In Focus: One Year Later, Fleet Deal Penalty Overcome by B of A

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CHARLOTTE - When Bank of America Corp. surprised the banking world a year ago this week with a deal to buy FleetBoston Financial Corp. for $47 billion, the early reviews were not friendly.

Stunned at what they saw as a betrayal of a pledge to make no more big acquisitions, many analysts and investors, in their milder moments, called the deal silly. The price, an eye-popping premium of 41% to Fleet's stock price, helped spark a wave of bank mergers, as chief executives and boards of selling banks sought to capitalize on the climate.

But since securing shareholder approval and closing the transaction April 1, Bank of America has moved quickly to absorb the operations. While much work still lies ahead and it is too early to declare the merger an outright success, chief executive and president Kenneth D. Lewis was feeling vindicated this week as he recalled the initial reaction.

"I really do think we have disproved the critics," Mr. Lewis told reporters Tuesday after a speech in Charlotte.

In some respects he has. Executives say the integration is on schedule, and expectations for annual cost savings have risen from an early estimate of $1.1 billion to $1.375 billion. The savings are expected to come fully by 2006.

By at least one measure - new accounts - the $1.1 trillion-asset company appears to be retaining and even adding customers in the Northeast, which is a new market. It gained a net 87,000 checking accounts and 316,000 credit card accounts in Fleet's eight-state territory in the third quarter.

Mr. Lewis said naysayers underestimated growth trends at Fleet.

"We thought the results at Fleet would be better than the market thought," Mr. Lewis said. "We saw traction with Fleet customers because of some things they were doing, and we thought we could speed that up."

B of A's shares lost 10% on Oct. 27, 2003, the day the merger was announced. They have rebounded since then, though; at the close of trading Wednesday they were up 8.4%. (They gained another 0.4% Thursday.) The KBW/Philadelphia Exchange Bank Index gained just 6.3% in that time. The American Banker index of the top 50 banks is up 12.7%.

"I like the balance and diversity of the company, and I think Ken Lewis has put together a good management team," said Frank J. Barkocy, director of research at Keefe Managers LLC in New York.

Nancy Bush at NAB Research LLC in Annandale, N.J., has maintained a "buy" on the stock even though she was disappointed at the original announcement.

"It was an expensive deal," she said Thursday. "But the Fleet earnings proved to be better than we thought they'd be. ... And Bank of America has handled the transition pretty well."

But in other respects B of A is still proving itself.

Some of the toughest merger tasks are still to come, such as systems conversions that are scheduled in 2005. B of A also has yet to finish renaming all of Fleet's branches, though it expects to complete the chore by yearend.

B of A suffered a black eye late in August when it fired 800 employees at former Fleet branches in the Northeast, angering public officials in Massachusetts and Connecticut. They accused the company of reneging on a promise - written into the Fleet merger agreement - to maintain employment levels in New England.

B of A has cut thousands of jobs since the merger, but it still has a way to go before it reaches it goal of 12,500. It also recently announced plans to eliminate another 4,500 jobs nationwide.

Mr. Lewis has tried to assuage New Englanders' concerns. On Thursday the company said it would open a new consumer call center in East Providence, R.I., in mid-2005 that will employ 700 to 900 people.

And in September, Mr. Lewis ordered dozens of wealth management executives to move to Boston to expand the size of the that division's headquarters there.

Ms. Bush said B of A has yet to demonstrate one of its original arguments for the deal: that it can do a better job than Fleet of selling to affluent customers in the Northeast.

Run by former Fleet executive Brian Moynihan, wealth management has been in turmoil since last fall. Regulatory investigations targeted both B of A's and Fleet's mutual fund units and resulted in $675 million in fines, penalties, and restitution just weeks before the deal closed.

B of A's rivals say they have been hiring away bankers and stealing business since the merger.

"The leading indicators are positive," Ms. Bush said. "But we're not going to see the coincident indicators for another year."

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