American Banker reporter David Boraks talks to L. Phillip Humann, chief executive of SunTrust Banks Inc., who reflects on the Atlanta-banking company's recent bid and subsequent failure to acquire Wachovia Corp. of Winston-Salem, N.C.
Mr. Humann says he has no regrets. But those waiting for the bank's next acquisition may have a wait on their hands.
Q. What was your initial reaction when you heard that Wachovia and First Union were talking about merging?
A. I guess my initial reaction was disbelief. Not that Wachovia had chosen to do a transaction with someone, because as we knew they were very close to doing a transaction with us. But we had First Union in the unlikely partner status.
Q. There was about a month between that and the time SunTrust announced its offer. Was that simply a matter of getting a good offer together, or were you considering whether to do it or not?
A. It was very difficult to contemplate doing anything, because they conveniently delayed the filing of their merger agreement until two and a half to three weeks. And so it wouldn't have been very prudent of us to seriously consider doing something when we didn't know what we were up against.
Q. Was there ever a question of whether you would do this or not? Or did you feel pretty strongly that you were going to do this?
A. No, until we got the merger agreement we didn't spend a lot of time seriously discussing doing something. The knowledge we had of our December transaction, coupled with the apparent inferiority of the First Union transaction, made us scratch our heads and sort of do a "What's wrong with this picture?"
Q. The First Union-Wachovia merger is now going through at that price, at that offer. Is it still surprising to you?
A. Well, it's going through at that exchange ratio. I think the single biggest reason that we were not successful is the impressive and somewhat inexplicable 18% rise in the price of First Union's shares. So, although our offer, from May 14 to Aug. 3, improved from $70 a share to $75 a share, First Union's offer improved [by]-- whatever 18% is of 59 bucks -- [to] about 70.
Q. In the end, a lot of shareholders were looking at the prices.
A. Yes. Basically what happened is the spread decreased from 17% to about 6%, but more than all of the decrease is due to the rise in First Union's stock. Because, see, ours rose too. So the Wachovia shareholder ended up getting from them a $10- or $11-a-share better deal than they had the day before we came along. Keep in mind they also got the dividend reinstated, which was very important to the individual shareholder and to some institutions.
Q. Looking back at the last couple of months, do you have any misgivings or regrets about the way this went, or about doing it at all?
A. Well, we don't have any misgivings about making the offer and pursuing it to the shareholder vote. We're not looking back at all. Obviously we wish the [North Carolina] legislation had not been put in place, we wish the litigation would've come out differently -- but you don't know any of that till it happens.
Q. Do you think there's been any benefit to SunTrust for having done this?
A. Well it certainly energized all of the bankers at SunTrust, I'll tell you that. I'll also admit that was an unintended byproduct. We certainly didn't do this to energize our folks, but that clearly is a byproduct. We've gotten a lot of visibility; whether that's good, bad, or indifferent I don't know. I know we can't measure the effect. I think we were able to tell a very good, consistent story throughout.
Q. How can you use this to your advantage?
A. [laughing] Well it's unlikely we would make unsolicited offers a line of business, but you gain a lot of experience. I mean we now have personal relationships with institutional shareholders that we didn't before. Because basically we called on more or less the top 100 institutional shareholders of Wachovia -- many of which, by the way, are also shareholders of SunTrust, and a good many of which weren't. There were lots of positive byproducts of it.
Q. Say a little bit about your meetings with those institutional investors. How did they receive both your short-term goal -- acquiring Wachovia -- and your long-term goals?
A. Every one of 'em's different. Even though I'm now going to place them into three groupings, it really isn't all that fair.
You had one group who didn't think First Union was ready for this transaction, who were mindful of their merger integration missteps of the past, and who had actually suffered through that as either shareholders, or in a couple of cases, as customers. So they were very receptive to our story.
You had another group that owned both Wachovia and SunTrust. And in many cases, institutions within that group sort of took the position: "Hey, I've got a nice gain in my Wachovia. First Union's stock has appreciated. And if SunTrust loses, it is very likely their stock will go up. And so since I own both, I'm better off voting for the First Union transaction, take my Wachovia gain, and watch my SunTrust position increase."
Q. So they win both ways?
A. Yeah. Now that group didn't get very deep into the fundamentals, and into the long term. We got reminded by virtually all of the institutional investors that, quote, "we don't have to own any of these stocks tomorrow morning." In most cases, they got no tax considerations. So it's sort of a different mindset than you've got with the long-term shareholder.
Q. Did that surprise you -- that when it came right down to it, they could agree with everything you were saying about SunTrust and its strengths and prospects, but that wasn't the argument?
A. It surprised me a little bit. It actually disappointed me a lot. Because we didn't hear from any institutional shareholder that "we don't like your story, we don't like your stock, we don't like your outlook." We never heard that one time.
I've described the two ends of the spectrum, but the bigger group was actually in the middle. They're what we called the bird-in-hand group, which basically said: "We like you, we like your stock, we like your proposal, we like your long-term outlook -- but it's pretty clear that at least the Wachovia board and management is insistent that SunTrust will never happen. And so we're better off taking the bird in hand." Now that, by far, was the biggest of the three groups.
Q. If you look at the history of hostile bank bids, it's rare that investors would vote in favor of the hostile bidder.
A. Let me say this: If the spread were 10% or greater, I think the bird in hand would've looked tiny to them, and they would've been willing to vote against the transaction -- honestly, not because they thought the Wachovia board would sit down with us the next morning, but because they then knew through filings, through the litigation, through whatever, that there were others out there too.
So I think [that] at a 10% spread this big group in the middle, many of them, would've gone the other way.
Q. When during this campaign did you begin to realize that this might not happen? Or did you still have hope at the last minute?
A. Oh no, we had a lot of hope up until the last minute. I mean it wasn't well, let me say this:
We had a 6 o'clock [in the evening] conference call on Thursday the 2d [of August], when it still looked very close. And it looked close because we appeared to be prevailing with the individual investors -- we had a fair amount of support from the institutional community. But a lot of the institutional community, at that point, believe it or not, hadn't voted yet. Or at least their vote hadn't gotten to where we could see it.
So, 6 p.m. the night before the vote .
Q. What was that conference call?
A. It was an internal conference call with people here [in Atlanta] and people in Winston-Salem, people in New York.
It wasn't until Friday morning [Aug. 3] that some of the late-voting institutions came in and apparently went the other way, and it looked like we weren't going to prevail.
Now, you've got to keep something in mind: They're publicly stating that they won 3 to 1. But I think when the vote comes out, you will see a 55 to 60% vote for the transaction, which means that 40 or 45% of the people voted against it, or didn't vote at all.
They are trying to make it appear that the nonvotes were simply due to shareholder laziness. And we happen to know from talking with a large number of individual shareholders, some of them quite large shareholders, that they decided not to vote knowing that [abstaining] was a "no" vote.
Q. I actually asked Bud Baker about this, and he said the 3 to 1 was only votes that they've seen.
A. They could've gotten up to 60%; that's where we have it -- we have it bracketed between 55 and 60. And we could've gotten only 20 against, which would leave another 20 not voting at all. Again, to assume those are just lazy Wachovia shareholders, I think, is inaccurate.
Q. Did you get a sense from your proxy firm about what the turnout might have been?
A. Not precisely. We're operating under the assumption that 80% of the shares were voted. But that could be off. The problem you've got, and what's taking so long to come up with a final count, is that many individual shareholders voted multiple times, and they [the third-party proxy firm] have to make sure the one they're counting is the latest proxy card, properly filled out.
Q. Some people from the outside might have looked at this and seen it as a negative bid, motivated by maybe disappointment over what happened in December. Do you agree with that?
A. Well, we don't think that's true. We thought it was a very positive offer. We thought it was better for the Wachovia shareholder while still good for the SunTrust shareholder.
You've got to keep in mind, by necessity and design, we had to focus a lot on the Wachovia shareholder but we work for the SunTrust shareholder. So we had come with an offer that was good for both. And, you know, that is one of the reasons we announced our "best and final, we're not increasing the price" statement -- because we work for the SunTrust shareholder. And getting into a bidding war, particularly a bidding war against ourselves, we don't think would've served them very well."
Q. What kind of feedback have you heard from your own shareholders?
A. Well, I mean, I've had a lot of congratulatory calls and notes. But, I certainly -- "Good effort, good fight, we're proud of you" -- all the kind of things people say.
Now, I mean, look, in all honesty, I've gotten a couple of letters saying, "If I get any more proxy material I'm voting the other way." People have stacks of stuff. And it isn't just 10 little proxy cards. It's 10 of this. [holds his hands about six inches apart]
Q. One of the investment banks that was involved on the other side, Merrill Lynch, has now come out and reinstated coverage of SunTrust. They've cut their rating somewhat from where it was, and said they feel that SunTrust has lost some of its valuation luster.
A. Well, I would say first of all, I would take serious disagreement with this report. SunTrust would not have done this if we weren't doing it from a position of strength. We would not have done it if there was any scenario other than win-win.
Now, we would've preferred to have won Wachovia, but we made sure throughout that if we didn't we would still have a winning hand. Because look: For the next two or three years we're going to do exactly what we did with NationsBank-Barnett, exactly what we did with First Union-Signet, and exactly what we did with Wachovia and two Virginia acquisitions they made -- we're gonna attract their customers to SunTrust and some of their best employees to SunTrust. So I would say, our outlook has never been better.
And I would also observe that that's the first [analyst] comment like that I've heard. I'm sure we could get you a raft of other analyst comments. I mean, even Mike Mayo said that things were going to be OK.
Q. You've just said you think the outlook has never been better. Say some more about the next few years.
A. Well, look, with or without Wachovia we are well into executing a business strategy and a sort of restructuring that we started putting in place a couple of years ago. It emphasizes high-growth, high-profit lines of business. It recognizes that all of our lines of business feed each other and need to be integrated and coordinated. You've got to keep in mind, which I know you know, we're still in some of the best markets in the entire country. And so our organic growth prospects are as good as they've ever been.
Yes, we will have to, quote, "do without the Carolinas for the foreseeable future." But the fact of the matter is, when you're in the other major markets we're in -- like Washington, Atlanta, Richmond, virtually the whole state of Florida -- you've got great prospects just doing business as usual.
Q. What about the Carolinas? That had to be one of your major motivations for pursuing Wachovia as fervently as you did.
A. Well, it's the most, if you just look at the broader Southeast, it's the most demographically attractive part of the Southeast that we're not already in.
Now, the reason the Wachovia transaction was so attractive to us is that it combines that with the ability to get a lot of cost saves because of our overlap in Virginia and Georgia. So yes, the Carolinas would still be attractive to us -- but there wouldn't be a situation where it would sort of combine the best of both worlds: a new demographically attractive market extension coupled with the ability to, in this case, take out $500 million in costs.
Q. Do you see yourself trying to fill that hole in the near future, or when?
A. Not on a basis other than what would be completely opportunistic. I have said to the investment community and I will say to you: We're not going to be back up here in front of you with another book, with another deal, anytime soon.
Q. In your gut, do you think when you finally do that, will it be a large merger or a large acquisition like this, or will it be something smaller? There's a limited number of options.
A. I have no idea. There's a limited number of acquisition options. But one strategy we could employ in the high-growth, demographically attractive cities in the Carolinas [is to] get a wealth management presence, get a mainstream commercial banking presence. You do that sort of one office or one group of people at a time. It wouldn't entail building 100 branches; that would be a 10-year strategy -- it wouldn't work out very well.
But you know, that's sort of one end of the spectrum. The other end is that you do some kind of a transaction. Now, what will end up happening? I have no idea.
Q. Do you think you have a shot at any of the branches First Union and Wachovia are talking about divesting?
A. I would doubt they would consider us a suitable buyer. Plus, you tend -- and this is not directed to this transaction -- but you tend not to divest your best branches.
Q. Looking at the reality of how things have turned out and how it may change things here in the Southeast, what is your mission? What do you think is going to happen here in the Southeast, with one major player being taken out of the game?
A. Oh I suspect far less than most people think. We have observed from a number of our much larger competitors that bigger is more difficult, bigger is harder to manage. Taking 42% out of a bank's expense base [as called for in the Wachovia deal] cannot be done without disruption to customers. So that's why in the next two or three years we're looking forward to what happens.
Now look, I'm absolutely willing to say that First Union will do the best job they've ever done on merger integration. I'm not going back and slamming them on past missteps. But the fact is when you do a 42% expense takeout, when you close half of the acquired bank's branches or the numerical equivalent of half of them, you're going to disrupt customers.
And we compete very effectively against much larger competitors, like Bank of America, and we've competed very effectively against both these two. As long as we've got great people and the right array of products, if anything customers shy away from the largest institutions. In fact, if you look around at what actually happens in Florida, Nations-Barnett would be a good example of this we picked up share. But the largest share was picked up by the community banks, as a group.
Again, any customers, particularly retail customers, shy away from the biggest, because of service difficulties, pricing, the whole nine yards.
Q. So at least on that level your real competition is the community banks? How is SunTrust set up to do that?
A. I mean, we do extremely well, because our whole operating model is built on getting the efficiencies of a big bank, having the service spectrum of a big bank, but delivering those services in a community bank environment. Our local people are much more empowered than anyone else. We don't make all the credit decisions in Atlanta, Georgia. The borrower gets handled locally, dealt with locally; our CEOs have tons of authority. So we look to the local customer more like a local bank, because they can go in and actually meet with the person who's approving their credit, as opposed to some windowless credit-approval factory in Charlotte.
Q. We've talked about all the products and services on the consumer side. What about the corporate side? How is that shaping up, and where do you see that going? What about the Robinson-Humphrey acquisition?
A. We have always had a corporate banking presence, but unlike First Union we target kind of the broader middle market, principally within our footprint.
Now don't get me wrong; we do business with Fortune 100 companies -- we have major relationships with Fortune 100 companies that are in our footprint, like the one you can see right out the window here. [points toward Coca-Cola headquarters] But our thrust is middle-market, in-footprint, full-based relationships.
First Union [has] the scale and desire to compete with Wall Street, with Fortune 100 and Fortune 500. That's not our target market. We're trying to handle the firm typically between $250 million in sales and $2 billion in sales. Although we've got major relationships with Coca-Cola, Delta Airlines, Genuine Parts, and hundreds of others, the fact of the matter is that those companies would tend to use Wall Street for their investment banking needs, not a SunTrust -- and, to a large degree, not even a First Union.
Q. Well, what was behind the Robinson-Humphrey acquisition?
A. Oh, it was very opportunistic and totally coincidental. We've known R-H for ever and ever and ever. We needed to enhance our investment banking capabilities, and particularly by that what I mean is get legitimate, solid, industry specialty coverage that we didn't already have.
You see, when we bought Equitable [Securities Inc., an investment bank in Nashville] in '98 we knew, and it was clear, that they had legitimate industry specialties in only about one handful of industries. And so that was great, don't get me wrong. But the fact of the matter is, you've gotta have more specialties in order to penetrate. And R-H clearly has that.
It was opportunistic because they were desirous of, I think, having an identity beyond a third-tier subsidiary of Citigroup, or maybe it was fifth-tier. And so that, coupled with the fact that we've known them well and favorably for a very long time, allowed that to happen. But it was totally coincidental.
Q. Can you talk a bit more about Equitable? The conventional wisdom among analysts is that didn't bear all of the fruit that you would've liked.
A. Well, that's absolutely true. But you've gotta keep in mind that we bought them on Jan. 2, '98. Until July of '98 the market was great: IPOs were right and left, they had the best six months they've ever had in the history of their firm. And then, come July, the market tanks. The rest is history: IPOs are almost nonexistent, their principal industry specialty went into the tank, at least from an investment banking perspective.
So you know, we weren't then unhappy, or now unhappy, with what we did with Equitable. It just clearly wasn't enough to make a difference. And we think R-H is enough.
Q. What are your goals for the new SunTrust Robinson-Humphrey?
A. Well, what we want to do is penetrate this same group of middle-market companies within these industry specialties. We think we can have the same kind of relationship with them that a Merrill Lynch or a Goldman Sachs or a Morgan Stanley might have with a Fortune 100 company. And I hate to use the term "full-service," because that has a retail connotation, but we can be their bank in all respects.
And now, with the enhanced scale and capability that R-H gives us and the industry specialty coverage, we're now in pretty good shape. There's not much we can't do?
Q. What about on the retail brokerage side?
A. Well as you know, Citigroup, Salomon Smith Barney specifically, was unwilling to sell the full-service retail brokerage group -- because that's basically, in the Southeast, what they've got. Honestly, one of the attractions of Wachovia is that we would bring the combined company greatly enhanced investment banking capabilities. They would bring the combined company greatly enhanced full-service retail brokerage, principally through IJL [Interstate/Johnson Lane].
So we're back to the drawing board on that. SunTrust needs an enhanced full-service retail brokerage capability -- but don't think for a minute that that means we have to go buy somebody with 1,000 brokers.
Q. How do you do it?
A. Well, you could do it one broker at a time. My guess is that given what's happened in the market in general, much less First Union-Wachovia in particular, that there will be plenty of very high-quality, high-producing retail brokers out there for us to talk to.
Q. How many retail brokers do you have now?
A. Well, we have about 400 series 7 brokers. But they tend to be, although they're very good, they tend to be what we call packaged-products [brokers] -- mutual funds, ours and others, annuities -- as opposed to full-service brokers, where they're giving advice. So that's the piece we're missing. We've got adequate broker coverage, but the capacity to get into full-service, getting into advice .
Q. Do you think bank customers are ready to start buying these other kinds of financial services from their banks? That's where everybody is headed.
A. The answer to that is an emphatic yes, but we think it's got to be in a relationship context. It can't and shouldn't be in a purely product-peddling context.
And full-service brokerage, just like its counterpart on the other end, the discount brokerage, appeals to just a certain segment. You can't and shouldn't try to sell a full-service brokerage relationship to everybody. I mean you shouldn't try to sell one to me, because I'm not a candidate for it. But there are plenty of people who are. You've got to segment your customer base and make sure you're going after the right one.
Q. Different kind of question: What kind of an executive are you and how do you approach making all of this fit together in your own company?
A. [laughs] Well, you'd have to ask somebody else that first question. But the way we do it here is the way we've always done it, and that is: have a really, really good team.
Yes, I am the current CEO -- and I will tell you we've got four great vice chairmen who are every bit as good as I am. We've got a management committee of 15 people who absolutely know their line of business, or function, or whatever it is they do. And we operate as a team. I don't know how you run a company of any size, much less one this size, without doing it that way.
Q. Looking ahead, do you have somebody who you view as your successor?
A. If you take our policy committee, which is me and the four vice chairman all but one of them [Wells] are older than I am. One of the reasons we have this structure is that I've only been CEO three years. I felt very strongly that at least for a pretty long while I needed to be kind of hands-on. Although I've been around here 30-plus years, I don't know everything about everything.
So given that I'm 55 years old and been in this job three years, it's premature to speculate on succession. But I will tell you one thing: Any of them could do it. And more importantly than that, there's another group under them that's coming along that's even stronger, and I think each of us on the policy committee would agree with that. We've got great depth.
One of the things we've been able to do, that I don't know anybody else has: . If you look at just say the five of us [on the policy committee], two of us came out of the Georgia company, one came out of the Florida company, one came out of the Tennessee company, and one came out of Crestar in the mid-Atlantic. I didn't do that because I was trying to create the United Nations. I did it because it was the four best people.
And I don't know of any other company that's got that kind of balance and has been able to integrate, you know, acquired companies and people as well as we did. You look around.
We've hired a bunch of people from Barnett. I don't know of a single senior Barnett person who is still around [at Bank of America]. Now, there may be one, don't get me wrong -- I can't think of one. I don't know of a single C&S bank person, now that Jim Lynch has retired, who's still around.
I'm not making any predictions about Wachovia and First Union, because only time will tell. But if you just look around at what others have done, you don't see what you see here, and that is an integration of people we've merged with and acquired, all working together.
Q. Do you feel any kind of pressure, given the fact that you did pursue this bid for Wachovia, about SunTrust's future?
A. Are you asking what we call the vulnerability question? No. Look: Banks get vulnerable when their earnings are not strong, when their revenue growth is not present, when they have credit quality problems. And that's 100% of the time. That's when banks become vulnerable and start having to either consider strategic alternatives or start getting calls from us. And thankfully, none of that's ever been present at SunTrust and clearly isn't present today. And we're all working hard to make sure it isn't present in the future.
There's nothing to this theory of "Oh, the industry's consolidating so much that $100 billion [of assets] was OK but now you've got to be $300 billion." That's just baloney. Fifth Third Bank is not driven by size, and they've probably got one of the best operations in the whole country.
So as long as we keep our earnings up, keep our credit quality good, keep some revenue growth, and watch our expenses, our stock's gonna perform OK and there isn't going to be any pressure.
Q. Let me ask this in a more general way: Ken Lewis at Bank of America says he's pretty sure that in the next few years there are going to be other coast-to-coast or national challengers to Bank of America. Do you agree with that? How do you think that's going to come about?
A. I guess there is a rationale for developing [a coast-to-coast franchise] over time. I can't think of much of a rationale that says, "We are turning into Canada, so if you're not one of the top four or five you're history." I don't think that's the case.
Banking is a lot like politics; it's all local. And even the large corporation in our footprint [Bank of America] is in many respects a local company. So I think the national franchise sounds good -- it clearly looks good on a map -- but I would also expect Ken Lewis will tell you it's pretty hard to manage. The bigger it gets, the harder it is to manage. I think if that weren't the case you would've seen Wells Fargo, for example, try to develop a national franchise already.
But you know, the interesting thing about banking in this country is [that] the consolidation is occurring, on the one hand, yet there are hundreds of new banks being formed. Now again, they're in the major, faster-growing markets. But you've sort of got this dichotomy of continued consolidation on the one hand and more and more banks springing up on the other.
The community bank, which we are trying to be in many respect, has got a much nicer feel to customers. Because again, other than the Fortune 100 or maybe the Fortune 500 [companies], they don't very much care if you've got a presence that stretches from the East Coast to the West Coast.
Q. One more question: Are there any things about SunTrust that haven't been written or that you think should be written about? What should we be looking at in the next few years?
A. The true answer is I don't know; I'd like to think about it. But one of the things that we and a few other companies like us don't get enough credit for is consistency. Yes, at any given point in time we may not look as good as the best, however you might define that -- but over a cycle, I would suggest to you that the consistent performer is the best. I would suggest that SunTrust, like Fifth Third, doesn't get enough credit for that.
This is a blocking-and-tackling business. The market might well want to believe a "transformational" story, because it always sounds good. But the fact is you've got to execute -- and that's hard. For us to say wealth management is our future is pretty easy to do, but to quarter by quarter and year over year increase our market penetration in wealth management is harder.
And I think, because it sounds good, a lot of press gets given to somebody's who's doing a "transformational" thing or who's decided they're going to be the best there is in whatever. To me, that's no news; [news is] two years after that, or three years after that, having done it.
That's the reason our stock over, a long period of time, has outperformed almost everybody else's. It isn't 'cause we're smarter, and it isn't 'cause we work harder. It's because we perform consistently. And we don't have one train wreck after another that then gets explained away.
