," said Katrina Blecher, an analyst at Brown Brothers, Harriman & Co.

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