Washington Mutual Inc. of Seattle moved to seal its position as the largest thrift and join the ranks of the biggest banks by signing a definitive merger agreement with H.F. Ahmanson & Co.
In a startling turn by bitter rivals, Washington Mutual said Tuesday it would pay $9.9 billion in stock for the California-based parent company of the venerable Home Savings of America.
The announcement of the biggest-ever thrift industry acquisition came even as Washington Mutual remains preoccupied with the post-merger integration of Great Western Financial Corp.-the Chatsworth, Calif., company it wrested from Ahmanson last year after an extended bidding war.
Great Western essentially doubled Washington Mutual's assets, to more than $90 billion. Ahmanson would raise that to about $150 billion, bigger than Bankers Trust New York Corp. or Banc One Corp. on the commercial banking Top 10 list.
Kerry K. Killinger, the Washington Mutual chief executive officer and architect of the growth strategy, said he has not finished his mission to achieve consumer banking supremacy on the West Coast. He has BankAmerica Corp. in his competitive sights.
"This gives us the market share and position critical to be able to become the market leader," Mr. Killinger said in an interview Tuesday. "This really helps get us into a very strong position in the West Coast, with California as the most important part of that niche."
The merger, which Washington Mutual said it hopes to complete late in the third quarter, would push the institution ahead of Wells Fargo & Co. into second place behind BankAmerica in California market share, with 17% of deposits.
At 3.8 times Ahmanson's book value and 20 times estimated 1998 earnings, the deal is pricey by thrift industry standards, but that did not keep analysts from singing its praises.
"This is one of the most expensive thrift deals I've ever seen, but it is absolutely worth it," said James R. Bradshaw of Pacific Crest Securities, Portland, Ore. "This is a very, very powerful franchise that Washington Mutual has amassed."
Mr. Bradshaw said Ahmanson came around "unexpectedly fast" to the conclusion that it should join, rather than fight, its rival from the north.
"It's a whole lot more fun to be on the same side as Killinger than the other side," one observer said of Charles R. Rinehart, the Ahmanson chairman and chief executive officer and erstwhile Killinger antagonist.
Mr. Killinger said when Mr. Rinehart approached him two weeks ago about a possible merger, the idea was too good to pass up. The two companies' boards unanimously approved the proposal.
"We came out of due diligence with a high degree of confidence that this is a very strong, vibrant company," said Mr. Killinger, who will retain the roles of chairman, president, and CEO as Ahmanson gets absorbed into Washington Mutual. "It fits in with our vision to create one of the premier consumer financial services companies in the country."
Irwindale, Calif.-based Ahmanson would be Washington Mutual's 21st acquisition in 10 years. Three current Ahmanson directors are to join the Washington Mutual board, increasing the number of directors to 19. Mr. Rinehart said he will not be one of them, as he plans to go his own way after the merger.
In his announcement Tuesday, Mr. Killinger addressed the operational challenges: "A smooth integration of Great Western remains our immediate priority for the first half of 1998. Once that integration has been completed, we will turn our focus on the integration of Ahmanson."
The latter would occur in two phases, Texas in the fourth quarter of 1998 and California in the second quarter of 1999. Meanwhile, Ahmanson is in the process of taking over Coast Savings Financial Corp., a smaller California thrift.
"When Wamu sits down to eat a meal, it's a big one," said Thomas O'Donnell, a thrift analyst with Salomon Smith Barney in New York. "This one will keep them satiated for a while."
But Mr. Killinger said he would "never say never" if another appropriate opportunity comes along.
The deal to buy Ahmanson will slightly dilute Washington Mutual's 1998 earnings and add to earnings by 2000, the company said. By that time, Washington Mutual plans to pare the merged entity's annual expenses by $330 million.
The deal is expected to result in the loss of 3,500 jobs, or 11% of the combined companies' 31,380 employees. About 170 of 1,252 total retail branches would be closed.
The new institution would have banking offices in eight states. Washington Mutual would be entering Texas for the first time, and R. Jay Tejera, an analyst with Dain Rauscher in Minneapolis, said Ahmanson's 40 branches there could be a springboard for growth.
Washington Mutual may be interested in buying the 166 Texas branches that BankAmerica is selling, Mr. Tejera said.
But the merger's competitive effects are likely to be greatest in California. The new Washington Mutual would be among the top three in market share in every California metropolitan area, with 700 branches in the state-roughly double what it has now.
"Wells and BofA are going to experience new levels of competition in California," Mr. Tejera said.
Mr. Killinger said he plans to beat competitors by focusing on consumers and small businesses.
"We have a very strong opportunity to go after the major commercial banks, whose strategies tend to be ones of limiting personal service," Mr. Killinger said. "We are finding a very significant part of the population would prefer a higher level of personalized service."
A competing banker questioned Washington Mutual's ability to deliver.
"Customers are tired of seeing their banks gobbled up by out-of-state institutions with little regard for customers or customer service," said Gene Galloway, executive vice president of retail and community banking at Sanwa Bank California.
But Mr. Bradshaw, the analyst, said "Washington Mutual views acquisitions as a business line. They have people who do nothing but acquisitions."
Washington Mutual was advised in the transaction by Lehman Brothers and the law firm Foster Pepper & Shefelman. Ahmanson had CS First Boston and the Sullivan & Cromwell firm on its side of the table.
