Bank Mega-Mergers Offer Big Challenges Northwest Region Knows This Tale Well By Now

Merging two large banks is a tough process, fraught with complex overtones, endless frustrations and a batch of upset customers.

Just ask KeyBank, which learned its lessons when it merged three years ago with same-size Society Bank of Ohio. The bank had its share of criticism as it processed the merger, and in addition earnings hit a plateau as a result of the merger process.

Ask, too, Wells Fargo Bank, which has encountered a rocky path as it has absorbed First Interstate Bank over the last 16 months. It, too, has encountered a good deal of criticism.

And ask Washington Mutual, which is a little more than a month into absorbing Great Western Bank of California - which is about the same size as Washington Mutual was before the merger. It is bracing itself for the process, hoping everything will go smoothly.

Among the challenges of a merger:

Where the banks have overlapping service areas, branches have to be closed.

The banks’ computer systems, often different, have to be combined into one smooth-flowing operation. And the changeover has to be made without disrupting daily banking activities.

Different business philosophies often clash as attempts are made to combine them.

Consumer goodwill built up over decades is threatened when the name of one bank changes.

“Organizations that undertake to do what KeyBank and Society Bank did have a very big job ahead of them,” says Bob Gillespie, chairman and CEO of KeyCorp, parent of KeyBank, as he looks back on the merger which took place three years ago. Gillespie was head of Society at that time.

“You delude yourself if you think you can do it overnight,” he adds. “There are major competitive and cultural issues.

“Unfortunately for us, we were the first to merge in that period. When we didn’t do everything right the first time, we got a fair amount of criticism.

“For two years after the banks came together, our earnings were flat because of the costs and the difficulties of getting the organization merged and converting computer systems, and what have you.”

Now that the merger is behind them, KeyCorp officials are promising double-digit earnings growth in the next three years.

“I think people will look at it in a little different light after that,” Gillespie adds.

Wells Fargo found a similar challenge to that faced by Gillespie and KeyBank when it began absorbing First Interstate in April last year.

The problems encountered by Wells Fargo were discussed in Seattle last week by Washington Mutual CEO Kerry Killinger. Speaking at the Seattle CityClub, Killinger, who has led Washington Mutual through 22 mergers in the last 10 years, said he believes the confluence of a number of reasons led to problems with the Wells Fargo-First Interstate merger.

Among them:

The transaction was a hostile one, making it harder to gain employees’ cooperation.

A large number of branches were closed in California, where branches of the two banks overlapped. Closing branches makes a merger more challenging.

Wells Fargo changed the name of First Interstate, losing goodwill in the process.

Wells Fargo started pushing hard toward introducing more technology in former First Interstate branches, moving away from contact with people. That caused a backlash.

The integration of the two banking computer systems was not easy.

Wells Fargo has had little recent experience with mergers.

“The good part is that we can watch and see if we can learn from what worked for them and what didn’t,” Killinger added.

“Also working in our favor is that we are going to closer fewer branches because there is less overlap.

“And we have done this before.”

Mike Worthy, area manager of Wells Fargo, agrees his bank’s merger has been rocky, but he disagrees on some of the sources of the problems.

“On the technical side, we can confirm we had some bumps,” Worthy said Thursday. “When you remember that this is the largest bank merger in U.S. history, you realize the technology that is involved and some things will drop through the cracks. Wells Fargo processes more checks than all of Canada.

“There was a tendency at the outset to look at the technology and hope it could handle the volume of two organizations. What we have learned is that in some instances we didn’t have the type of capital we needed and we have had to make incremental upgrades.

“At this stage, we would not be able to say that we have resolved everything, but there is a fix on all of the problems.”

Worthy said a “gigantic investment” is being made in technology to solve the problems. That investment is bringing great improvements.

In Washington state, the situation was complicated in that Wells Fargo was new to the area and therefore unknown, Worthy added.

Worthy discounted the argument by Killinger that the hostile nature of the merger had caused problems. First Interstate had realized it was going to be acquired by someone; bank officials were just not sure which bank it would be, he said.

He also disagreed that the push toward technology means less customer contact. Technology provides a wider range of services for customers, he said.

Wells Fargo is over the hump, Worthy added, as far as the immediate technology and cultural challenges are concerned. But work remains to be done on recovering old records when they are requested by customers - in that regard the bank is “slower than we want to be.”

Gillespie of KeyCorp believes that critics of the Wells Fargo/First Interstate merger are being unduly harsh. “It is not that the merger isn’t going well, but it has not gone well yet,” he says.

Give it time, Gillespie suggests.

“We plead guilty to undue optimism; we over-promised and it took two full years to get it configured the way we wanted to have it. The industry was changing at the same time. We were not only merging the organizations, but trying to create a competitive model and preparing it for the next millennium.

“We are delighted we did it.”