Analysts agree that Wells Fargo & Co. has a lot going for it-first-rate management and commanding status in a strong market. But recent events are a reminder that even the best can hit rough spots.
The San Francisco banking company's stock, once nearly bulletproof, has dropped more dramatically than most other banks' over the past month, and its first-quarter earnings were sharply disappointing.
To put it simply, Wells Fargo has illustrated just how difficult it is for even a top-flight company to absorb a huge merger and meet Wall Street's expectations all at the same time.
"It's a tall order to boost your revenues and cut your costs simultaneously," said banking analyst Thomas F. Theurkauf Jr. of Keefe, Bruyette & Woods Inc., New York.
Mr. Theurkauf observed that there may well be a important lesson lurking here for investors counting on the ability of whoever finally gets to buy Great Western Financial Corp. to do both at the same time.
"It makes you wonder about Washington Mutual and Ahmanson," he said. "It certainly does."
Of course, Wells Fargo is far from the first major acquirer to endure a bout of indigestion. For instance, it has been difficult for Fleet Financial Group to integrate both Shawmut National Corp. and Natwest PLC's American affiliate after buying them in 1995.
"Eighteen months after Shawmut, their earnings are just starting to show some consistency," Mr. Theurkauf pointed out.
Wells posted first-quarter earnings of $3.61 per share, well below the consensus expectation of $3.75. As result, Mr. Theurkauf cut his per-share earning estimates for 1997, to $14.50 from $16.50, and his 1998 estimate to $18.50 from $20.50.
Wells supporters, like analyst George M. Salem of Gerard Klauer & Mattison & Co., New York, are tempering their outlook.
Mr. Salem is keeping his "buy" rating on Wells but cut his 1997 earnings estimates by 3.3% and reduced his target price to $360 from $400.
Wells Fargo's plan for the last year has been to shrink its balance sheet as it absorbed First Interstate Bancorp, which it merged with last April.
Some of the shrinkage, the bank figured, would come from disgruntled First Interstate customers taking the business elsewhere.
Although such losses are typical for any merger, the bank apparently didn't count on the degree of back-office-related difficulties in its ambitious conversion program.
Instead of shifting retail and corporate customers' accounts by converting their First Interstate checking accounts into Wells accounts and then changing their savings accounts, the decided to convert all accounts simultaneously by geographic region.
"Unfortunately, the disruptions lasted longer than we anticipated," chairman and chief executive Paul Hazen and president William Zuendt acknowledged in an unusually forthright letter to shareholders in Wells' 1996 annual report.
"We did not expect things to go smoothly from start to finish," the top Wells managers said candidly. "They didn't."
The disruptions caused many customers to take their accounts elsewhere, observed analyst Joel W. Silverstein of Deutsche Morgan Grenfell Inc., New York. Net interest income at Wells has slipped 8% since the second quarter last year.
"People voted with their feet, and the bank couldn't attract new business because of all the service disruptions," Mr. Silverstein said.
Even Wells' critics emphasize the merger problems are not fatal. No one really questions Wells management's ability to absorb the merger with First Interstate. The company's largest shareholder, famed investor Warren Buffett, has been silent.
And with good reason, say analysts and investment bankers: When the company resumes buying stock, the value of the remaining shares will go up. "They've agreed to spend $2 billion a year buying back shares after the First Interstate deal," said one investment banker not connected with the merger. "There's really no way shareholders can lose. If the stock goes up, they get rich; if the stock goes down, earnings per share explode."
Still, analysts caution that Wells' short-term outlook is not exactly rosy. "The second quarter's going to be trouble, too," Mr. Theurkauf said.
"It's a huge organization, and you can't just wake up one morning and say, 'We're done with the cost takeouts, let's boost revenues,'" he noted.
And Mr. Salem agrees, noting that "the loss of customers will not be easy to reverse near-term."