WHY WELLS FARGO IS CIRCLING THE WAGONS
Culture clashes with First Interstate have slowed a once fleet giant
Not long ago, Wells Fargo & Co. was one of the sleekest--and most profitable--banks around. The San Francisco-based company's cost-conscious management, technological prowess, and streamlined operations were the envy of the industry. Investors, including Warren Buffett, lapped up Wells Fargo stock. The bank's average return on equity in the first quarter of 1996 was more than 28%, vs. 16.5% for the 50 largest banks. "Wells Fargo was really on top of its peer group," says Thomas F. Theurkauf Jr., an analyst at Keefe, Bruyette & Woods Inc. in New York.
OPTING OUT. But since Wells Fargo swallowed First Interstate Bancorp for $11.3 billion last year in a hostile takeover, Wall Street's little darling has had a bad case of indigestion. Computer-system glitches have frustrated customers and caused a rash of account errors. Branch closings have led to long lines at remaining branches for customers who prefer tellers to Wells Fargo's ubiquitous automatic teller machines. "If you were expecting a baby within a month, you could basically go full term standing in line," says Allan A. Smaul, a small-business owner who recently took his accounts elsewhere.
Meanwhile, an unexpectedly large number of First Interstate's senior management--386 out of 506 so far--have cost the nation's eighth-largest bank-holding company at least $415 million: Rather than work for the new boss, they opted for a generous severance package. Many other executives have left--voluntarily or not--because of the institutions' cultural differences. First Interstate was known as a traditional bank in which customers could expect hand-holding and personalized service. Wells Fargo is known for efficiently executing customer transactions through the most convenient, low-cost channel.
The executive exodus has forced Wells Fargo to hire temporary workers and pay overtime to grapple with employee shortages and unfamiliar systems. "It has not been a pleasant picture for me and not one that I've enjoyed," Wells Fargo Chairman and CEO Paul Hazen, a 27-year Wells veteran, says candidly. And on May 21, the bank announced the retirement later this year of President William F. Zuendt, 50, who oversaw the consolidation and is often credited with Wells Fargo's technical innovations.
Of course, Wells Fargo is hardly in dire straits. The bank should meet its goal of cutting operating expenses annually by $800 million. The bank's workforce has shrunk from 47,000 in April, 1996, to about 35,000. Some 428 branches have been or are being closed or sold, with more on the way. At the same time, small-business loans grew 44% in 1996, to $2.1 billion. Online financial services are flourishing, with more than 300,000 active customers, vs. just 20,000 in 1995.
But at the moment the good news pales beside the troubles. Merger headaches and competitors' anti-Wells Fargo advertising blitzes have led to customer defections and sinking revenues. Since December, the bank concedes it has lost about 1% of its retail customers outside California every month--though it claims a similar increase within its home state. Says Bruce G. Willison, ex-president of First Interstate who is now vice-chairman and president of HF Ahmanson & Co., a large consumer bank: "This has been the most problem-laden merger seen on the West Coast."
NOT SACRIFICIAL. Wells Fargo's financial results aren't changing that perception. The company announced first-quarter earnings of $3.62 per share--well below analysts' expectations of $3.75. Loans dropped 3%, to $63.5 billion, while average core deposits slid 4%, from a year earlier, to $77.6 billion. Since the merger, the company's stock price has suffered (chart). "I didn't anticipate the reactions outside of California to the way we do business," says Hazen.
Zuendt's impending retirement after 24 years at Wells has created further instability. Hazen, who clashed with Zuendt over management issues, says he favored a team-oriented structure, while Zuendt preferred a more hierarchical chain of command. But Hazen maintains that Zuendt's departure is unrelated to the bank's woes. "He is not a sacrificial lamb," says Hazen, who is replacing Zuendt with four vice-chairmen in a newly created Office of the Chairman. Still, Sandra J. Flannigan, an analyst at Merrill Lynch & Co., says that it "raises the issue as to how much strife the integration has caused. And it does not make me feel any more comfortable about the company's near-term outlook."
Rivals are crowing about all the unrest. Cindy Leslie-Cardenas, a branch manager at Glendale Federal Bank in Encino, Calif., whose husband hands out her business card to customers waiting in line at Wells Fargo branches, says that business accounts at her location have jumped from 30 to 450 in the past 18 months. Two-thirds of those, she estimates, came from the merged banks.
Union Bank of California says it is adding 100,000 new accounts annually, most of which also are coming from Wells Fargo. Industry experts say Wells Fargo miscalculated the allure of its nifty electronic-banking services to customers who prefer warm and fuzzy banker relationships. "In hindsight, Wells Fargo didn't know enough about First Interstate," says Raphael Soifer, an analyst at Brown Brothers Harriman & Co. in New York. Experts also say Wells Fargo let too many First Interstate executives go before it could capitalize on their knowhow.
Despite these difficulties, Hazen insists his bank will return to its glory days. The company plans to launch fresh marketing campaigns to lure new customers. It also is focusing on improving customer service to keep its current clients. Hazen concedes, however, that regaining the bank's previous stature will take time. "The less measurable costs to this are to the organizational reputation," he says. "In markets where we weren't well known, what customers first saw was degraded service levels. That's not what we stand for." Now all Hazen has to do is prove it.By Linda Himelstein in San Francisco, with Kathleen Morris in Los AngelesReturn to top