Having sealed its deal to acquire Firstar Corp. of Milwaukee, Star Banc Corp. is taking a giant leap into the superregional big leagues-and confronting challenges on a scale it has not faced before.
The post-merger bank would have $38 billion of assets, compared with about $15 billion at Star today.
With corporate headquarters in Milwaukee and a consumer banking base in Cincinnati, the new Firstar would compete in seven midwestern states, going head-to-head against such powerhouses as U.S. Bancorp of Minneapolis and the company resulting from the combination of Banc One Corp. and First Chicago NBD Corp.
"This gets us to a plateau in the banking and financial services industry that we were not able to get to on our own," said Jerry A. Grundhofer, chief executive officer of Star Banc, who was designated to serve as president and CEO after the Firstar merger.
But Mr. Grundhofer emphasized that the $7.2 billion stock deal, announced Wednesday, was not motivated by size.
"We don't care how big the company is," he said. "We care about shareholder returns."
Mr. Grundhofer is credited with turning Cincinnati-based Star Banc into one of the most profitable and efficient banking companies.
Now, Mr. Grundhofer will aim his turnaround skills at Firstar, which has posted 10 quarters of flat earnings because of an inability to pare expenses. Some observers are inevitably wondering if the former BankAmerica Corp. executive has bitten off more than he can chew.
"For Star Banc, it's a little bit of a big bet," said Douglas Walouke, an analyst with Fifth Third/Ohio Co., Columbus. "You're taking that low- cost mentality and imposing it on a bank that, at least in assets, is bigger than you."
"The economics make all sorts of sense-it just comes down to the cultures," he added.
Star Banc is paying $48.55 a share for Firstar, or 23 times the latter's estimated 1998 earnings and four times its book value. Firstar chairman and CEO Roger L. Fitzsimonds would be chairman of the combined company, which would have a market value of $14 billion.
Shares of Star fell by 25 cents Wednesday, to $63.625. Firstar rose $8.1875, closing at $46.375.
Citing his experience at Star, Mr. Grundhofer said it would take two years to get the underperforming Firstar into shape. Star expects to reduce the expense base by $174 million, or 23%, to be in compliance with Star Banc's strict overhead policy.
The merger will require a $325 million pretax charge against earnings when it closes late in the fourth quarter or early next year.
Mr. Grundhofer is regarded as a careful integrator of acquisitions. Many analysts said they have long considered him and his management team capable of running a much bigger company.
"With any large deal, there is execution risk," said Joseph Duwan, an analyst with Keefe, Bruyette & Woods Inc. "But I think Jerry Grundhofer is extremely hands on and will be intimately involved in the integration of this merger. That gives me a great deal of confidence."
"I think you do have a new Midwest powerhouse," Mr. Duwan added.
Mr. Grundhofer joined Star Banc in 1993, just after the sleepy banking company rebuffed an unwanted takeover attempt by hometown rival Fifth Third Bancorp.
He brought with him former colleagues from BankAmerica who became two of his closest confidantes and who are likely to wield power at the new Firstar: David Moffett, vice chairman and chief financial officer; and Richard Davis, vice chairman and head of retail banking.
"What gives us some comfort is (management) has worked at larger banks and they know how to run larger banks," said Fred Cummings, an analyst with McDonald & Company Securities, Cleveland.
Mr. Cummings said, "Firstar is where Star was five years ago."
The new board would consist of 18 directors of Star Banc and 14 from Firstar. John Becker, Firstar president and Mr. Fitzsimonds' right-hand man, would be vice chairman and chief operating officer.
Some analysts said Mr. Grundhofer would have done a big deal sooner but did not have the opportunity.
Mr. Grundhofer seemed to confirm that Wednesday, saying, "I've always said size does not matter, but I've also said if I had my druthers, bigger would be better from a pure scale" standpoint.