Assessing California's Big Marriage

Grinning from ear to ear, BankAmerica Corp. chairman and chief executive Richard M. Rosenberg fairly bounded into an executive conference room at Security Pacific's Los Angeles headquarters Monday morning.

Hours before, he had unveiled the biggest bank merger in U.S. history, and he was eager to discuss it with the assembled reporters.

Despite all the enthusiasm, however, there can be little doubt that Mr. Rosenberg is making the biggest gamble of his career.

Deal Brings Risk

The chances are good that the deal will cement BankAmerica's position as a premier banking organization. But by joining forces with a company whose loan portfolio is littered with problems, BankAmerica's chief is also taking an enormous risk.

Friends and colleagues say it is absolutely in character that Mr. Rosenberg would take on a colossal challenge not with steely resolve, but with bubbling enthusiasm. "This is the happiest experience in Dick's entire career," said a close associate.

Make no mistake, Mr. Rosenberg has hedged his bet as much as possible. He is using a favorable accounting technique for the deal, and he is seeing to it that Security Pacific will take steep loan writedowns before the deal is completed.

Without question, the opportunity is great. If the combination is handled smoothly and the potential cost savings realized, the new BankAmerica will have the size, earnings power, and market capitalization to leap ahead of the pack in the nationwide banking race.

Yet, in reaching for the brass ring, Mr. Rosenberg is putting on the line BankAmerica's hardwon return to financial health.

Nasty Surprises Possible

Security Pacific's loans - including a motley collection of credits to foreign countries, commercial real estate owners, and leveraged buyouts - could turn out to be in much worse shape than expected. Or California's economy could slip several notches further down. In any case, the definitive merger agreement prohibits BankAmerica from backing out should nasty credit surprises pop up.

In the worst case, BankAmerica could find hanging from its neck the kind of Texas-size millstone that brought inadequately protected acquirers in the Lone Star State to their knees.

"BankAmerica is taking on substantial credit risk," said Campbell K. Chaney, an analyst with Sutro & Co., San Francisco.

At BankAmerica, senior management's phobia against credit risk has been intense since bad loans nearly brought the company down five years ago. Indeed, Mr. Rosenberg's acquisition strategy has been carefully crafted to minimize exposure to risky credits.

Until now, BankAmerica's chief has stressed government-assisted deals, like the nearly dozen failed-thrift purchases he has engineered in the past year and a half.

In a speech at an investors conference in March, Mr. Rosenberg outlined his approach: "We'll forgo high-risk deals ... that will expose our shareholders to excessive additional financial or credit risk.... We would do a whole-bank deal only with the greatest care, because of the credit risks involved."

Strategic Benefits

But, in the case of Security Pacific, Mr. Rosenberg felt the benefits were worth the potential pitfalls. "This deal positions them to be competitive in the kind of world they're going to be in for the next 10 years," said an individual close to the deal. "It was just an opportunity they couldn't pass up."

To be sure, Mr. Rosenberg insisted on terms that provide a substantial measure of protection against a meltdown of Security Pacific's loans.

Security will ante up about $1 billion in additional loan-loss reserves before the deal closes. Also, a portion of a planned $700 million in restructuring charges may be available to cover credit losses.

Driving the Acquisition

What's more, by using purchase accounting instead of the pooling method, BankAmerica will be able to classify additional reserves as intangibles and goodwill. Such costs can be amortized over 25 years and need not be wrung out of the income statement in a few brief quarters.

"The credit losses can be accounted for over a 25-year period; the cost savings will be realized over a two- to three-year period. That's what drives this acquisition," said R. Jay Tejera, an analyst with Dain Bosworth Inc. in Seattle.

But, Mr. Tejera warned: "If California continues to slide, all the purchase accounting in the world won't bail you out."

Mr. Rosenberg, it seems, is a gambler with the nerve to place a bet when the payoff is big enough and the odds are right.

"This merger creates the preeminent banking institution in the U.S." he said Monday. For that kind of payoff, Dick Rosenberg was only too happy to put his money down.

PHOTO : Where the Savings Will Come From Source: BankAmerica

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