Articles
January 2001: BIG BANK MERGERS - BIG INDIGESTION
Bank of America at nearly $700 billion in assets is one of the largest financial institutions in the country. In its current form, this bank was created by the September, 1998 merger of San Francisco-based Bank of America and Charlotte, North Carolina-based NationsBank. At the time of its announcement in April of 1998, this was the biggest bank merger ever in the United States. The combined bank would be headquartered in Charlotte, not San Francisco and would be led by NationsBank CEO Hugh McColl. Also at the time the merger was announced, it was expected that between 5,000 and 8,000 jobs would be eliminated at Bank of America and that roughly $1.3 billion in cost savings would be accomplished as the operations were consolidated.
Also based in Charlotte, First Union with total assets in excess of $250 billion was formed in 1998 through the acquisition of Philadelphia-based CoreStates bank. At the time of the announcement in November of 1997, First Union indicated that it expected annual cost savings in excess of $250 million and increased earnings for the combined company beginning in 1999. Bank One, based in Chicago, is the fifth largest bank in the country with total assets in excess of $270 billion.
Bank One was created by the October, 1998 merger of Bank One of Columbus, Ohio and First Chicago NBD of Chicago. First Chicago NBD, in turn had been the result of a 1995 merger between First Chicago and NBD Bank of Detroit. When the Bank One deal was announced in April of 1998, the bank anticipated $930 million in annual cost savings and improved earnings beginning in 1999.
First Union recently announced that it would be taking a $2.9 billion charge against earnings for "restructuring" and "repositioning". Roughly $1.8 billion represents the costs associated with closing down The Money Store, a business First Union acquired during 1998, for which it paid $2.1 billion. Expensive marriage; expensive divorce! The remaining $1.1 billion was related to cleaning up other operations, most likely the result of indigestion from past bank acquisitions.
Bank of America recently announced up to 10,000 job cuts or about 7% of its workforce. These are in addition to the thousands of job cuts already undertaken as a result of the merger. Related to the latest round of job reductions, the bank will be taking a $300 million to $500 million restructuring charge. Clearly the personnel adjustments anticipated at the beginning of this marriage were substantially underestimated and the predicted cost savings were far more difficult to accomplish.
Bank One recently announced a $1.91 billion charge related to its credit card and other banking activities. The improved earnings forecast for 1999 and beyond have turned into heavy writeoffs in 2000, most likely related to unreasonably high expectations in the face of the substantial risks inherent in assimilating two large and far flung independent business cultures.
These three banks, all among the ten largest in the country, have seen their stock prices deteriorate since the post-merger-announcement euphoria that created their size. Bank of America, from $80 per share to under 50; Bank One from the high 50s to the low 30s; First Union from 60 to under 30. If you were a stockholder in either Bank of America or NationsBank and sold your shares within a month or so of the announcement in April of 1998, you came out okay. By the time the deal closed at the end of September, the value of the deal and the value of a share in either bank were down about 40%. By the time the Bank One deal closed, the stock valuations of the two companies involved had lost approximately 35%. While consolidation in the financial services industries may be a fact of life, many of these deals have not produced a good outcome for the thousands and thousands of people whose jobs have been eliminated; also not a good outcome thus far for many of the companies' stockholders.
