Firstar Corp.'s $10 billion deal for Mercantile Bancorp. sets up a big test for Firstar's integration skills, analysts said Monday.
The Midwest deal, announced late Friday, comes just five months after Milwaukee-based Firstar was formed by Star Banc Corp.'s acquisition of the old Firstar.
"They are pulling a lot of stuff together, which increases the execution risk," said Henry Dickson, bank analyst at Salomon Smith Barney. "This is a very large deal."
Jerry Grundhofer, chief executive officer of Firstar, is generally given high marks for his acquisition know-how and management prowess. But merging the two companies' systems and cultures will still be very tricky, observers said. They noted that both partners are still digesting earlier acquisitions.
"It's a little early for Firstar to be doing a deal," said Thomas W. Smith, a bank analyst at Standard & Poor's Corp.
Mr. Grundhofer, slated to become CEO of the merged company, exuded confidence, saying Firstar has a strong history of creating shareholder value.
"If a leopard does not change its spots, then this is a fabulous deal," he said. "This leopard is not going to change its spots."
The deal, announced late Friday, would create the 16th-largest banking company in the country. The beefed-up Firstar would have $75 billion of assets and a market capitalization of $30 billion. The transaction, which would give Firstar 1,180 branches, five million customers, and operations in 13 states, is slated to close in the fourth quarter.
Mr. Grundhofer, addressing analysts in New York, said there was a strong geographic fit between Milwaukee-based Firstar and St. Louis-based Mercantile. He also said the merged company would save $169 million a year in costs-19% of Mercantile's total-and thus be able to price its products very competitvely.
In a separate meeting Saturday with reporters, the executives declined to say how many jobs would be eliminated. Mercantile was already in the process of laying off 1,300 employees, or 11% of its work force.
In the analysts' meeting, Mr. Grundhofer said that Firstar plans to scrap Mercantile's fairly new computer system-contributing to a pretax $428 million merger-related charge-and move its own systems into place. He said that most of the systems conversions required by the Firstar/Star deal had already taken place and the rest will occur in the first quarter of 2000.
But that is no guarantee of success, said Charles Nathan, a partner with Fried Frank Harris Shriver & Jacobson.
"Wells Fargo touted superior technology when it merged with First Interstate," said Mr. Nathan. "They told everyone that converting systems would not be a problem. Well, Wells was wrong, and the market told them so."
Despite the risks, many analysts see bright prospects for the deal, which valued Mercantile at $66 a share. In Monday trading, Firstar shares rose 31.25 cents, to $30.375, on almost three times average daily volume. Mercantile jumped $3.6875, to $60.6875, on almost four time average volume.
Investors are banking on Mr. Grundhofer's skills at acquiring companies, squeezing out cost saving and maintaining lofty stock prices.
Firstar, which sells at 5.8 times book value, bought Mercantile for 3.4 times book.
"We have seen deals that are mostly dilutive," said Carole S. Berger, president of Berger Jackson hedge fund. "And if they are accretive, they are accretive by 2% or maybe 4% in the next year. But Firstar is accretive immediately which is extraordinary."
Another plus for Firstar is its balance sheet management, observers said. The company is skilled at taking liquid low-yielding assets off of the balance sheet, which helps increase profitability.
Typically, management will shrink the balance sheet by selling off mortgage assets or part of the investment portfolio, said Ms. Berger.
By doing this they increase profitability as well as return on assets and return on equity.
"There will be concerns that it is a big deal very soon," noted Ms. Berger. "But I'm not worried about that because it does not close until fourth quarter."
She added: "The cost saves are baked in the cake already, the revenue is strong, and by the time they close the Mercantile transaction, Firstar's previous transaction will be well behind them."
The deal positions Firstar to make still more acquisitions in the future, said Michael Plodwick, bank analyst at Lehman Brothers Inc.
Some of the companies that the new Firstar might pursue are First American Corp., Huntington Bancshares and U.S Bancorp, Mr. Plodwick said.
Firstar and Mercantile share a presence in only three states: Iowa, Illinois, and Kentucky. The market lap is most extensive in Iowa, where the combined companies would be No. 1 in deposit share, overtaking Wells Fargo & Co.
At a press briefing in St. Louis Saturday, the CEOs acknowledged divestitures may be required in Iowa, but said it was too soon to be more specific.
The new bank would also be No. 1 in deposit share in Missouri and No. 2 in Kentucky and Wisconsin.
Mr. Jacobsen would become chairman of the new company, replacing Roger L. Fitzsimonds who plans to retire. There was no word on the fate of any other Mercantile executives. Mr. Grundhofer accomplished a complete overhaul of management at the former Firstar. All of the top several executives will have left by year end.
Asked how the deal came together, Mr. Jacobsen said has known Mr. Grundhofer for some time and had informal conversations, but "the last several months we started to get more serious and once we took a look at a possible combination and what it would do for both companies shareholders, we said this is something we ought to get done."
"We decided this is the best possible combination at this time," Mr. Jacobsen said. "I think this combination will be relatively seamless. I couldn't say that about other combinations we've been involved in in recent years or other banks have been involved in."
"This was a negotiated deal, it wasn't an auction," Mr. Grundhofer said.
Mr. Jacobsen said news of investor unrest had been "blown way out of proportion," and he added, "That had no bearing on this transaction."
However, when twice asked after the Saturday press conference whether he sensed any shareholder discontent, Mr. Jacobsen refused to comment.
Firstar was advised by Credit Suisse First Boston, while Mercantile was advised by Donaldson, Lufkin & Jenrette. Morgan Stanley Dean Witter rendered a fairness opinion to Mercantile.
