Sweetening The Deal

The City of Brotherly Love reacted with an uncharacteristic burst of anger late last year when First Union Corp. announced its planned acquisition of the city’s oldest and largest bank, CoreStates Financial Corp. The $17 billion deal was challenged by citizens action committees, was criticized by Philadelphia business leaders and politicians, and provoked ridicule within the local media. Case in point: Philadelphia Daily News writer Paul Davies jabbed the Charlotte-based acquiror by predicting that sophisticated Philadelphia bankers would soon be saying “good-bye wingtips, hello clodhoppers.”

The overwhelmingly negative community reaction occurred in spite of the fact that First Union proffered a sweetener its board had hoped would take some of the sting out of the acquisitionu00e2u20ac”a $100 million charitable trust for the city of Philadelphia. And while the gesture is said to have ignited a trend for such deal concessions, ironically, it failed to smooth the Charlotte bank’s entrance into the Philadelphia marketplace.

Consider another example. Last spring, San Francisco-based BankAmerica agreed to merge with NationsBank in a coup that will allow the merged owners to hold $570 billion in assets and corner the nation’s largest market share. Along the way, San Francisco lost a major financial headquarters tou00e2u20ac”du00c3u00a9ju00c3 vuu00e2u20ac”Charlotte. Like Philadelphians, San Francisco politicos were outraged at losing their prestigious and powerful local bank. According to news accounts, Mayor Willie Brown characterized the loss as nothing short of a “crisis.” A day-after editorial in the San Francisco Chronicle read:

Our concerns about this merger are not just parochial. Small businesses and residents in lower-income neighborhoods tend to get neglected by giant financial institutions. Recent history shows that banks often raise fees and loan ratesu00e2u20ac”and reduce returns on savingsu00e2u20ac”after mergers.

On the heels of the $66 billion goliath deal announcement, both banks extended a rather large olive branch in the form of a 10-year, $350 billion national commitment to community lending and investment. But even this gesture, which included specific lending and investment goals for affordable housing, small businesses, and consumersu00e2u20ac”plus economic development in rural and Native American communities across the countryu00e2u20ac”did little to allay concerns expressed by Bay area groups over what was termed “Godzilla banking.” While some activists applauded the unprecedented size of the commitment (it exceeds the combined pledges of all other U.S. banks during the first 20 years of the Community Reinvestment Act), others, such as the Greenlining Institute and the Association of Community Organizations for Reform Now, were quite sharp in their attack. They charged that NationsBank, in particular, had a poor track record in charitable giving and community reinvestment and complained about a lack of concrete details in the commitment. In a mid-summer Chronicle editorial, the two banks’ CEOs volleyed, stating that the $350 billion initiative was “…a commitment, not a goal. It is a floor, not a ceiling…because a nationwide banking franchise can only be as strong as the cities and towns in which it operates.”

According to Michael Shepherd, an attorney with the San Francisco office of Brobeck, Phleger & Harrison, the furor surrounding the deal was tempered by the announcement of the Wells Fargo/Norwest merger two months later. Assurances that the headquarters of the combined bank will remain in San Francisco seem to have taken some of the sting out of the earlier loss, observes Shepherd.

Dealing with a bitter pill

Not all deals are filled with acrimony and, in some cases, sweeteners work. The citizens of Jackson, Miss. smiled when First American Corp. announced a $15 million charitable trust as part of its 1997 deal to acquire the $7.5 billion Deposit Guaranty Corp. Deposit Guaranty had provided significant funding for a variety of organizations in Jackson, and its board was worried about the loss of those contributions after the merger. By alleviating those concerns, First American’s charitable trust paved the way for the Nashville bank’s smooth passage into the Mississippi Delta. Similarly, Little Rock welcomed Regions Financial Corp., a $26 billion, Birmingham-based holding company, into the fold when Regions formally wrapped $8 million in combined charitable and investment funds into their bid to acquire First Commercial Corp.

Why do some communities graciously accept the olive branch, while others shun such overtures? The answer may have less to do with the gifts than with the tone in which they are given. Clear, concise communication can help remove a community’s fear of the unknown: local job loss, higher fees, and the perception that the acquiror will become a so-called “absentee” landlord.

To deal with these fears, acquirors might observe those involved in the most volatile of environments: the stock market. Investment relations specialists and investment bankers involved in mergers have long understood the value of good communication. James J. McDermott, Jr., chairman and CEO of investment bankers Keefe, Bruyette and Woods, says that in any given case, “reams and reams of information are provided to analysts and the press regarding the deal. It used to be, we were lucky to get the price. The more information provided, the better the market reacts.” The fact that shareholders hardly blinked an eye at First Union’s $100 million dollar peace offering included in the purchase price of CoreStates appears to bear this out. And while it’s true First Union’s stock languished after the CoreStates deal before joining other bank stocks on the market’s recent roller coaster ride, that lack of activity shouldn’t be taken as a reaction to the deal’s sweeteners, says Keefe Bruyette’s R. Harold Schroeder. In this case and others, he maintains, deal concessions are a natural evolution that the market has come to accept.

Nevertheless, public relations managers have a more difficult job in quieting fervent activist groups when a new bank owner rides into town. Matthew Lee is executive director of Community on the Move, a citizens organization that regularly attempts to block bank mergers. Lee has seen his share of conflict and agrees honest communication is key to a community’s acceptance of a merger. His advice: “There are real losses when banks merge. Tell us what those will be.” This, he emphasizes, can diminish some of the fear people feel when one of their city’s major financial companies is acquired. And communication helps both sides: As leaders in their communities, directors will be on the front line if a negative reaction occurs. They need to have ready answers when they’re sitting in the hot seat.

Even when a bank has a good track record and worlds of experience, though, surprises still occur. If anyone could have headed off the storm of protest in Philadelphia, one might think that First Union, having acquired literally hundreds of banking institutions across the country, should have been able to do so. What happened?

First, locals took it hard because they believed CoreStates was entrenched and would never sell out. Psychologically, the rug had been pulled out from under them. Second, it was the oldest bank in the country and a strong and vibrant business leader in the community. At the time of the announcement, Philadelphia was just recovering from a stretch of bad economic conditions; its citizens were particularly sensitive to the loss of a major financial and business force. According to Ken Darby, First Union’s vice president of corporate communications, CoreStates presented the largest public relations challenge in all of First Union’s years of acquiring banks.

“We’ve done several hundred acquisitions over the years. Usually we go into much more vibrant economies, and the communities welcome us.” In this case, he said, anxiety was pent-up from an economic standpoint.

NationsBank faced a similar uphill battle. Jean Luc Servat, managing director at Hoeffer & Arnett, a West Coast investment banking firm whose business involves representing community banks in mergers and acquisitions, acknowledges that public sentiment seldom takes the nasty turn it did in these two cases.

It is becoming more common, however, for large transactions to be faced with verbal citizens-action committees rallying to save jobs, branches, and financing for local businesses. And though myriad complaints have been filed with the Federal Reserve and the Office of the Comptroller of the Currency, the Fed has yet to withhold its approval of a large merger because of community reinvestment concerns. As a condition of approval, however, the Fed has required banks to table cost-cutting plans that involve eliminating scores of branches in order to ensure that credit will be available and competition will remain lively within a given market area.

Thus, faced with the enormous challenge of winning the public’s affection, the reality is that banks must pay heed to community sentiment. After being bombarded with protests, First Union scurried to offer up an additional list of goodies above and beyond the $100 million trust it had already offered. These include a $6 million retraining fund for employees that are terminated as a result of the merger, priority hiring of CoreStates’ personnel, and a $13 billion community reinvestment plan to be carried out over the next five years.

Lessons learned

In the wake of the merger, First Union continues to tiptoe around business and civic leaders in Philadelphia. As late as September 15, Charles P. Connolly, Jr., president of First Union, Pennsylvania/Delaware, announced a $1 million contribution to the construction of the National Constitution Center on Independence Mall in Philadelphia. He reminded citizens that “the gift is a demonstration of First Union’s longstanding commitment to education and our continuing involvement in the Philadelphia region.” It was a part of a $17 million cultural, civic, and educational project the bank recently created to offer grants in eastern Pennsylvania, Delaware, and New Jersey. Darby tentatively suggests that “slowly but surely, we’ve seen some support. We have to prove that we are committed to Philadelphia.” While some wounds are still too fresh, time will reveal the success of the plan.

One lesson in gaining the public’s trust is not to lieu00e2u20ac”or even appear you did so. According to Darby, Philadelphia’s backlash largely was due to the perception that CoreStates, which had recently deflected a major bid from regional rival Mellon Bank, just gave up on remaining independent. At that point, he says just about anyone coming in would have been the fall guy. “Admittedly,” says Darby, “we probably underestimated community sentiment.” Community activist Lee acknowledges that First Union’s timing was a contributing factor but believes that its motives were defensive rather than altruisticu00e2u20ac”the much-needed $13 billion community reinvestment plan was developed only after community action groups threatened to block the deal.

Philadelphians were further chagrined to learn that CoreStates CEO Terrance A. Larsen, who had stated he would serve as regional vice chairman and be involved in First Union’s management, planned to walk away early. Larsen was to have sat on the board of the $100 million trust, headed up the corporate banking base in Philadelphia, and led the bank’s advisory committee for a minimum of one year, but five months after the announcement, the 51-year-old CEO was effectively gone. Larsen stated that his departure was designed to allow the establishment of a permanent organizational chart. At the time, First Union’s only public comments reflected the stance that Larsen had done a good job of negotiating the deal; Larsen himself stated in the trade press that he had never intended to stay for a significant length of time and that the move would be in the best interest of the new institution. And while Larsen and five other former CoreStates directors continue to sit on the First Union board, events like the former CEO’s early departure continued to undermine First Union’s credibility in Philadelphia.

Another lesson for acquiring banks is not to underestimate the power of the community and its leaders. Early on, San Francisco threatened to pull funds from BankAmerica, which may have come as a shock to NationsBank CEO Hugh McColl after his bold announcement of the $350 billion community investment commitment. What NationsBank may have overlooked, however, was that, unlike Philadelphia, the Bay area economy is strong; credit is readily available to most of the city’s population and businesses. Furthermore, by stating publicly his commitment to Charlotte as the home of the new institution, McColl may have inadvertently brought up questions about his commitment to the West Coast.

Sending the message that the two banks are working in partnership during the deal is one of the best ways to alleviate conflict. In communicating its acquisition of Deposit Guaranty to the public, First American made it clear that it had long been a supporter of the communities in which it served. Within five months of the announced acquisition, the CEOs of the two firms stood side by side as the first check from the foundation was handed to representatives of University Medical Center’s Children’s Hospital in Jackson. The bottom line: The community at large has welcomed First American, which continues to do business in Mississippi as Deposit Guaranty.

Robert P. Houston, executive vice president of Regions Financial, downplays the strategic significance of the charitable fund Regions created after the acquisition of First Commercial. Houston says setting up the fund is simply a matter of formalizing the policy of continuing contributions previously made by the acquired bank.

“We have been consistent since 1971 in supporting local communities. We value the bank’s business in the local community. We make every effort to retain the front-line people, from the president on down to the trust and loan officers,” states Houston. “Charitable giving and having employees and officers continue to be involved in local civic activities is always encouraged.”

Houston emphasizes there’s no substitute for keeping local, trusted directors and officers in place to emphasize the acquiring bank’s commitment to the local community, even though this practice creates additional overhead. Why? Because “in order to maximize the acquired bank’s value to Regions,” Houston explains, “we need local boards to continue to receive local support.”

Underneath it all, activist Lee says if banks act on principal and not just for the sake of good PR, they will have a higher likelihood of community acceptance. Acquiring banks would be wise to heed the advice of those that have succeeded in making smooth transitions.

And if the medicine won’t go down, a spoonful of sugar never hurts.