BankAmerica, Security Pacific to Merge
BankAmerica Corp. and Security Pacific Corp. have agreed to merge, in a $4.3 billion deal that puts BankAmerica within reach of becoming the nation's largest banking company.
With $190 billion in assets, the merged company would stand behind only Citicorp, which has $217 billion in assets.
The driving force behind the deal, as with other big bank mergers struck in recent weeks, is largely a need to cut costs and boost profits. BankAmerica and Security Pacific said they should save about $1 billion in annual operating costs as a result of their merger.
BankAmerica Is the Stronger
Though the union was billed as as a partnership of equals, BankAmerica is clearly the leading player. The San Francisco-based giant has turned in a solid profit performance the past two years, while Los Angeles-based Security Pacific has seen its earnings squeezed by soured loans on real estate and takeover deals.
In an obvious sign of BankAmerica's dominance, the combined company will be controlled by current BankAmerica chairman Richard Rosenberg, 61, who will function as chairman and chief executive officer. Meanwhile, Robert H. Smith, Security Pacific's 55-year-old chairman, will serve as president and chief operating officer of the new company.
The merged entity will do business under the name BankAmerica, relegating the name Security Pacific and its logo to the dustheap.
"As of Aug. 1, I've been with Security Pacific for 30 years," Mr. Smith said at a news conference on Monday. "Clearly, seeing the disappearance of the Security Pacific name creates a touch of sadness."
Experts said they doubted Mr. Smith would ever be asked to replace Mr. Rosenberg, and they speculated that Mr. Smith would announce his retirement soon. "I don't see Smith taking over the reins one day," said Campbell Chaney, an analyst at Sutro & Co.
The stock market was quick to signal its approval of the deal, sending BankAmerica stock up $2.25, to $39.625, yesterday, while Security Pacific's stock rose $9.125 to $32.125. The new entity will be particularly strong in California, one of the biggest and most competitive retail markets. It will boast banking relationships with 2.9 million California households, representing a whopping 50% share of the state's banking market, according to Payment Systems Inc., a research company based in Tampa, Fla.
BankAmerica is already No. 1 in California, doing business with 31.6% of all households. Security Pacific, the No. 3 bank in the state, has an 18.4% share.
The new entity will control 15.6% share of all bank accounts held by Californians, including depository, credit, loan, mortgage and trust products. Its closest competitor, Wells Fargo Bank, has 6.5% of accounts and does business with 21.7% of California households.
"It will be a monster power in this marketplace," said Richard C. Hartnack, vice chairman of Union Bank in San Francisco, of the proposed new BankAmerica The marriage of BankAmerica and Security Pacific will also create what will be, by many measures, the largest retail banking operation in the nation. The new BankAmerica Corp. will be the nation's largest home mortgage originator and will own the biggest automated teller machine network. More consumers' ATM cards will sport the BankAmerica logo than any other bank's.
The combined banking company's deposits will also rank it No. 1 in the states of Washington, Arizona, and Nevada; and No. 2 in New Mexico, No. 3 in Oregon, No. 4 in Alaska, and No. 5 in Idaho. It will also have operations in Texas and Utah.
Terms of the transaction call for each Security Pacific common share to be exchanged for 0.88 of a share of BankAmerica stock. Those terms value Security Pacific at about $4.3 billion.
Deal Dwarfs Others
The size of the deal dwarfs the nation's other "megabank" mergers, which paired Chemical Banking Corp. with Manufacturers Hanover Corp. (combined assets: $118 billion).
Analysts said that with a such a dominant position in western markets, particularly in California, the new company will be able to exert tremendous financial pressure on the two other big California banks, First Interstate Bancorp and Wells Fargo & Co.
"They'll have to consider a consolidation," said Michael Starr, an analyst at Duff & Phelps.
In Asia, the BankAmerica-Security Pacific entity will be one of the biggest players in trade finance. The merger also allows BankAmerica to get back into the lucrative trust business. Straspped for cash four years ago, B of A sold its trust business to Wells Fargo.
Risk of Loan Problems
However, the deal was not greeted with universal praise. While the merger is expected to generate $1 billion in annual cost savings after three years, experts questioned why BankAmerica took on the risk of Security Pacific's mounting loan problems.
Indeed, terms of the deal require Security Pacific to write down its loans to current market value. To account for that, the new company will add $1 billion to its loan-loss reserve.
Some analysts wondered if BankAmerica was being a bit arrogant in assuming it could identify all future loan problems at Security Pacific.
"It's incredible that B of A would buy SecPac" after just putting its own problems behind it, said one analyst at an institutional investor who would not be identified. B of A struggled through the 1980s saddled with a huge pile of soured Third World loans.
Moody's Investors Service Inc. put BankAmerica on review for possible downgrade.
BankAmerica said it would take a $700 million restructuring charge to account for the costs associated with merging the two companies. BankAmerica has about 1,500 branches and 54,000 employees. Security Pacific has about 900 branches and 39,000 employees.
The companies would not be specific about how many employees would be laid off or how many branches would be closed. However, Frank Newman, BankAmerica's chief financial officer, told analysts that "a significant number of senior executives would be let go" and that "cost cutting was going to be a key objective" of the deal.
Judging by previous mergers, the job cuts are likely to range from 9,000 to 15,000.
Including the planned writedown at Security Pacific, the combined entity is expected to have a 5.5% equity-to-asset ratio and $12 billion in equity. As of now, no additional equity offerings are planned to shore up the balance sheet.
BankAmerica plans to maintain its current quarterly dividend rate, which is 30 cents per quarter, B of A's current dividend rate.
While analysts suggested that Mr. Smith came out the loser in the merger, two Security Pacific executives will hold key strategic positions in the new company.
Nicholas B. Binkley, who was chairman of Security Pacific's Financial Services System, will become vice chairman in charge of consumer and commercial finance with responsibility for leasing, trust, and venture capital operations.
Jerry A. Grundhofer, head of Security Pacific's lead bank, will become vice chairman in charge of corporate banking, capital markets, California middle market, and commercial real estate.
They will be part of the 10-member managing committee of the new company. The other members will be Mr. Rosenberg, Mr. Smith, Kathleen J. Burke, formerly head of administrative services at Security Pacific who will now head human resources; Mr. Newman, who will continue as chief financial officer; Thomas E. Peterson, a BankAmerica executive who will continue to head the consumer banking operation; Michael E. Rossi, a BankAmerica executive who will continue to be head of credit, and Martin A. Stein, a BankAmerica executive who will continue to head the computer operations.
Mr. Newman ducked the succession question at an analysts' meeting on Monday. "You can assume that we now have a terrific board of directors that will make decision when appropriate," he said.
The New Board
The new board of directors will have 30 members, evenly split between the two institutions. All 15 current BankAmerica directors will serve on the board, as will 15 of Security Pacific's 23 current board members.
As for expense reduction, $300 million to $400 million is expected to come from consumer banking, while $100 million to $200 million should come from corporate and international banking.
The rest would come from the combination of computer systems, branch closings and other operational combinations.
Teresa Carson, Sam Zuckerman, Yvette D. Kantrow, and Ellen Braitman contributed to this article.