How embarrassing. Here was the very prahpah Bank of Boston--the bank in Boston since Napoleon was a road guard," to quote one bemused observer--being peddled off like some old coat at a Filene's Basement sale. And publicly at that.

Over a tumultuous six-day period in late July, Bank of Boston Corp. tried to negotiate separate mergers of equals with Mellon Bank Corp. and CoreStates Financial Corp., simultaneously, resulting in such a fire storm of investor protest that both deals were killed. Banc One Corp. also picked this moment to swoop in with an unsolicited offer, only to be rebuffed by Bank of Boston chief executive Ira Stepanian.

[Expanded Picture]All was gleefully reported in the pages of the Wall Street Journal and the Boston Globe, thanks to an abundance of loose lips at the bank, including, evidently, its own board of directors. Had the Mayflower leaked as much, it would have sank. The affair abruptly ended on the evening of Wednesday, July 26, when the directors fired Stepanian. It was one the damndest spectacles that anyone had seen in years. "They were becoming, in many people's view, the laughing stock of the industry," says one merger advisor.

To the casually prurient, Stepanian's downfall might seem one of the stranger aspects of this affair. The bank had completed a successful turnaround from a point of near-collapse four years before, and was enjoying lots of earnings momentum just as other regional banks were running out of gas. it should have been a moment of triumph for the 58-year-old Stepanian, the son of Armenian immigrants who became CEO in 1987. "He did a very credible job," says veteran Advest Inc. analyst James Moynihan. "He brought the company back from the brink of disaster. His firing was a shock to everyone."

But there is another side to the story that reflects poorly on Stepanian. There were a handful of potential mergers, including separate deals with Shawmut National Corp. and Fleet Financial Corp.--bank of Boston's big New England rivals--mat were sabotaged by Stepanian's inflexible negotiating style. He seemed determined to advance his own interests first, and this may have cost him the support of his board. Says senior bank analyst Thomas Brown at Donaldson Lufkin & Jenrette, "He was clearly an impediment to doing deals."

The Bank of Boston story is far from over, however. The man who must now sweep away the debris of failed deals and lead the bank forward is former president and chief operating officer Charles K. "Chad" Gifford, who became CEO when Stepanian left. It was initially speculated that Gifford--a more easygoing person than his former boss--would soon sell the bank.

[Expanded Picture]That remains to be seen. Though cautious in his public remarks, Gifford has said privately that he prefers to go it alone for now. Still, the key to Bank,of Boston's long-term future may lie in Gifford's own doubts about its survivability in a consolidating industry where institutions keep growing larger. The $45 billion banking company boasts a world-class Latin American operation, and in the U.S. has a fast-growing consumer finance business and a solid wholesale banking franchise. But it's a Johnny-come-lately in retail branch banking, and many analysts doubt it can ever catch up.

Shortly after Gifford took over, he, along with a small group of senior managers, held a series of off-the-record meetings with analysts and consultants to solicit their advice. The board has instructed Gifford to review the company's strategic options and report back by year-end. According to a participant in one of those meetings, "Gifford's first question was, `Can a company like this survive?'" this person recalls. The participant walked away with the impression that Gifford is not yet convinced that it can. "I think he truly has a preference to keep the company independent," this person explains. "But I think he has doubts about it. He has real concerns about the size issue."

Gifford's opposition to a merger also would disappoint some of the bank's largest shareholders, who would like to see their holdings bought out at a premium, By putting the bank in play, Stepanian has backed his successor into a comer. To stay independent, Gifford must convince shareholders that he can deliver a higher return than by selling out now to the highest bidder. "That's what Chad inherited, and how he gets out of this is anybody's guess," says one former employee.

Any doubts Gifford may have about Bank of Boston's future are not reflected in its greatly improved profitability. Net income for the first nine months was $399 million, compared to $315 million for the same period in 1994. The bank's return on assets at the mid-year mark was 1.21%, its return on equity was 17.280/o and its efficiency ratio was 56.7%. Both its ROE and efficiency ratio are in the upper ranks of the 50 largest U.S. banks.

It's a much prettier picture than in 1990, when the bank lost $468 million. Another loss of $113 million followed in 1991, but Stepanian began pulling the bank out of the ditch after that--culminating in a $435 million profit for'1994. Like a great many lenders in the mid-1980s, Bank of Boston beefed up on commercial real estate, then had to work through a massive pile of bad loans when the market eventually collapsed. To his credit, Stepanian resisted the temptation to fund the loan cleanup by selling off his Latin American business. And in 1993 he began an aggressive push into the consumer finance market that has quickly paid off.

"Did a Few Things Right"

With the bank's operating performance showing such steady improvement, why were Stepanian and the board seemingly so intent upon finding a merger partner? Stepanian declined to be interviewed for this story, in a brief telephone conversation, he would only say that he was "very proud" of what had been accomplished--at Bank of Boston in recent years, pointing out that its stock price has climbed from $3 a share in 1991 to the mid-forties today. "We did a few things right," he remarked.

Likewise, three outside directors--Richard A. Smith, chairman of Harcourt General Inc.; Paul C. O'Brien, president of The O'brien Group Inc. and former chairman of New England Telephone and Telegraph; and Alfred M. Zeien, chairman of The Gillette Co.--also declined to comment. All are members of the board's powerful executive committee.

But it can be easily surmised that by this spring, Stepanian and his directors were beginning to feel the vise-like grip of consolidation tighten around them. Bank of Boston's problems probably began in 1991 when it missed acquiring the failed Bank of New England at auction from the Federal Deposit insurance Corp. The winning bidder was Fleet, and the addition of BNE's retail franchise put Bank of Boston on the defensive.

Stepanian did have an opportunity to counteract that deal when he entered merger talks with Shawmut in 1992, and again in 1993. According to people who are familiar with the situation, both attempts to strike an agreement failed in part because of Stepanian's aggressive bargaining tactics. The first go-around was especially well-timed because Shawmut's CEO, Joel Alvord, was trying to recover from his own real estate lending problems and needed a partner. "Ira blew it big time," this person says. "That was the right move, and Ira couldn't pun the trigger on it. He had joel down.

The problem, according to both this person and an advisor who worked on the deal, was that Stepanian tried to deny Alvord any significant role in the new organization. After having won every major negotiating point, the advisor says, Stepanian came back and tried to eliminate Alvord altogether. "Ira was having trouble co-existing with Joel," the former employee says. The talks dragged on for months. "Just when everyone thought things were buttoned up and ready to go, Ira would bring up new things," he adds. Finally, in December 1992, `Joel said screw it' and went out and got some capital." The window of opportunity had closed, at least for then.

Stepanian's hardheaded bargaining was evident again in June 1994, when the bank sold its Maine and Vermont units to KeyCorp. An analyst who follows both companies says Stepanian wouldn't stop negotiating the terms. "You thought you had a deal and then 10 things popped up," this person says. "(KeyCorp was) so mad at the end of it they were ready to walk away."

Stepanian is often described as laconic and abrasive, someone who was more comfortable with ledger sheets than with people. "He's a very cold individual," says the former employee. "He didn't let people get close to him." This person also says that Stepanian enjoyed the power and prestige of being chairman. "He wouldn't give that up, and he would not submit himself" to serving under another powerful executive.

If Stepanian was reluctant to share power and prerogatives with another strong executive, then the board seemed to have its own issues as well. Directors reportedly wanted the bank to retain its name in any merger, and sought to have the new institution's headquarters located in Boston. Founded in 1784, Bank of Boston had been an economic stanchion in the community for as long as anyone could remember. The directors, most of whom have local ties, seemingly were intent on preserving that.

[Expanded Picture]Stepanian had yet another opportunity to secure the bank's New England franchise in the early months of this year--this time through a merger of equals with Fleet. Once again, Stepanian's bargaining style helped sink the deal. Donaldson, Lufkin & Jenrette's Brown says that when he attended a Fleet board meeting earlier this year, Fleet CEO Terry Murray "came up to me and said, `Your boy blew it again.'" Murray complained that Stepanian kept haggling over issues like the composition of the new bank's senior management team. Says Brown, "They would decide on four people for Fleet and four people for Bank of Boston, and it would come back five for Bank of Boston and three for Fleet." "They went into those merger of equals negotiations with the attitude that they were going to screw the other guy," Brown adds. "I think they're lucky they didn't get some of these deals done."

When Murray could not hammer out a deal with Stepanian, he cut one with Alvord instead, And the merger of Fleet and Shawmut, announced in late February, no doubt put even more pressure on Bank of Boston to find a merger partner. The bank's next attempt came a few months later, when it proposed a merger of equals with First Fidelity Bancorp., which declined the offer in favor of a competing bid from First Union Corp. (see "Why Big Banks Are Getting Bigger," August 1995). Interestingly enough, according to an advisor who was involved in that deal, it was the board--and not Stepanian--who guided the negotiations. "From what I understand, the directors had taken control of the process," he says.

After the merger of First Fidelity and First Union was announced on June 19, Bank of Boston resumed talks that had taken place earlier that year with Mellon. But Stepanian also starting exploring a similar merger of equals with CoreStates. "The merger expert says it's "unusual and extremely foolish" to negotiate two merger of equals simultaneously, since an auction-like atmosphere is not conducive to building trust. "And the results were exactly what one would have anticipated," he says. "That might make sense when you're a seller, but not when you're an MOE."

The Mellon deal, which was further along, would have installed Mellon CEO Frank Calhoun as chief executive of the new bank. its headquarters would have been in Boston, but there would not have been a role for Stepanian. A merger of CoreStates and Bank of Boston, though still in the exploratory stage, would have started out with Stepanian as CEO and CoreStates CEO Terry Larsen as president. Larsen would later replace Stepanian, according to someone with firsthand knowledge of die details, although Gifford's role was to be "marginalized."

Stepanian preferred the CoreStates deal, and on Thursday, July 20, "blew Mellon away" in a meeting with his board of directors, according to the advisor. The next day, a story appeared in The Wall Street Journal that Bank of Boston was in merger discussions with the Philadelphia bank. Some of the former's large institutional shareholders were said to be very upset by the prospect of a merger of equals, since they would not receive a premium for their stock. The two banks simply would have pooled their equity, with their respective shareholders receiving stock in the new bank according to a predetermined formula. Press reports at the time valued the deal around $4.5 billion, or $38 a share, which was a few dollars less than the trading price of Bank of Boston's stock at die time, Not only would shareholders receive no premium, they would see their equity exchanged at a discount.

One of the loudest to holler was Harry Keefe, chairman of Keefe Managers Inc., a large New York-based hedge fund that owns 800,000 shares of Bank of Boston's stock. When Keefe was tipped off by an investment banker to Bank of Boston's negotiations with First Union in mid-may, he called Stepanian and requested a face-to-face meeting. "He was not a very accessible man," Keefe says. Keefe says he had a 5 p.m. appointment, but Stepanian kept him waiting until 5:30 and then told him he had to leave shortly. "So I went all the way to Boston for 15 minutes!" Keefe growls. "I told him I'd heard he was thinking of doing a merger of equals. I said, `Don't. The market doesn't like them. I don't like them.'" Keefe says he warned Stepanian than he would oppose him publicly if he tried one.

Keefe kept true to his word. When the news of the CoreStates talks broke in the journal, he made himself available to any reporter who wanted an interview, including The New York Times and the Boston newspapers. He even claims that Larsen at CoreStates called his old firm, Keefe Bruyette & Woods in New York, and asked them to get him to quiet down. Keefe says he called Larsen the following Monclay to say, "I've got nothing against you or your bank. I just don't like mergers of equals."

Keefe argues that Bank of Boston's Latin American franchise, which provides 25% of its net income, is worth a king's ransom. "They are the best lending bank in Argentina and Brazil . . . period, " he says. "As an investor, I think I should get paid for that."

In the midst of this confusion, Banc One CEO John McCoy also made a public offer of $45 a share for Bank of Boston. Stepanian turned his low-ball bid aside, although it was widely speculated at the time that McCoy was more interested in acquiring CoreStates and saw a public offer for Bank of Boston as a defensive tactic. But even at that, his bid added fuel to what had become a public embarrassment for the bank.

The talks between Bank of Boston and CoreStates broke down over the weekend, and McCoy pulled his offer on Monday. An advisor to CoreStates says the negotiations with Bank of Boston were "not nearly as far a long as the papers said." There were still a number of details to be"worked out. "People were announcing a merger when we hadn't had our first date." Bank of Boston vice chairman William Shea, who is also the bank's chief financial officer and headed up the due diligence team on the CoreStates talks, said the news leaked prematurely. He doubts whether a deal would ever have been consummated since the two banks are so different. "In terms of fitting together, it wasn't even close," he says.

Another question is how Bank of Boston's negotiating efforts ended up in the newspapers. Suspects include rival investment bankers who were not involved in the talks and wanted to see them fail. The CoreStates advisor points a finger at the board. "Let's just say the Boston Globe had an awfully good source, even down to the board vote on Stepanian," this person says. Agrees Shea, in a surprisingly frank remark, "Leaks around the board room were very unfortunate."

A Surprise Firing

Stepanian's end came only a few days later, when the board forced him to resign. It was a surprise to most people. Moynihan at Ad-vest says he talked to Stepanian on the telephone the night before. "Ira had no inkling he was on the brink of disaster," he says. Keefe believes that Stepanian's dismissal was related to the string of failed deals, which had resulted in great loss of face for the bank. "The directors said he handled the negotiations in an inept fashion," Keefe says. "That's why they fired him." And the former employee adds that Stepanian had compromised the directors' fiduciary obligations to shareholders. "I think he got fired because he put the board in the position of supporting someone who cared more about his own position," he says. In the end, this individual adds, it came down to this: "Was the board going to be perceived as a true board or a puppet of Ira?"

The turmoil in July created the impression that no one was in charge. Shea says that's regrettable because in actuality, Bank of Boston was merely doing what virtually every other large regional institution is doing today. Beginning this year, the bank began looking more aggressively at various strategic alternatives, in part due to pressure from a small group of shareholders. "We were no different, we were just looking at options," he explains. Shea adds, "There was some concern on the part of some people that we were not in the game." There was a view that "Bank of Boston wouldn't answer the phone. The feeling was that we had to be more active. Well, the fact was that we were talking to people."

The man who must lead the bank forward is the 52-year-old Gifford, a career employee who joined the bank in 1966, worked his way up the lending side and became president in 1989. The new CEO is quite a different person from Stepanian, by all accounts. He's warmer and more engaging, a person that employees in the bank might rally around if given the opportunity. "He's a good people person," says Advest's Moynihan. "He knows the banking industry, knows his company from top to bottom. This has been his life and he'd like to keep it that way."

Contrary to the conventions normally associated with their roles, Stepanian was the tough, inside manager while Gifford tended to function as Mr. Outside. Anyone who would have served as Stepanian's subordinate probably would have had to submerge his own ego. Now, ventures Brown Brothers Harriman Analyst Nancy Bush, "I think he's going to show us some toughness that wasn't there before. As president to Ira's CEO, he had to do a certain amount of cheerleading." It's worth noting that Gifford oversaw the workout of the bank's commercial real estate problem, and he led a very successful drive to improve its efficiency ratio through expense reduction. Both efforts have been significant factors in Bank of Boston's return to profitability.

Can Gifford seize the moment--or will he be overwhelmed by it? "Chad was a good soldier, a good number two guy. (But) he hasn't been tested on his own in a long time," says a former employee. "The question you hear around the streets of Boston is, 'Is Chad an empty suit? . . . he continues. "I don't think he's an empty suit. He has good ideas, but leading things through to conclusion isn't his strength." This person believes that to be successful, Gifford needs to be surrounded by strong operating people. "He can be a good leader. People want to follow him. But he has trouble following through."

Gifford's closet associates are Shea, 47, and vice chairman Edward A. O'Neal, 51. Shea oversees the bank's international operations, as well as its finance, treasury and administrative functions. Bush at Brown Brothers says that Shea became the bank's de facto chief operating officer after Gifford's promotion. Prior to joining Bank of Boston in 1993, Shea spent 19 years at Coopers & Lybrand. O'Neal, a large man who seems barely able to contain a naturally effervescent enthusiasm, is in charge of the bank's retail operations and systems development and technology. He arrived in 1992 from Chemical Banking Corp.

[Expanded Picture]O'Neal makes the case that the three men are a good team. "We work very well together," he says. They clearly seem to be comfortable with one another. Shortly after Stepanian was fired, an analyst was quoted in the Boston Herald as saying that Gifford would be lucky to survive for 90 days as CEO. One day Shea left Gifford an anonymous note on his desk, saying, "Chad, good luck . . . you have 76 days left." Shea says that Gifford wrote back, "If I have 76 days, you have 77."

The bank has made it clear that it intends to avoid any merger discussions for now. "Bank of Boston has already told us that they aren't going to do a deal right now," says Bush. "The important thing is to come up with a strategic plan by year-end." Gifford is said to have formed a nine-member working committee which includes Shea and O'Neal. The group will review the bank's various options--including, presumably, a sale--and report to the board. Bush figures that Gifford will be given at least some time by other CEOs who might like to acquire the bank, but don't want to rush in add risk being rebuffed.

It would seem that Gifford's gut desire is to remain independent, based on remarks he has made in private, and by the impression that he has left with people who have talked with him. Moynihan at Advest says he attended a breakfast meeting with Gifford a few weeks after Stepanian's departure. "Chad was pounding the table saying, `We have too much going for us. We are not for sale.' If he said that once, he said that several times." "Their earnings right now are sensational," he adds. Keefe cites the inevitable--and understandable--yearning that a man in Gifford's position might have to run his own show. Says Keefe, "If you're 52 and the boss is 58 . . . never did it occur to Gifford that he would ever get to be CEO."

If that's the case, then he hides it well in public. Interviewed in late August, Gifford spoke with enough obfuscation to rival Federal Reserve Chairman Alan Greenspan on the direction of interest rates. "Anyone who expects the bank to say specifically that we shall do this or we shall do that, I think, is going to be disappointed," he says. Gifford agrees that an argument could be made for independence. "Could a case be made? Absolutely. The question is, what are we going to generate in the future?"

But did the steady parade of failed deals mean that Bank of Boston is desperate to find a merger partner because it cannot--or does not think it can--survive alone? Gifford says that's simply not the case. "If you pursue any business opportunity, it doesn't mean it's necessary for survival," he argues.

Gifford tries hard to not to tip his hand. Invited to say that at the very least, it would take a substantial offer--a "princely sum"--to buy the bank, Gifford pleads the Fifth. "You know that responding with an answer to a, question like that could put me right in a hornet's nest," he says.

"I think Chad is being very open-minded, and he has to be," says a consultant who is familiar with the situation at the bank. If the board thought Gifford was standing in the way of a sale, the consultant adds, "he'd be out of there in two nanoseconds, and he knows it."

Bush agrees that a case can be made for Bank of Boston to eschew a merger for now. "If it's a defensible position for Wells Fargo, it's a defensible position for them," she says. "It's defensible for any bank that can demonstrate that it can create value on its own. There is nothing that says you have to be a certain size to survive. Nothing," she adds for emphasis. "Wells Fargo has shown that. They're not particularly big."

Bank of Boston, due to their distinct business mix, arguably has more revenue growth opportunities than the classic superregional," says James McCormick, president of First Manhattan Consulting Group. "There's a core within the bank that could generate a high return on equity and growth."

Nor, according to one veteran bank attorney, is the bank under any obligation to auction itself off to the highest bidder as a sop to shareholders, "There is none--categorically," he says. If another bank makes a formal offer, the board must consider it. But it is not required to, in effect, finish the end game that started under Stepanian.

Of course, investors like Keefe are hoping for a sale. To keep them satisfied, Gifford will have to make a compelling case that, as Bush puts it, the bank can build value on its own. Gifford says that he is currently developing a corporate goal for return on equity, but allows that "I think in the long-term (it) has to be in excess of 18%."

If Bank of Boston is to survive on its own, it must do so on the strength of its unique franchise. The bank's traditional bread-and-butter business was lending to large corporations, in New England and outside the region as, well. Stepanian had been working hard to change that, however. In 1993, corporate banking accounted for 64% of the bank's operating income. Last year the proportion dropped to 53%, even though corporate banking revenues themselves grew by $80 million. The bank has beefed up its syndication efforts and now is less inclined to hold loans on its balance sheet than it has in the past.

"As you know, that market is more mature, and margins are under pressure," says Gifford. "We're moving from book-and-hold to more of an intermediary (role)." While he doesn't expect the business' revenue growth to exceed single digits percentage-wise, We'll do so with significantly less utilization of assets, so the return on equity numbers, including the risk-adjusted return on equity, will be much improved."

Given the historic importance of corporate banking, it's surprising that Bank of Boston never applied to the Federal Reserve for Section 20 powers, which would enable it to engage in limited investment banking activities. Robert E. Gallery, group executive for large corporate business in New England, says the bank's real estate-related problems of a few years ago distracted it from building up its corporate finance capabilities. Gallery says the bank will probably apply for Section 20 powers. "I think we've concluded that it's a given. You really need to do it," he says.

Finding a Zone

Gallery also is confident that corporate banking can earn a 15% ROE on a weighted average. "If your corporate return is that high, can you afford to make less than that?" he asks. "I think it can--it already does in pockets." The bank's corporate business gets a vote of confidence from McCormick, who says, "They have found a nice zone where a bank of their size is competitive."

The jewel in Bank of Boston's crown is its extensive Latin American operation--principally in Argentina and Brazil--where it functions as a local bank, lending to large corporations, middle market companies, small businesses and individuals. Salomon Brothers ranks it as the sixth largest bank in Argentina, based on deposits, and the biggest in Brazil, according to its estimate of share of wallet. In Argentina, Bank of Boston has acquired the faded Banco Integrado Departmental, which will give it the third largest branch network in the country.

Manuel R. Sacerdote, president and regional manager of Banco de Boston Argentina, says the growth opportunities in Argentina are superb. The economy there has stabilized in the wake of the Mexican peso crisis earlier this year, and he sees an opportunity to build the consumer loan portfolio. Sacerdote points out that 90% of all homes in Argentina do not carry mortgages--a byproduct of its past struggles with hyper-inflation. "With an inflation rate of 100% a year, there was no way you could make a retail loan," he explains.

The country's banking system is going through a consolidation process, and Sacerdote sees an opening here as well. There are about 150 banks in Argentina today, and "we think we're going to have even less," he says. "We're looking to be one of the winners."

In Brazil, the bank is building both its credit card portfolio and mutual fund businesses. it also runs smaller banks in Chile, Uruguay, Colombia--and as of early last month, Mexico.

Back in the U.S., there has been a big push since 1992 to expand the retail franchise--it accounted for 27% of operating income last year, versus 10% just three years ago. Long considered the weakest of the bank's businesses, it has been bolstered by a nationwide network of consumer finance companies. The operation began with the addition of Fidelity Acceptance Corp., acquired when Bank of Boston purchased the Society for Savings three years ago. One advantage of the FAC deal was that it gave much greater geographic diversification to the bank's loan portfolio since the company does most of its business in 24 midwestern and western states. The bank subsequently bought Newport Beach, CA-based Ganis Credit Corp., which also has a national base and specializes in collateralized loans for recreational vehicles and boats. And more recently it acquired a third consumer finance company, Kansas City, MO-based Century Acceptance Corp. "Consumer finance is a great business, but most banks don't know it," says O'Neal.

The bank also has a strong private banking unit, which O'Neal says is "one of the highest return businesses in the bank." There is currently $14 billion under management, and "our cross-sell ratio is incredibly high," he adds. The biggest challenge is finding a way to accelerate the unit's growth, which Gifford says is in the single digits.

Targeting Mortgages

With a portfolio of $40 billion, Bank of Boston ranks in the top 15 mortgage servicers in the country. The question, says O'Neal, is "Do we want to be in the top 10, or five?" While there are certain economies of scale, they are less than in other processing businesses. Overall, he reasons, "It's not a killer not to be big." One problem is that as a servicing portfolio grows larger, so does its sensitivity to interest rate changes. O'Neal hints that Bank of Boston may try to get around this problem through a joint venture with another servicer, where they would pool their businesses--capturing the economic advantages of size but avoiding the increased volatility.

And the bank is adding a credit card to its arsenal--after having sold its card portfolio to Chase Manhattan Corp. six years ago when it was digging out from under its loan problems. O'Neal concedes that most people will judge this to be a quixotic pursuit since credit cards is a mature business--and an insanely competitive one at that. But he also points out that the card issuers who are most successful at building market share are smaller, more focused companies like MBNA Corp. and First USA Inc. that aggressively segment their customer base--not the giant organizations.

O'Neal has cut a deal with First Data Resources to outsource the bank's card processing, which he expects will enable the business to grow without making a large technology investment. It's important that Bank of Boston add a credit card to its personal banking product line, and linking up with FDR will keep the front-end investment under control. "Come back in a year and I might look like a fool--but I won't have spent any money either," he says.

The biggest challenge for Bank of Boston is to build up its branch-based operation in New England. It's a huge undertaking, and some analysts believe they've waited too long. "I think they've really got to think that strategy through again," says Bush. And it is here that Stepanian's failure to reach an agreement with Joel Alvord hurts the most. "Strategically, the best option available to the company was to have made a deal with Shawmut, as it would have contributed a large consumer lending operation and complemented (its) consumer finance businesses," concludes a June research report by Salomon Brothers bond analyst Ethan M. Heisler.

The bank has identified 300 communities in New England where it wants to be either the market leader or a strong number two. O'Neal says it has achieved that position in roughly half of its target sites. To strengthen the personal banking operation further, O'Neal has been adding product to the branches and experimenting with alternative delivery channels. Bank of Boston claims to be the first in the region to offer home banking access through Microsoft Corp.'s Money, and Intuit Inc.'s Quicken, software programs. And it will soon begin installing automated teller machines in Cumberland Farms, Walgreens and Ann & Hope stores throughout the region. Combined with ATMs it has already installed, or is planning to, in supermarket branches, McDonald's restaurants and Wal-Mart stores, Bank of Boston will have added 86 locations to its ATM network by year-end.

The bank's retail strategy, O'Neal stresses, is to focus on upscale customers in those 300 communities--not to build the largest branch petwork in New England. "If scale was everything, we'd be out there grabbing everything," he says. "To me, retail banking is still smarts and not scale."

O'Neal may be right. But to accelerate its rate of growth, the bank may still have to consider an in-market acquisition, similar to four very successful deals in 1993 and 1994 that added about $7 billion in assets and were immediately accretive to earnings. Advest's Moynihan believes that if the bank tries to expand its New England network by opening branches de novo, the going will be tough. "Once the dust settles, I think you'll see a series of strategic acquisitions," he says. In early October, the bank announced it would pay about $220 million to acquire $2-billion-asset Boston Bancorp, which has $1.3 billion in deposits and 70,000 customers.

But Moynihan pitches a much bigger acquisition: Bridgeport, CT-based People's Mutual Holdings and its $6.5-billion-asset People's Bank subsidiary. People's is strong in Connecticut's affluent Fairfield County, where Bank of Boston is comparatively weak. "That would be a beautiful fit," he says.

An even larger deal--and one that could greatly boost Bank of Boston's branch network--would be a merger with Boston-based BayBanks Inc., which has a much stronger retail operation. In October, BayBanks CEO William Crozier was quoted publicly as saying the $11-billion-asset institution might be sold. A buyout would saddle Bank of Boston with significant dilution--but Gifford might be loath to see a strong outside competitor invade his home turf.

Shea cautions, however, that the bank will be very careful about doing any acquisitions. It would only take dilution if the deal was of significant strategic importance, and the dilution could be earned out quickly. One respected analyst even believes that Bank of Boston's weak position in consumer banking threatens its future viability. Asked point blank if Bank of Boston can survive on its own, this person replies: "I'm not going to answer that question on the record. No. They're starting too far back."

Talk With Hugh

Gifford will no doubt get lots of advice in the months ahead. Indeed, he's received quite a lot of it already. "We have told them that if they're looking at all the options, they had better talk to Banc One or NationsBank," says investor Harry Keefe. Keefe reasons that Bank of Boston needs help--primarily access to capital--to grow its Latin American business. He has even called NationsBank Corp. CEO Hugh McColl and pitched the idea to him, suggesting that McColl retain the Bank of Boston name and establish Boston as his northern headquarters. To do otherwise would ignore what the board has already said about the importance of retaining a strong banking presence in their community. Unfortunately, McColl is known to feel strongly that any acquisition must assume his bank's identity. "He said, `Well, we're pretty proud down south, too.' I said, `We're not talking about buying your bank. We're talking about buying the Bank of Boston.'"

DLJ's Brown suggests that Bank of Boston spin its consumer finance business off to shareholders, since it would trade at a much higher multiple to earnings if liberated from the bank itself. He also thinks they should sell the Latin American operation to someone like BankAmerica Corp., and then auction off what is left--mostly an average-performing regional bank--to the highest bidder. Brown figures the regional batik could fetch $45 a share even though it may be years before its retail business catches up with the competition. "Someone will pay you for your franchise," he reasons. "I think you could find someone today who would pay a multiple of (the regional bank's) earnings as if they were already there."

But it's hardly likely that Gifford or his lieutenants would willingly dismember their company. Sacerdote may speak for the rest of the bank when he remarks, in the context of Latin America, "Why would you sell something that works so well for you? Warren Buffet doesn't sell off his jewels. He sells off what doesn't work."

Perhaps the best argument for not selling the bank is that it hasn't peaked yet. Bidding now would probably start in the mid-$50-range, some analysts have suggested, and could go as high as $60 a share. It might be better to wait a few years, perhaps raise some capital to invest in Latin America, continue growing the consumer finance business and keep chipping away at the Northeast branch operation. In three years, say, the franchise might fetch even more.

Maybe what Bank of Boston needs now, if it is to remain independent, is a skillful obfuscator--someone who can say yes and no at the same time. Yes, we're keeping our options open, so investors don't think they're being totally inflexible. But no, we don't want to sell just yet. We've still got some fixing up to do before we put the old house on the market. But please call again.

If Chad Gifford can do that and deliver an 18% ROE in the process, he'll fill out that suit just fine.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.