Five years after its merger with First Union, Wachovia is winning plaudits for top-flight customer service and organic growth. But Ken Thompson's appetite for deals-most recently the $26 billion acquisition of Golden West Financial Corp.-has raised eyebrows with investors and analysts. Yet proponents say Thompson's ambition, coupled with strong organizational skills, is sure to keep customers and investors satisfied.
Ken Thompson has never lacked for confidence-either his own or that of his co-workers. Back in 1997-still three years before he was named chairman and CEO of what today is Wachovia Corp.-the folksy Thompson was the overwhelming choice in a board-mandated poll of 30 top managers to be the company's next leader. "He's a very approachable, team-oriented guy," says David Carroll, head of Wachovia's capital-markets operations and a long-time associate. "People trust Ken-employees, directors, customers."
Trust is one thing; money another-something some investors and analysts are voicing strong opinions about. In May, Wachovia jolted Wall Street by announcing plans to acquire Oakland, CA-based Golden West Financial Corp., the nation's second-largest thrift. Within a week, Thompson's company had shed 10 percent of its market cap amid a series of analyst downgrades. The $26 billion deal, priced at a 15 percent premium to Golden West's previous closing price, makes Wachovia a big player in California real estate just as the market appears poised for a downturn. Some wonder if Herb and Marion Sandler, Golden West's founders and co-CEOs, got the better end of the deal by selling a franchise whose better days may be behind it. For others, the deal conjures up images of the old First Union, Wachovia's predecessor, and its fondness for big, dilutive deals. In either case, Thompson's willingness to pay a premium for Golden West has raised eyebrows.
Kevin Fitzsimmons, an analyst with Sandler O'Neill & Partners, notes that Wachovia, which has done a good job generating internal growth, was getting credit for discipline after reportedly stepping away from dalliances with credit-card giant MBNA and North Fork Bancorp. Buying Golden West "disappointed investors who had bought that story and were finally seeing the stock get a higher multiple."
Richard Bove, an analyst with Punk Ziegel, says the discount on Wachovia's stock-at $53 per share, it trades around 11 times 2006 earnings, versus a 13 P/E for Wells Fargo, another big institution with favorable demographics-is due mostly to a perception that Thompson, a sharp manager, is more interested in empire building than operations. "Investors are saying, 'You've got these businesses, you run them very well, and when you do that you make a lot of money. Why are you so intent on making acquisitions? ...We don't want that.'"
Thompson, 56, is making no apologies. For one, he says, the capital on Golden West's books should adequately cover the premium. "The way I look at it, we acquired it at basically a market price," he points out. More importantly, the deal allows Wachovia to achieve at least two key strategic objectives, gaining a foothold in the fast-growth West-and especially coveted California-with 285 branches, while beefing up mortgage operations and the asset side of the balance sheet with adjustable-rate mortgages. "In one fell swoop, we wind up with an outstanding mortgage team and a branch network in the West where we can introduce our model of banking and do very well with it," Thompson declares. "We think it's a very good deal."
If Thompson's strategic ambitions are open to question, his skills as an organizational leader aren't. Five years ago this month, the landmark merger between the old First Union and legacy Wachovia was completed. Since then, Thompson-who took the helm a year earlier, in 2000-has overhauled the organizational structure and culture, transforming a fumbling, lumbering giant into a nimble organic-growth machine. Earnings have grown at a compounded annual rate of 21 percent during that time, while total returns have been 133 percent-even after the recent stock swoon-compared to 41 percent for the Keefe Bruyette & Woods Bank Sector Index. "If you were giving an award to the megabank with the greatest turnaround in performance, they would win," says Jim McCormick, president of First Manhattan Consulting Group in New York.
Under Thompson, Wachovia has morphed into a universal bank, with brokerage, wealth-management and investment-banking operations under its umbrella. The CEO likes the cross-selling opportunities and diversification the mix provides. It also has bulked up in key retail asset classes-Wachovia is a top-10 player in auto, mortgage and small-business lending-and has won plaudits for stabilizing the balance sheet, and for improved investor-relations and capital-allocation skills. All M&A deals must be capable of generating 15 percent internal rates of return and be not dilutive within two years.
For all that, Thompson credits engaged employees and customer service as Wachovia's key differentiators, twin pillars that support customer retention, loyalty and, ultimately, profits. "There's no question in my mind that great service is the most effective bottom-line strategy in banking," he says. "It allows you to cut down on customer attrition, and you can sell more product to customers if they feel well-served."
While conventional wisdom holds that big banks can't do those things well, numerous objective measures indicate that Wachovia can. The company has ranked No. 1 among financial services institutions five years straight in the University of Michigan's American Customer Satisfaction Index. The bank's customer-attrition rates, near 20 percent in the late-1990s, now hover around 10 percent. Cross-sell ratios between various operating units, the focal point of a committee headed by Thompson, are up. And an in-house "new-loss" ratio, which measures the number of new customers against those who have left, stood at 1.31 in the second quarter, its highest level ever. In 1999, First Union was in the bottom decile among large banks in FMCG's same-store deposit growth rankings; today, Wachovia ranks in the top 10 percent.
None of this is accidental, nor, on its face, all that revolutionary. Many banks tout superior customer service, using it as both an internal rallying cry and marketing identity. For Wachovia, the difference lies in the execution. Indeed, customer service has become something of a science within Wachovia, a thing to be measured in countless ways, supported, trained for, incentivized and hashed out in detail by high-level committees.
Thompson uses his bully pulpit to continually preach the gospel, personally chairing a monthly meeting of 40 top managers to review customer-service metrics. "We go through a book of service-level measurements that's probably two inches thick, and if your trends are moving down, you're held accountable to your peers for how you're going to fix it," explains Bob McGee, COO of the general bank. "Everyone knows this is the most important thing in the company, and everyone is held accountable."
Incentives reinforce the notion. Pollster Gallup conducts 80,000 surveys per quarter with clients who have recently interacted with the company. Each Friday, branch managers get a report showing which employee's customers were surveyed, and the service score. When an individual's score is bad, everyone in the office suffers: Individual bonus payments can rise or fall by as much as 30 percent, depending on the service numbers generated by his or her operation. Fortunately, says senior evp Shannon McFayden, head of HR and an in-house customer-analysis, research and targeting group, overall scores have jumped to 6.61 on a scale of 7, from 5.59 in 1999. "This isn't just talked about in the hallways," she says. "It's a formal process."
In return, Thompson, a former HR head, aims to make Wachovia a better place to work. Once every 18 months, all 90,000 employees are invited to anonymously register their desires and gripes in a formal process known as "Wachovia Listens." Insights gleaned from the survey are taken seriously, sliced and diced by employee age, business line, date of hire and dozens of other ways. When key problems are identified, steps are taken to fix them. The most recent survey found widespread discontent with career-path options. In response, the company posted an enhanced career-development guide on its intranet, and launched an online "job agent," which notifies employees of internal openings that fit their pre-selected criteria.
The thinking is that if you want good customer service, employees have to be enthused about the company. "Wachovia understands that if you empower employees, they'll go out and sell like crazy," Bove says. Thompson's gift has been getting all those workers to buy into a set of "core values"-service, accountability and "winning" among them-that, in his words, will make Wachovia "admired and trusted." Tony Plath, a banking professor at the University of North Carolina, Charlotte, says morale among the Wachovia people he knows has clearly improved. "They're happy, energized, focused," he says. "They're prouder to be part of the organization."
Rival bankers seem to be feeling the effects. The CEO of one mid-sized bank confides that Wachovia is his toughest competition. Community bankers, too, sound flummoxed. "They almost uniformly say that Wachovia has stepped up the most competitively over the last three years," Sandler's Fitzsimmons says. "There's an actual air of respect in what they're saying, and, believe me, the small banks like to bash the big guys when they can."
It has been a long road from the late 1990s, when botched acquisitions had the old First Union on the ropes. The company made more than 120 acquisitions in the '80s and '90s, becoming one of the nation's largest banking companies. Back then, the idea for deal-making was simple, recalls Carroll: "Pay a big premium, jam the companies together and cut costs as fast as you can. We had done it so much, it was kind of a reflexive thing."
Then came two big 1998 acquisitions. Cost cutting and poor integration of The Money Store, a small-business lender, sparked a flight of loan officers and customers. Two years later, the unit was shuttered. At CoreStates, the big Philadelphia bank, hubris and a variety of integration issues collided with cultural resentment to spark massive customer losses. "We were arrogant and in too big of a hurry," Carroll says. "And Philadelphia isn't Columbia, S.C. People thought the Clampetts had come to town. They weren't at all happy about this company from the South taking over the largest bank in town." Financial metrics declined, and investors soured on the company, driving the stock price from $65.75 in early 1999 to $23.50 less than two years later.
The share-price slump and bad press battered employee morale and sparked soul searching in the management ranks. In the summer of 1999, top executives began gathering on weekends to determine what went wrong and how to fix it. Part of the resuscitation would come organizationally - the creation of Wachovia's general bank (essentially a combination of retail, small-business and middle-market operations), to consolidate a collection of state banks and act as an organizational center. But the bigger decisions centered on halting customer runoff.
As many executives saw it, the company was caught in a death spiral: Cost cuts led to poor service, which hurt retention and revenue growth, which forced further cost cuts to achieve financial results. In a memorable dinner meeting with Thompson, Ben Jenkins, now head of the general bank, and McGee presented a mocked-up newspaper story explaining that the Atlanta Braves had decided to play without a shortstop to save a little money. The point: "We were operating like those Braves; we didn't have a shortstop," Jenkins says. "You can't win enough games if you're not fully staffed." Thompson bought the pitch, agreeing to boost staff spending by $100 million in the coming year. "We had lost the confidence of the investment community and employees," he recalls. "We needed to stop the erosion of our customer base, and, in order to do that, we needed to fix the service."
Spending more, not less, on something was "really a counter-culture move," McGee says. But the increased staffing made mistakes less common. Plath says an emphasis on "operational excellence" has accompanied the customer-service thrust. "Checks aren't bounced, deposits don't get lost, people are helped when they contact a call center," he explains. "The little, behind-the-scenes operational things work, and they didn't before."
Around the same time, venerable old Wachovia ran into credit-quality trouble. Thompson began talking with CEO Bud Baker, sometimes meeting at interstate motels to maintain secrecy, and in 2001 the two struck a deal. More than a few investors cried foul: First Union was in the early stages of its revival, and seemed to be risking what progress it had made. When Atlanta-based SunTrust launched a hostile bid for Wachovia, some thought Thompson was in over his head. In retrospect, officials say, jointly fending off SunTrust's advance made the merged company stronger. "It got everybody in the same foxhole," Carroll says. "We weren't grousing at each other. We were working together to beat back SunTrust."
The in-house goal of the merger, articulated by Jenkins, sounded audacious: no net customer losses. But the companies moved slowly - the process took three years - and attrition rates actually fell during that time. More than that, the merger served as the launching pad for a new culture, one that successfully blended the entrepreneurial, shoot-from-the-hip style of First Union with Wachovia's disciplined conservatism. "No one would say this company feels anything like either of those two," McFayden says.
With happy employees, satisfied customers, and a track record for mining growth opportunities and translating them into returns, analysts say Wachovia is clicking on all operational cylinders. If the goal is better shareholder returns, many ask, then why continue making deals? "Investors want to invest in banks where management runs the business, not where management thinks that acquisitions are critical to the organization's future," Bove says.
Thompson indicates he at least understands the issue. "Until we announced the Golden West deal, [we had] significant improvement in shareholder returns," he acknowledges. But he also argues that acquisitions on his watch have made the company not only bigger, but better. "Our shareholder returns have demonstrated that."
Since the First Union deal, the company has purchased SouthTrust, the Birmingham bank; acquired WestCorp, an auto lender with some California branches; and entered into a brokerage joint venture with Prudential. Heeding the lessons of the past decade, officials say integrations are now patient affairs, executed over years, not months. "We no longer make decisions that are convenient for the integration, but have a negative impact on customers," says McGee. Patience has its rewards: Loan production at former SouthTrust branches jumped 105 percent in the 18 months after the deal's completion, according to company figures.
Golden West presents the biggest challenge yet. Critics don't like its rate-sensitive thrift customer base, and fear that its huge ARM portfolio could blow up in Thompson's face. Most of all, however, they fret about what might come next, because, for better or worse, M&A remains as big of a part of Wachovia's DNA as customer service has become.
It's long been believed that Wachovia wants to build a national franchise capable of competing with crosstown rival Bank of America. Thompson says he doesn't want to be in "all 50 states," but does little to dissuade the widely held view that a 'U'-shaped franchise-down the Eastern seaboard, across the South and Southwest and up the West coast-is the ultimate goal. Even fans say that will require Thompson to pay up again in the future. "At some point in the next few years, they'll have to give up price to achieve their strategic vision," Plath says. That's bound to drive investors nuts. But Thompson has a long-term plan and confidence in the franchise he's building. Don't count on him to stop.
