Bank M&A: Now the Hard Part

The insider’s guide to investment banking and capital markets October 6, 2008 www.iddmagazine.com Bank M&A: Now The Hard Part Now that BofA, JPMorgan and Citi have come to the rescue of floundering banks, the integration process begins

BY Gerelyn Terzo

hen John Thain took the helm out to Charlotte-based Bank of America. whether or not he is going to step up to of Merrill Lynch last Novem- The sale came on the weekend leading the plate for them. Wber, he entered into one of the up to that fateful day of Sept. 15, when “They will say of his legacy that he most distinctive cultures of all the wire Lehman Brothers filed for Chapter 11 prevented and saved Merrill Lynch from houses on Wall Street. “Mother Merrill,” bankruptcy protection. going bankrupt. But I’ll bet a lot of Mer- as the firm was endearingly referred to Thain himself admits that M&A was rill guys wish he would have done what by many of its brokers, feeds off of an not in the original game plan. “It’s fair to [Morgan Stanley CEO] John Mack did entrepreneurial spirit that since the firm’s say that this isn’t necessarily the outcome and kept the bank independent,” says one inception in 1914 has been rooted in an that I would have expected when I took recruiter who declined to be named. Irish, “good old boy” culture. this job,” he said on a conference call with Now that the wheels are in motion, It’s a country club that Thain—who was repor ters on Thain and BofA’s CEO, Ken Lewis, are reared in a distinctly different culture at Sept. 15. But the left to sort out one of the most vital pieces Goldman Sachs—was not instantly con- dogmatic re - of the M&A puzzle—the integration of sidered a part of, at least not by all, when he sponse was not employees, clients and technology. And was named chief executive. enough for some they’re not alone. “Goldman is a very ‘clubby’ place, but Merrill brokers. very much managed with the interest of And now that Too much, too fast? the partnership or company in mind. Thain’s future is While few major institutions on Wall That’s tough for some Merrill brokers to apparently sewn Street have been immune from the car- take because they are part of a very en- up, as on Oct. 2 nage of the credit crisis, BofA, JPMorgan trepreneurial crowd,” says Nancy Bush, BofA revealed and Citigroup have arguably been more founder of New Jersey-based NAB Re- protected than some of their search. rivals. Even with all of his loyal followers from Milestone’s Jess Varughese: Firms like JPMorgan Goldman, and those who sing his praises ‘What people predicted would have somewhat less ex- at the New York Stock Exchange, from take decades has happened posure to the more exotic where Thain defected to join Merrill, in 30 days.’ securities created in re- there was some disgruntlement among cent years, though it does brokers. And while under Thain’s leader- remain closely tied to the ship Merrill had begun to clean up its bal- consumer-lending mar- ance sheet and repair some of the damage he would stay on with the combined ket, as do Citi and BofA. What they left by former CEO Stan O’Neal, those company as president of global banking, do offer, of course, is a mammoth base territorial sentiments re-emerged when securities and wealth management, many of deposits from their retail banking less than a year into his regime, he sold of Merrill’s employees are wondering customers. It seems reasonable, then, that this trio “Their aspirations for the West Coast departments will be integrated into the new would play a role in Wall Street’s recovery. were realized through the acquisition of firm, among others. But all three of the aforementioned model WaMu,” says Milestone partner Doug Mc- In many ways and despite the shrink- banks have taken on targets—for BofA, Gann. “JPMorgan’s weak points were the ing financial services arena, high-per- Merrill; for JPMorgan, Washington Mu- Southeast and the West Coast, and it solved forming brokers appear to hold a lot of tual; and for Citi, Wachovia—that only one of those items with this acquisition.” the cards. “Financial advisors will be 30 days ago were not necessarily at the Dimon and Sandy Weill orchestrated a determining what is best for their clients center of their radar screens. They were string of acquisitions from 1975 to 1988 and their family,” says Manis. shotgun marriages at best, arranged by that helped to build Citi into a banking gi- In addition to the human capital, there father circumstance and mother opportu- ant. Since taking the helm at JPMorgan, Di- are huge logistical issues to address. “The nity. And all of them were done at a time mon has outperformed many of his peers. technological and operational components when much of Wall Street is ducking for “They integrate well and integrations of these deals are extremely significant cover. don’t tie them up as long as somebody who given the size and breadth of the compa- “What’s worrisome is when you look at doesn’t have the playbook JPMorgan has,” nies these organizations are taking on,” what just happened—the fastest-ever cre- says Milestone’s Varughese. says Milestone’s McGann. ation of a universal banking model. What The lesson in spades of what not to do when In traditional integrations, the buying people predicted would take decades has integrating a company is learned through Wa- company has to deliver some synergies, for happened in 30 days. It has created an oli- chovia’s 2007 acquisition of AG Edwards. instance to prove that it is saving money gopoly which will have ramifications for the “AG Edwards is a ship adrift at sea right now,” on a particular platform. But given the ur- consumer over time, but none of that is of says Darin Manis, CEO of Denver-based re- gency driving much of M&A, there is less any real immediate consequence given the cruiting firm RJ & Makay. Manis expects of a burden to sell a deal right now. “The liquidity pressures the acquired institutions there will be an “unprecedented exodus of traditional M&A model is out the win- have been under,” says Jess Varughese, brokers” from the firm as a result. “Many dow” says Milestone’s Varughese. “These managing partner at financial services con- brokers are nervous and upset and feel left recent deals were shotgun integrations. sulting firmMilestone . out to dry,” he says. “I don’t see many brokers You don’t have to prove to shareholders For BofA, the challenge of integrating joining AG Edwards right now. It’s a complete you’re getting a good deal when you are a firm the size of Merrill, with a nearly mess over there.” buying assets at firesale values.” 17,000-strong thundering herd of brokers A Wachovia spokeswoman refuted One of the harshest criticisms of the compared with its 2,000 brokers, is daunt- those comments, maintaining that rushed deals that have unfolded on Wall ing. the integration of retail brokerage AG Street of late has been the apparent lack But combined with the fact that Lewis’ Edwards is going “very well” and is of due diligence. For instance, when Thain firm only just finished the integration of on track for final conversion in Feb. was meeting with US Treasury Secretary US Trust and this month will wrap up the 2009. Henry Paulson on the weekend prior to conversion of LaSalle Bank’s systems, the the Lehman bankruptcy, BofA’s Lewis was task at hand seems that much more ambi- What to expect not even there. tious. The coming weeks are going to be espe- It wasn’t until Thain picked up the And this is all being done at a time when cially telling as to how these newly-com- phone and called him on the morning of yet another acquisition, Countrywide Fi- bined firms manage a key part of the inte- Saturday, Sept. 13, that the combination nancial, is still being swallowed. The mort- gration process—their talent. According became a very real possibility and hours gage lender is expected to be fully absorbed to Manis, the average attrition rate when later, after some face time, a reality. into BofA by the third quarter of 2009. a company takes over another brokerage “That doesn’t keep Lewis from saying That leaves the biggest deal of them all, house is 8%-15%. As a result, many are due diligence was completely adequate. Merrill, which Lewis’ team will not begin not taking any chances. But let’s be real,” says Gary Townsend, combining before early 2010. Manis’ phones at the office have been of Maryland-based Hill Townsend Capi- “That is a core competency. We know ringing off the hook with calls from tal. how to manage transitions. I don’t want to “poised” Merrill brokers and “panicked” Others are more philosophical. “Don’t understate the size and the degree of dif- AG Edwards financial advisors, Manis says. let them fool you into thinking they ficulty ... but it will be done and it will be He has since transferred recruiters from haven’t been looking at each other for done very professionally, ” said Lewis on other areas of his company to manage the a long time,” says Rob Hegarty, man- the same call. volume. aging director at research and advisory JPMorgan from its inception two centu- Manis has launched an aggressive cam- firm TowerGroup. “This was not a deal ries ago has been an acquisitive firm. This paign to court Merrill and AG Edwards’ that was drummed up in the shower on year it has been most ambitious. The inte- brokers, trying to sell culture, platform, Saturday morning and completed on gration of Bear Stearns was only formally payouts and the mighty transition package Sunday night. These two firms are very completed over the summer, and Jamie to them. There are still more questions than familiar with each other.” Dimon, JPMorgan’s chief, has already answers, such as whether target firms will jumped right back into the M&A arena. keep their name and how much of some [email protected]