In a deal to create another retail banking giant in the heartland, Milwaukee-based Firstar Corp. said Wednesday that it has agreed to buy Minneapolis rival U.S. Bancorp for $21 billion in stock.
The deal would create a company with $160 billion of assets, 10 million customers, and 2,200 branches in 24 states stretching across the upper Midwest and Plains to the Pacific Ocean. The combined entity would take the U.S. Bancorp name and be based in Minneapolis.
The deal is also a family affair. U.S. Bancorps chairman, John F. Grundhofer, 61, is to be chairman of the combined company until his retirement at the end of 2002. His younger brother, 56-year-old Jerry A. Grundhofer, who is chairman of Firstar, will take on the titles of president and chief executive officer at the new company.
At a presentation Wednesday, the brothers described the combination as playing to the relative strengths of their companies. U.S. Bancorp, which has enjoyed strong gains from its Piper Jaffray investment banking unit and its payments processing business, was suffering from sluggish revenue gains in retail banking. Firstar, a Midwest power in retail banking, lacked investment banking and other product capabilities for its corporate bankers.
For Firstar, the combination would greatly diversify revenues, which are now tilted heavily in favor of traditional lending and deposit-taking activities. Consumer banking would make up 38% of revenues; corporate banking 29%, and payment systems and wealth management the rest. Fee income at the combined company would account for 43.2% of the total. At Firstar, fees make up only 35.4%.
And the deal would vastly expand Firstars selling territory by bringing it for the first time into faster-growing markets on the West Coast. We were absolutely salivating to get into these great growth areas, Jerry Grundhofer said.
The new ground overlaps substantially with another former Minneapolis retail powerhouse, Norwest Corp., which in 1998 acquired San Francisco-based Wells Fargo & Co., a former Grundhofer employer. At the presentation, the Grundhofers said they were looking forward to the jockeying. Im not afraid to compete with any of them, Jerry Grundhofer said.
Firstar agreed to exchange 1.265 shares of its stock for each share of U.S. Bancorp. On the basis of Firstars stock price at the close of trading Friday, the value of the deal would be $28.30 a share, a 24.4% premium, and 11.7 times U.S. Bancorps 2001 earnings. The deal needs regulatory approval and is slated to close in the first quarter.
The companies project they will achieve cost savings of $266 million through 2003, about 80% of it by the end of 2002. They plan an $800 million restructuring charge, about $208 million related to employees. But because there is little overlap in operations, the companies said they do not expect significant layoffs or branch closings.
Firstar might well have expected its shareholders to applaud the terms of the deal. Firstar said it would immediately add to earnings, which is seen as crucial for any large bank deal after a slew of megamergers in 1997 and 1998 failed to meet ambitious revenue and cost targets.
In this environment, you cant afford to overpay, said Denis LaPlante, an analyst at Fox-Pitt, Kelton.
Still, Firstar stock dropped 10%, to $20 in trading Wednesday, on investor fears that $74 billion-asset Firstar had yet to prove itself after a recent spate of deals to nearly triple its size, and that it is now taking on its biggest yet. U.S. Bancorp has $84 billion of assets. Its shares rose 7.8%, to $25.
Firstar is the product of a 1998 merger with Cincinnati-based Star Banc Corp. That deal was followed by the purchase of $35 billion-asset Mercantile Bancorp of St. Louis last year. Firstar also recently struck a deal to buy the Tennessee branch operations of First Union Corp. of Charlotte, N.C.
While Firstar is considered an efficient acquirer, its once high revenue growth has faltered in the process of digesting these deals. Contrasting with Star Banc revenue-growth highs of 9% in the mid-1990s, revenues per share rose 5.8% last quarter.
The challenge here is that they havent fully demonstrated an ability to ramp up revenue growth at acquired companies, said Mr. LaPlante. Firstar management thinks theyre on the verge of showing that, but before that happened, they did this deal.
Still, Firstars aggressive sales initiatives and employee incentive programs have produced positive results that U.S. Bancorp has not been able to replicate. Firstars consumer bank has been growing at a rate of 21.2%, the companies said, while U.S. Bancorp has struggled with 6.1% growth.
It was taking longer than expected to accelerate the revenue growth in retail, Jack Grundhofer told analysts Wednesday. Firstar has a different model, and that model is correct.
The deal brings to an end a busy decade for an executive nicknamed Jack the Ripper for his cost-cutting integrations of the 1990s that culminated in the 1997 merger of his bank, First Bank System, with Portland, Ore.-based U.S. Bancorp.
One question raised is whether U.S. Bancorp recently viewed as regaining some of its lost momentum, particularly in retail sold too soon. The executives would not comment on whether U.S. Bancorp had other suitors.
On Wednesday, Mr. Grundhofer said that he had begun serious talks with Firstar in mid-September after witnessing big changes that were sweeping through the industry, notably Citigroup Inc.s acquisition of Irving, Tex.-based Associates First Capital Corp. and Chase Manhattan Corp.s deal for J.P. Morgan & Co.
Our currency was too depressed to make an acquisition of our own, he said. This was our best choice."
