Bank of America Corp.’s Kenneth Lewis
cut 10,000 jobs and presided over eight straight quarters of
rising profit since becoming chief executive officer in 2001.
Investors responded by driving up the Charlotte, North
Carolina-based bank’s shares by 49 percent. Until this week.
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Lewis’s announcement that he’ll pay $47 billion for
FleetBoston Financial Corp. to create the second-largest U.S.
bank behind Citigroup Inc. sent Bank of America shares down 11
percent the past two days, wiping about $13 billion off the
company’s value and shaving the purchase price by almost
$4 billion. It was the worst two-day drop of his tenure. Lewis, a
56-year-old Mississippian who rose through the bank’s ranks for
three decades, may have overpaid for FleetBoston.
“The acquisition itself wasn’t wrong, the price was,” said
Paul Vrouwes, who helps manage $14 billion at ING Investment
Management in The Hague and sold some of his Bank of America
shares. “History shows that you almost always lose customers.
And losing customers is losing revenue.”
Bank of America is paying 2.78 times FleetBoston’s book
value to add 1,458 branches in the Northeast U.S., according to
Bloomberg data. That compares to Citigroup paying 2.02 times the
book value of Golden State Bancorp when it bought the San
Francisco-based thrift last year. HSBC Holdings Plc paid 1.84
times book value when it bought consumer lender Household
International Inc., a transaction completed in March.
“They’re going to have to work very hard to make this
work,” said Marshall Front, who manages $1.5 billion at Front
Barnett Associates LLC and doesn’t own shares of either company.
“It’s always a problem to integrate two companies.”
Bank of America stock yesterday fell 72 cents yesterday to
$72.85 in New York Stock Exchange trading, adding to Monday’s 10
percent dive. It’s the third-worst performer this year among the
24 members of the Philadelphia KBW banks index, with a gain of
4.7 percent.
Lewis said investors may have to be won over.
“I don’t think anyone could do an acquisition that the
market would like in the short term,” he told reporters when
announcing the transaction. “As investors look at the underlying
fundamentals, they will tend to like it over time.”
Bank of America Chief Financial Officer James Hance said the
new Bank of America will have 5,669 branches, the most of any
U.S. bank and that the combined company will save $1.1 billion a
year by 2005.
FleetBoston CEO Chad Gifford, who will become chairman of
the combined bank, said it’s “too early” to detail how the
workforce may be affected.
In terms of stock price, Bank of America agreed to pay 41
percent over FleetBoston’s pre-announcement share value, the
biggest premium of the six U.S. bank acquisitions valued at more
than $20 billion since Jan. 1, 1997. Those transactions include
the purchases of Citicorp, BankAmerica Corp., Wells Fargo & Co.,
First Chicago NBD Corp. and U.S. Bancorp.
Credit Suisse First Boston analyst Susan Roth told clients
in a note that she was “surprised and disappointed” by Bank of
America’s move because the transaction was too expensive and will
be a distraction for management.
“Bank of America was a premier franchise before this deal
and, best we can tell, executing at the top of its game for not
having the distraction of acquisitions or integration,” she
wrote.
The current Bank of America was created by Lewis’s
predecessor, Hugh McColl, who made 60 acquisitions over two
decades. Net income rose 31 percent to $2.92 billion in the third
quarter from the year-earlier period, with about half the bank’s
profit from services such as consumer loans, checking accounts
and credit cards.
By comparison, J.P. Morgan Chase & Co., the current No. 2
U.S. bank by assets, reported $1.63 billion in third-quarter
earnings.
Buying Boston-based FleetBoston, the seventh-biggest U.S.
bank, will add customers in New England, Pennsylvania, New Jersey
and New York to Bank of America’s current strongholds in
California and the Southeast. While that means little regional
overlap, Lewis has to unite two organizations that together will
have more than 180,000 workers, operations in 34 countries and
$933 billion in assets.
“From a shareholder standpoint, you almost go into
purgatory” when two commercial banks are blending operations,
said Dan Genter, chief investment officer of RNC Genter Capital
Management, which manages $1.6 billion. “For 18 months, you
don’t know whether you’re going to heaven or to hell.”
Lewis, who grew up in Meridian, Mississippi, and attended
Georgia State University, started his career in 1969 with NCNB
Corp., a North Carolina regional bank that became NationsBank
Corp. in 1990. NationsBank bought San Francisco-based BankAmerica
in 1998.
“His No. 1 object in life is Bank of America,” said Jim
Hynes, the retired chairman of Hynes Inc. in Charlotte, who
served with Lewis on the board of the local United Way charity.
“He is a highly focused, very intense guy.”
As CEO, Lewis ditched an unprofitable auto-leasing division
and exited sub-prime lending. He slashed loans to corporate
clients, including Wal-Mart Stores Inc., the world’s largest
retailer, and other accounts that wouldn’t hire the bank for
lucrative investment banking. He earned $6.9 million in salary
and bonus last year.
Lewis’s only other large purchase was 25 percent of Grupo
Financiero Santander Serfin, Mexico’s third-biggest bank, in
December. The $1.6 billion acquisition was part of a bid to serve
36 million U.S. Hispanics and boost the bank’s money-transfer
business.
The company also has made a push into underwriting and
mergers advice, with New York-based Banc of America Securities
Inc. hiring bankers during the market rout that led other Wall
Street firms to fire as many as 100,000 employees worldwide.
Lewis has been trying to take advantage of the 1999 repeal
of the Glass-Steagall Act, which allowed commercial banks to
compete for business with stand-alone securities firms such as
Merrill Lynch & Co. and Goldman Sachs Group Inc.
In April, Lewis said as much as a third of the company’s
profit may come from global corporate and investment banking, up
from 20 percent. The division will never contribute as much as
consumer banking because investment-banking profits are cyclical
and erratic, he said.
With the purchase of FleetBoston under his belt, Lewis may
be one step closer to lending his name to the Bank of America
headquarters, North Carolina’s tallest building, which is still
nicknamed the “Taj McColl.” He says he felt pressure to succeed
from his mother, a nurse, who asked how far he was from the CEO’s
office when he was named president in 1999.
“Ken is an understated guy, especially following Hugh
McColl,” said Hynes in Charlotte. “You can’t have a low profile
if you’re chairman of Bank of America, but there’s not a lot of
ruffles and flourishes, just getting it done.”
Bloomberg News
