Through the 1980s and 1990s, First Union Corp. had played the merger game as well as any bank in the country -- using dozens of rapid-fire mergers to transform itself from a sleepy North Carolina bank to one of the nation's 10 largest. But when G. Kennedy Thompson took the helm of First Union in April, 2000, the reality was that the Charlotte bank was at risk of becoming a takeover candidate itself.
The SWAT-team approach to mergers that had served Thompson's predecessor, Edward E. Crutchfield Jr., so well for two decades had begun to backfire: The bank's 1998 acquisition of CoreStates Financial Corp. resulted in massive customer losses. And First Union's $2.1 billion Money Store acquisition proved a bust after First Union realized -- belatedly -- that the unit had been using aggressive accounting to grossly overstate profits.
So when Crutchfield stepped down after being diagnosed with cancer, it appeared briefly that -- with First Union's stock in freefall -- his successor's only task might be to find a buyer for the one-proud bank. But Thompson would have none of that. Months after taking the helm, the career executive unveiled a massive restructuring plan that included $2.8 billion in charges, the closing of Money Store, and a new strategy focused on three businesses: consumer banking, investment banking, and asset management.
AVOIDED PITFALLS. The turnaround went so smoothly that when in-state rival Wachovia Corp. put itself into play in 2001, the affable Thompson was able to win a takeover battle for Wachovia against Atlanta's SunTrust Banks. Winning that takeover battle not only sealed First Union's independence but also gave Thompson control over a combined bank that was now the nation's fourth-largest.
And the merger has so far avoided the pitfalls of those earlier deals: Despite the tough banking climate, the combined -- and renamed -- Wachovia Corp. (WB
) recorded a 121% jump in profits last year, to $3.6 billion, and it has landed at No. 35 on the 2003 BW50 list of top performers. In February, Thompson announced his latest bold move, a deal to acquire Prudential Financial Inc.'s network of 4,400 retail stockbrokers -- a move that gives Wachovia the nation's fourth-largest brokerage force.
In the two years since the Wachovia deal, however, it's clear that
Thompson has taken a different approach to mergers than his predecessor, moving slowly to cause as little disruption to customers as possible. Thompson recently talked to BusinessWeek Atlanta Bureau Chief Dean Foust about the change in merger philosophies by phone. Following are edited excerpts from that interview:
Q: When First Union acquired CoreStates Financial, there was a lot of criticism of the way the bank handled the consolidation. And now, even though First Union acquired Wachovia two years ago, you are still beginning to combine, and close, some of the different branches of the two banks. Is this a result of the earlier criticisms for the way you handled the CoreStates merger?
A: We have changed our merger integration paradigm. I guess our philosophy used to be back in the '80s and '90s that you merged the companies quickly, cut expenses as fast as you could, then just suffered the customer fallout that results from that philosophy and moved on.
Our philosophy now is to integrate mergers in a way that, optimally, you lose no customers. So it's a complete mindset change. It comes from a belief that the best growth strategy in the financial-services industry is simply to hold on to your existing customers -- and do a better and better job for them every day. That's your best opportunity to grow.
This merger has worked extremely well because of that: Our customer attrition rate is the lowest it has been since we begun measuring it. And our customer service scores, as measured by the Gallup Organization, which we hired three or four years ago, have improved 15 quarters in a row. We think we are now "best in class" in the large banking peer group for customer service.
Q: Is the change in philosophy because having run the numbers from some of those earlier mergers, that you concluded that the losses from that attrition outweighed any cost savings? Or because there may not be as many big merger opportunities ahead, and you can no longer take customers for granted?
A: I don't think it's the latter. And to tell you the truth, I don't think we ever tried to run the numbers. It really comes from a philosophy that our management team has that is totally focused on the customer. We believe the best way to grow is to do a great job with your existing customers and to attract new customers.
So it simply makes sense to us that when you go through a merger, you ought to try to keep every customer from both sides of the (deal) because that's simply the raw material you use to grow revenues going forward. So it was really a leap of faith on our part rather than running the numbers.
Q: Can you draw a direct correlation between the increases in customer-satisfaction rates and on the other side, the increases in net income you've reported?
A: I don't think I can give you a quantitative line from point A to point B. It was a leap of faith on the part of our management team. I can tell you when I became CEO, the first thing we did was, in late 1999 and into 2000, we spent $100 million to increase the staffing in our branches and our telephone banks and in our back-office operation centers, because we felt we could never give good customer service until we were staffed in an appropriate way to do that.
And we did that in spite of the fact that we were coming off of two earnings warnings in the early part of 1999. So maybe the hardest decision I ever had to make was to spend another $100 million to improve customer service.
But in retrospect it was absolutely the right decision to make. And it's paying off for us because we're improving customer service scores, and we are improving in our ability to hang on to existing customers.
There's no question in my mind that this reduces funding costs because we increased [low-cost] core deposits. And it increases our opportunity to grow revenues because, by giving good service, you are also able to sell more products to your existing customer base.
So we've been in a lousy market environment for the last three
years but, in spite of that, customer attrition is improving, earnings are getting better, our funding costs have gone down, and our balance sheet is much stronger. A lot of good things have happened, and they all started from that root decision to really focus on good customer service.
Q: How will this change in philosophy -- and your experience with integration of First Union and Wachovia -- influence your recent move to acquire the brokerage sales force of Prudential Financial.
A: We are also taking our time on that. It's going to be an 18-month-long [process]. We're going slowly. We're going to communicate thoroughly with customers on both sides. We're going to spend plenty of time training our brokers so they can answer customer questions.
We think the result of that will be, one, we won't lose many brokers because the brokers will be comfortable with their clients. And two, we think it's the best growth strategy we have in the brokerage business -- to hold on to existing clients and do more with them.
MARCH 24, 2003
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