When George Schaefer Jr. took over as president and chief executive officer at Fifth Third Bancorp. in 1990, his first thought was: "Don't screw it up." The Cincinnati company was one of the industry's strongest performers, and the conservative West Point graduate wanted to keep it that way.
His strategy was simple; he had none.
"I'm not a vision kind of guy," the low-key 55-year-old explains over a lunch of club sandwiches and iced tea in his functionally decorated office. "My deal is day-to-day execution."
His tightly focused, hands-on style worked smoothly over a decade of prosperity. He built up the company one safe little step at a time, largely through small acquisitions close to home.
But last November he boldly departed from that uncharted course with a deal to buy Old Kent Financial Corp. of Grand Rapids, Mich. The deal is a bet on his ability to raise the performance of a much weaker Rust Belt cousin - more than twice the size of any of his previous acquisitions - in the midst of an economic slump.
Already there have been painful shocks. Last month Mr. Schaefer announced unprecedented layoffs, and Fifth Third's stellar stock is an also-ran against the Midwest banking competition in this year's market downturn.
That's a lot of pressure for someone who operates without the backup of a No. 2 executive and has had two heart bypass operations, the last one four years ago. And none of that pressure is necessary, since he could walk away with Fifth Third stock and exercisable options worth over $130 million.
Mr. Schaefer concedes that he has a good long run in the job, and says he won't wait till age 65 to retire. But he's plowing straight ahead, and he dismisses any concerns about his physical fitness for the job.
"If I had the least bit of concern about my health I wouldn't be here," he says. "I talk to the doc about that all the time. As long as it's fun, I'm going to keep on working. Why wouldn't you want to manage the New York Yankees?"
He's already included Old Kent in a major Fifth Third sales campaign and is reorganizing his Michigan acquisition, even though the deal - which will create the 16th-largest U.S. banking company, up from No. 24, with assets of $70 billion - won't close for several months. Mr. Schaefer expects Old Kent to be fully integrated into Fifth Third before the year is out.
The key to making the acquisition work will be in getting Old Kent's 7,000 post-layoff employees (Fifth Third has 11,600) to buy into Mr. Schaefer's intensely competitive way of doing things. His competitiveness is what keeps him going and helps makes Fifth Third special.
It is also, by definition, a quality limited to a small number of people.
"It's not an easy company to work for," says Stephen Gresdo, an analyst at the hedge fund Second Curve Capital, which holds no stake in Fifth Third. However, "if you're a type-A person who thrives in a meritocracy, you'll love it."
Mr. Schaefer didn't invent the system; he just proved that with his quiet forcefulness it could be exported time and again.
In essence, Fifth Third is a collection of banks in competition with everybody, including each other, and Mr. Schaefer is the scorekeeper. He watches over more than a dozen "affiliate banks" - semi-independent operations organized under six charters - in the Midwest (Ohio, Kentucky, Indiana, Illinois, and Michigan) and in Florida and Arizona, for the customers who fly south for the winter.
"We make loans, we make pricing decisions, we have the ability to run our businesses," says Robert J. King Jr., an executive vice president who is also president and CEO of Fifth Third's affiliate bank in Cleveland. This autonomy has even been driven down into the branches, which have their own profit-and-loss statements.
The company also focuses intensely on top-line growth. Employees are expected to sell. Every month, each of the affiliates is expected to have at least one "blitz" - a massive sales campaign, like the one Old Kent is participating in, that wears out lots of shoe leather and draws the participation of senior executives including Mr. Schaefer.
Fifth Third's concentration on sales paid off big in 2000, when its earnings grew almost 18%, to $863 million, as many other banking companies were running out of gas. Return on average assets was 1.98%, and return on average equity 20%. The latter is especially impressive when you consider that Fifth Third ended the year with equity capital equal to 10.6% of assets, a much higher ratio than at most commercial banks.
Adjusted for stock splits, the company's earnings per share have grown at a 15.7% compound rate over the last 20 years. Eleven of those years were on Mr. Schaefer's watch, and throughout much of the 1990s Fifth Third arguably was the country's best bank. Despite the recent selloff, its stock currently trades at 28 times earnings, which is higher than all but four of the 50 largest U.S. banking companies.
That sky-high valuation leads to the inevitable concern that its stock is overvalued, though that doesn't worry Lehman Brothers analyst Henry Dixon. "I call Fifth Third the General Electric of the banking industry," Dixon says. "It has been able to maintain more consistency in earnings than almost anyone else in the banking industry. And that consistency is worth something."
There is a direct connection between the laser-like focus on execution that Mr. Schaefer applies to the entire organization and its strong performance. Not everyone, though, can handle the accountability he insists upon. "He's relentless," says Mr. King.
Mr. Schaefer gathers data and measures everything. The bank's management information system allows him to track the performance of all major profit centers and identify the winners and losers within the company. It's as if Mr. Schaefer sat in a control room and monitored Fifth Third's operations through the dials and gauges of his MIS reports.
Routine sharing of this information with Fifth Third employees has the effect of pitting executives, whether affiliate presidents or branch heads, against one another without turning Mr. Schaefer into one of those high-testosterone bosses who manage through fear. Peer pressure is a powerful motivator at the bank - no one wants to be on the bottom of any list that gets circulated among his or her peers - and it's a stick that Mr. Schaefer yields without seeming to.
"There's an intensity in our company," says Neal Arnold, Fifth Third's chief financial officer, "but it doesn't come from George putting a finger in your chest." Mr. Schaefer is not an intimidator, Mr. Arnold says. "I've never seen a temper."
Mr. Schaefer's number crunching does not mean he is remote from the bank's employees. Fifth Third's flat organizational structure, including the absence of a chief operating officer, keeps him close to the action. He admits that he finds it difficult to trust subordinates to do things correctly. "You can make the decisions, but I'm going to be watching the decisions you're making," he says.
Mr. Schaefer is also an incrementalist who proceeds cautiously and doesn't like to spend aggressively on new business ventures. Mr. Arnold says his boss doesn't subscribe to the "build it and they will come" philosophy of developing new businesses; because he is so fixated on profitability, new ventures must pay off fairly quickly. Mr. Schaefer also prefers to start small and grow, rather than start big and hope that revenues catch up with expenses.
"Whatever your dream is, he's going to make you get there one piece at a time," Mr. Arnold says.
The carrot is there for those employees who hang in - and in Mr. Schaefer they can see how plump that carrot can be. Seventy-three percent of Fifth Third employees hold equity in the company, and employees and directors combined own 9.7%. Vice presidents and above are eligible to receive stock options, and five of the company's executive vice presidents own more than 500,000 shares apiece.
It's worlds apart from West Cincinnati, the working-class community where Mr. Schaefer grew up and played football at Elder High, a Catholic high school. Going to West Point had more to do with finances than with patriotism; Mr. Schaefer had five brothers and sisters, and West Point offered a better education than his parents could afford for him.
"I got my application from a really tough football coach at Elder who had been there a long time," Mr. Schaefer recalls. "He came up one day after practice late in the season of my senior year and had an application. He hit me in the chest with it and said, 'Mr. Schaefer, I think you're the only person on this team who can read. Why don't you fill this out and send it in.' "
Given his motivations, it's not surprising that Mr. Schaefer ultimately chose not to make a career in the military. A classmate, Chris Olinger, remembers him as having been delightfully down-to-earth, unlike many of the "want-to-be MacArthurs" who were attending the academy.
Mr. Olinger was a year behind Mr. Schaefer, and like every first-year student - or plebe - was subjected to hazing by upperclassmen. One day a group of them had him cornered outside of Mr. Schaefer's room. Hearing the commotion, Mr. Schaefer came out, saw what was happening, and ordered Mr. Olinger into his room. After closing the door, Mr. Schaefer kindly let the rattled plebe calm down until the coast was clear and he could escape.
The episode showed that even as a young man, Mr. Schaefer had a "healthy disregard for convention," Mr. Olinger says. "The convention was to beat up on plebes. What George did was not conventional."
Still, the academy taught him discipline and trained him to think about the important aspects of any job. "It turned out to be very worthwhile," he says. "I don't think I'd be where I am today had I not gone there."
After earning a degree in engineering at West Point and attending the Army's Ranger School in Georgia, he learned what it was like to function under real pressure starting with a two-year tour of duty in Germany as part of a nuclear demolition munitions unit. If the Soviet Union launched an attack, the unit was to use small nuclear bombs to blow up roads and bridges.
In 1969, Mr. Schaefer went to Vietnam, where he helped build a 25-mile stretch of road about 50 miles north of Saigon.
He found Vietnam a kaleidoscope of sights and sounds and experiences. He was struck by how cheap - sometimes literally - life was in Vietnam. "The maximum settlement in an accidental killing was $65 - and that was if you were a big strong male," he says. Nor was it unusual in the morning to find dead bodies of the enemy lying around from skirmishes the night before. Many were dragged out from the jungle and left lying by the road as a warning to the Viet Cong.
"It was a very unstable environment," Mr. Schaefer says. "You knew the bad guys were going to shoot you, but if you weren't careful the good guys were going to shoot you too. As you can imagine, there was a lot of alcohol being consumed over there."
Building a road in a war zone was a dangerous assignment, and Mr. Schaefer was awarded a Bronze Star for valor.
Though he stayed in the army only as long has his commitment required, he wanted to remain an engineer. On discharge he applied for a job at a nuclear generating plant being built by Cincinnati Gas and Electric. When the plant's license was delayed, he joined Fifth Third in 1971 as a management trainee making $8,500 a year.
He planned to stay only until the licensing issue was resolved, but the plant never opened.
The accidental banker then turned his ambition toward the work at hand, and made the most of his superior mathematical skills. He asked to be placed in the commercial loan department because a brother-in-law who worked for the Federal Reserve in Cincinnati said that was where the action was.
Later he was put in charge of the data processing operation, even though he didn't know anything about the subject. It was the dawn of ATM networks, and the unit he worked in, now known as Midwest Payment Systems, was turning itself into a profit center by processing transactions for other companies. Mr. Schaefer's leadership there brought him to the attention of senior executives and directors at the bank.
After a few years at MPS, Mr. Schaefer returned to the commercial loan department, where he would remain until becoming president and chief operating officer in 1989. The following year he succeeded Clement Buenger as chief executive. "I've either been on the fifth floor or the third floor of this building for 30 years," Mr. Schaefer laughs.
For a conservative manager who believes in building his business a little at a time, Mr. Schaefer is taking an uncharacteristically big step in acquiring Old Kent. (The deal is scheduled to close in the second quarter. )
Fifth Third intends to cut 16% out of Old Kent's overhead. As in previous mergers, much of the savings are to come by centralizing most of the Michigan bank's processing activities with its own. But this time big layoffs are planned too - 1,400 Old Kent employees, more than 15% of its work force.
That could lead to morale problems and make it harder to inculcate Fifth Third's sales culture and code of strict accountability into a company that has not performed nearly as well. Last year Fifth Third's net income per full-time employee was $76,400, more than double Old Kent's $35,600. It's efficiency ratio was also substantially better, 41.3% versus 56.6%.
Raising Old Kent's efficiency and productivity to Fifth Third's level will be a steep climb, and Mr. Schaefer concedes that there are risks. "Every time you do a deal, you dilute your culture," he says.
And though he has generally succeeded in raising the performance of acquired companies, some have failed to embrace his methods and shine. Consider Ohio Co., a Columbus-based regional brokerage firm acquired in 1998. Fifth Third officials claim it has met all of their financial expectations, but a significant number of brokers reportedly left out of dissatisfaction with the buyer's operating style, and some took a lot of client assets with them.
Of course, Mr. Schaefer isn't the only banker to stub his toe entering the securities industry, and he hasn't tried again since. But Fifth Third could join the noteworthy group of companies, among them Bank One, First Union, and Bank America, that have had trouble with very large acquisitions.
Mr. Schaefer hopes to avoid that pitfall by breaking down Old Kent into smaller pieces and for the most part putting his own people in charge. That is the technique he has used on all acquisitions, regardless of size.
The Old Kent franchise will be divided into three "affiliate banks." Two, including responsibility for the Chicago market, will be placed under Fifth Third executives. The third, the Grand Rapids operation, will be given to an Old Kent executive. By carving up Old Kent and putting some of his own people in command, "by definition you break up the old culture," Mr. Schaefer says.
Fifth Third has already exposed Old Kent to its aggressive sales style by including it in a three-month sales campaign to raise low-cost-checking deposits.
Executive vice president Robert Niehaus, who oversees Fifth Third's retail efforts, says the new affiliates will have all of its products by the fourth quarter. "I believe that in 2002 you'll see them really focusing on sales," he says.
An equally important question is whether Mr. Schaefer can continue to run a nearly 50% larger company in the same hands-on way. Will he spread himself too thin? An added concern is the two heart bypass operations, in 1982 and 1997.
Still, analysts see Fifth Third as have a deep bench, including Mr. Arnold, Mr. King, and Mr. Niehaus. "George Schaefer gets too much credit around here for the culture," Mr. Schaefer himself says.
But with a big acquisition to integrate and a legacy of financial excellence to protect, Mr. Schaefer is under more pressure than ever before. His very nature is to measure and compare, and now he has a great deal more to keep track of - in the worst economic environment in years.
Mr. Milligan is a freelance writer based in Charlottesville, Va.
