It has been no easy thing for Wells Fargo & Co.'s Paul Hazen to establish his own identity. For nearly three decades, he labored under the shadow of banking legend Carl Reichardt. But in pressing his stunning $10.7-billion hostile bid for First Interstate Bancorp, despite the Los Angeles bank's frantic resistance and First Bank System's competing bid, Wells' chairman and chief executive has transformed himself into a major force in his own right, placing his indelible stamp on the nation's top-performing large bank.
There are many ways of looking at Hazen's gambit. From a business standpoint, an acquisition of First Interstate could provide the fuel to keep San Francisco-based Wells' already lofty profits in the stratosphere for years to come. At the same time, the bid reveals much about the kind of businessman he is and the sort of vision he has. One thing is certain: a hostile run at First Interstate proves that Well Fargo is Paul Hazen's bank now.
Of course, Reichardt too yearned for First Interstate, California's second-largest bank company. Wells' former chief repeatedly courted his downstate rival, most recently in an early 1994 buyout offer. But First Interstate spurned Reichardt, partly out of fear of Wells' zealous approach to cutting costs and jettisoning employees after takeovers, and Reichardt was loath to pursue an unfriendly deal. Hazen did not undertake his bold gamble until First Interstate's William E.B. Siart-another relatively new CEO-had declined similar merger overtures.
Now Hazen is forcing the issue in a way Reichardt was never willing to do. With First Interstate fleeing into the arms of First Bank, Wells' CEO has already increased his bid once and is preparing to take his case directly to shareholders in a proxy contest. In the process, Hazen is showing that his quiet, reserved demeanor belies a ferocious approach to business.
"Paul is much more aggressive that Carl ever was," a Wells executive said prophetically just before Hazen took the CEO job a year ago. "He is more willing to take risks in transactions." Hazen himself, asked in an interview last year to compare himself with his former boss, responded: "I would characterize myself as more of a risk taker."
Still, the Interstate bid is not just about a CEO's aggressiveness. There is no shortage of empire-building chief executives in banking. But Paul Hazen is not one of them. Above all, the acquisition of First Interstate was conceived as an exercise in financial engineering. Hazen's offer reflects a coolly analytical way of making decisions, rooted in the numbers. "Those who think it is about size, scale and market share misunderstand Wells Fargo's motivation," says Bear Stearns analyst Lawrence Vitale.
Despite the eye-popping price tag, around three times First Interstate's book value, the deal could provide a quick payoff. Analysts note that the acquisition price is not as burdensome as it might seem since the Wells stock that would be used in the purchase itself trades near three times book value.
And Wells officials say that within 18 months of a merger they would be able to lop off between $800 million and $1 billion in annual expenses from the combined companies, depending on the baseline assumptions used, offset by $100 million in revenues lost as customers defect. That incremental cash flow would be used to increase the rate at which Wells repurchases its stock, one of the most powerful weapons in Hazen's arsenal for boosting per-share profits. Wells calculates that stock buybacks would total $8 billion within five years of a merger, about $2 billion more than the two companies might carry out on their own.
Purchase Accounting Route
"The proposed merger is fundamentally quite simple," Hazen said in a press conference. "Financially it involves cutting costs and using a significantly higher level of cash earnings to repurchase shares."
But there is one big problem. In order to continue its share buyback program without interruption, Wells proposes to use purchase accounting rather than a pooling of interests in the acquisition. That means a combined institution would wind up with a whopping total of nearly $7 billion of goodwill on the balance sheet. Amortizing the sum would reduce stated earnings by about $400 million per year for 25 years and produce 12% earnings-per-share dilution in the first year of a merger, Wells projects. The merger wouldn't raise reported per-share earnings until 1998.
Hazen is gambling that investors will perceive goodwill amortization as an accounting convention and focus instead on cash flow, since it is the extra cash generated by the merger that would allow an acceleration of the stock buyback program. That is a big if, given Wall Street's aversion to dilution and goodwill.
If Hazen pulls off a deal, success will hinge on his ability to deliver on expense savings. His track record is promising-as Wells president, he was instrumental in carrying out the far-reaching cost cutbacks that made the 1986 acquisition of Crocker National Corp. a model merger.
In his bid for First Interstate, Wells' chief has shown he combines two qualities that don't often go together: decisiveness and financial rigor. If a deal takes place and he executes it, then Paul Hazen may very well create a new banking legend of his own.
