MPR: Merger for U.S. Bank and Firstar?

Merger for U.S. Bank and Firstar?
By Bill Catlin
September 27, 1999

The wave of consolidation in banking has slowed since last year, when a flurry of mega-mergers, including the pairing of Norwest and Wells Fargo, reshaped the industry landscape. At the time, many observers wondered whether U.S. Bancorp, the Twin Cities' other major bank, would find a partner. The company has been snapping up smaller California banks, but hasn't made a big move. Banking industry analysts are pondering the possibility that U.S. Bancorp would join up with Firstar of Milwaukee, a merger that would bring together the brothers Grundhofer.

U.S. Bancorp reported second quarter 1999 operating earnings (net income excluding nonrecurring items) of $383.8 million, compared with $358.2 million in the second quarter of 1998. On a diluted per share basis, operating earnings were $.53 in the second quarter of 1999, compared with $.48 in the second quarter of 1998, an increase of 10 percent. On a diluted per share basis, cash operating earnings were $.58 in the second quarter of 1999, compared with $.52 in the second quarter of 1998, an increase of 12 percent.
Source: SEC filing

FIRST THE CAVEAT offered by Ben Crabtree, a veteran industry analyst now at George K. Bawm in Minneapolis.

Crabtree: Investors, and especially bank analysts, love to speculate on this stuff.

Add reporters to the list.

But noted banking expert Bert Ely says this is an era of consolidation in banking and financial services. Deregulation is breaking down barriers between banking, insurance, and securities firms. Technology, mergers, and the growing popularity of stock investing put pressure on banks to grow larger and offer a broader array of financial products from life insurance to online stock trading. Ely says such forces will drive consolidation for years to come, creating banks with ever bigger geographic footprints.

Ely: Just as an aside, in my opinion, Wells Fargo will at some point form the western end of a second bi-coastal bank, the first one being Bank of America. And I can easily see a U.S. Bancorp in some iteration forming the western pacific coast of a third bi-coastal bank.

U.S. Bank and Firstar are roughly the same size; they're the 13th and 14th largest U.S.banks, And they're run by Jack and Jerry Grundhofer, two highly regarded bankers who happen to be brothers. But what interests observers more than their relationship is geography. Again Bert Ely.

Firstar Corporation's net income for the third quarter of 1998 was $81.5 million, or $.55 per common share, on a diluted basis, up from the $75.3 million, or $.51 per common share, for the same period last year. This represented a 8.2% increase in net income and a 7.8% increase in earnings per share. Return on common equity was 18.07% for the quarter, compared with 18.51% for the same period last year, while return on average assets was 1.61% compared to 1.54% during the third quarter of last year.
Source: SEC filing

Ely: Take a look at U.S. Bancorp, and you can see several different combinations that it could fit into, but particularly from a geographical standpoint, the merger of those two companies would make a lot of sense.

U.S. Bank has branches in 17 states in the upper Midwest and on the west coast. Firstar's service area has relatively little overlap, and would extend the combined area's franchise to the south and east, with Florida and Arizona as bonuses. Ben Crabtree says the two firms have similar management philosophies and have important lines of business in common as well, such as credit card processing and trust operations.

Crabtree: To me it would be a fairly interesting, a very interesting and probably quite positive development. Doesn't mean it's going to happen.

If the two businesses appear to merge well, Crabtree says another question is whether the managements will get along.

Crabtree: For it to work, it would have to be kind of a friendly melding, kind of what has come to be known as a "merger of equals." In that regard I think it would be necessary that the CEO's of the two organizations get along well.

That's where the relationship between the Grundhofer brothers becomes more than a curiosity.

Crabtree: The stories that I've heard is that the brothers are, of course, competitive, and to know either one of them, you would know that's true. But on the other hand, they do get along quite well together, they are friends and quite compatible.

Bert Ely says there's no reason for the brothers to avoid a merger simply because it would look too cozy.

Ely: I believe there's certainly no reason from the standpoint of how the directors or investors would look at this that they should be concerned that two brothers, both of whom happen to be very successful bankers, are at the top of a merged banking company.

Jerry Grundhofer of Firstar probably has his hands full with the recently completed purchase of Mercantile Bancorporation of Missouri. And Ely says both have to put the interests of shareholders before their own. In any case he says, neither U.S. Bank nor Firstar is forced to consider another merger at the moment.

Comments?
Bill Catlin covers business as the deputy business editor of Minnesota Public Radio. You can reach him at bcatlin@mpr.org.

Ely: You know, each of them have options to them open to them, so that's why I don't think it's a certainty or even a near certainty that it's going to happen. But I'm certainly not going to be surprised if it does happen.

Ben Crabtree says if the two do merge, he suspects the headquarters of the new company would be in Minneapolis.

Officials at both banks declined to comment for this report, although one did pause to wonder what the two brothers' talk about at the family Thanksgiving dinner.

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