First Bank System Inc. announced an agreement Thursday to acquire U.S. Bancorp, joining an elite few banking companies poised to expand nationwide.
Valued at $8.4 billion, the deal would roughly double First Bank's asset size, to $70 billion, and provide the route to the Pacific Coast long coveted by the company's chief executive officer, John F. Grundhofer.
Mr. Grundhofer is paying dearly-more than three times book value-but he considers it an ideal strategic fit.
"These are two companies moving down the same strategic path," Mr. Grundhofer said at a press conference. Their complementary business lines, products, and systems "will enable us to leapfrog over the pack."
After the merger, the company would adopt First Bank's Minneapolis headquarters as its base, but it plans to take the U.S. Bancorp name.
Analysts said Mr. Grundhofer probably has his sights on further growth in his native state of California. He attempted to enter the Golden State last year in a failed white-knight bid for First Interstate Bancorp, which went to Wells Fargo & Co.
"A number of additional deals (could) be much easier to do now that they have an infrastructure in place," said Steven Schroll, analyst at Piper Jaffray Inc. in Minneapolis. He suggested Firstar Corp. of Milwaukee and Westamerica Bancorp. of San Rafael, Calif., are likely candidates.
First Bank, reincarnated as U.S. Bancorp, could also eventually be interested in whatever company results from the tug-of-war over Great Western Financial Corp. The Chatsworth, Calif.-based thrift has received an unsolicited offer from H.F. Ahmanson & Co. but prefers to merge with its white knight, Washington Mutual Inc. of Seattle.
Some analysts speculated that First Bank had its eyes on Great Western after its failure to win First Interstate.
"We have our hands full at the moment," Mr. Grundhofer said Thursday. "And we don't discuss future acquisitions."
First Bank and U.S. Bancorp are each superregional heavyweights in their own right. First Bank has expanded out of its Upper Midwest base to establish representation in 11 states, going as far West as Colorado and Wyoming.
Its bank-office network does not overlap in any of the six states where U.S. Bancorp, the leader in the Pacific Northwest, operates. The Portland, Ore.-based institution in recent years has moved east into Idaho, Utah, and Nevada, and established a toehold in California.
"They're going to become the Death Star," Salomon Brothers analyst Michael Plodwick said. "They've set themselves up for building a national franchise, and after BankAmerica and NationsBank, they're really in a position now to do that."
The acquisition, the fourth-largest in U.S. banking history, would make the post-merger institution the 14th-largest among bank holding companies.
It would also give the new company a sizable presence-in many cases among the top three in market share-in 17 states in the western third of the country.
U.S. Bancorp would bring to the deal the No. 1 share of deposits in Oregon and Idaho. First Bank is No. 1 only in North Dakota, though in the bigger states of Minnesota, Colorado, and Nebraska it is a strong No. 2. First Bank tends to shadow its Minneapolis-based archrival Norwest Corp., both of which had interstate branching authority before the recent wave of deregulation.
If approved by regulators and shareholders, the deal would result in the exchange of 0.755 First Bank share for each one of U.S. Bancorp. On the basis of share prices the day before the deal was announced, that ratio would bring the deal's value to $59.08 a share, or $8.7 billion in all.
The premium of 3.4 times U.S. Bancorp's book value and 17.1 times estimated 1997 earnings is rich by any measure, but most analysts said it was not exorbitant given First Bank's multiples.
First Bank shares dropped $2.75 Thursday, to $75.50, while U.S. Bancorp rose $2.875 to $55.125. At those levels, the deal price would be $57 a share, or an aggregate $8.44 billion.
"Strategically it's a slam dunk and financially it appears to be a very rationally priced agreement," said Mr. Schroll.
He pointed out that First Bank would be paying a premium of only about 20% higher than its current price-earnings multiple for 1997. The average on the past 12 large bank deals was about 40%, he said. First Bank's strong currency-its shares are trading at about 14.5 times 1997 estimated earnings-makes such a pricey deal possible, he said.
The acquisition would be accounted for as a tax-free pooling of interests and would add to earnings, on a reported basis, by the second quarter of 1998-just nine months after its expected close, according to company officials. It would add 8% to earnings by 1999, the company said.
Though the branch banking operations do not overlap, the companies expect to cut 28% of U.S. Bancorp's expense base and achieve $340 million of cost savings.
The cuts would come mainly from centralizing data processing functions, more efficient technology use, and elimination of other duplicative back- office tasks.
As in all megamergers, there would be layoffs-about 4,000 positions estimated at the moment, with the majority among U.S. Bancorp's 14,000 workers. On a pro forma basis, before any reductions, the new company would have about 26,630 full-time employees.
Mr. Grundhofer, who was dubbed "Jack the Ripper" after gutting First Bank's work force in the early 1990s, was asked in the press conference how it feels to be looking at further job cuts.
"I had to do what I had to do to save First Bank in 1990," Mr. Grundhofer said. "That was an unfair connotation. It's not what we like to see happen but it's the nature of this industry, and if you don't do what you have to do you won't be around anyway."
As far as the structure of the new company's management, at least two U.S. Bancorp executives would get prominent roles, reporting to Mr. Grundhofer. Vice chairman Robert D. Sznewajs would become vice chairman in charge of retail banking. Gary T. Duim, president of retail banking, would become vice chairman in charge of corporate banking in U.S. Bancorp's region.
Mr. Sznewajs would also be responsible for overseeing the integration process, which is expected to cause $625 million of restructuring charges through the second quarter of 1998.
Mr. Grundhofer be president and CEO of the new company. U.S. Bancorp's current chairman, Gerry B. Cameron, would retain that title until 1998, when he had previously said he would retire. The new board would combine First Bank's 16 directors with U.S. Bancorp's 12, and would be cut back only through attrition.
Mr. Cameron said Mr. Grundhofer first contacted him last November about doing a deal and said, "I told him to talk to somebody else, that we weren't interested."
The two met around Thanksgiving, and this led to discussions with the companies' respective boards and more substantive talks in February, Mr. Cameron said. Due diligence was completed last weekend and both boards have voted their approval.
First Bank, which expects to complete the transaction in the third quarter, retained Merrill Lynch and Goldman Sachs as financial advisers, along with the law firms Sullivan & Cromwell and Clearly Gottlieb Steen & Hamilton. U.S. Bancorp used Credit Suisse First Boston and Wachtell Lipton Rosen & Katz.