MPR: Banker Brothers Unite

Banker Brothers Unite
By Bill Catlin
October 4, 2000

Minneapolis has gained the headquarters of a top-10 national bank. U.S. Bancorp, the largest remaining locally-based financial-services institution, has agreed to be acquired by Milwaukee-based Firstar. The combined company will keep U.S. Bank's name and Twin Cities headquarters. The deal also unites Jack and Jerry Grundhofer. The brothers, who have run the two banks separately, will now be at the helm of the combined firm.

THE DEAL, initially valued at more than $21 billion, is the second-largest in the Minnesota history. It's the latest in an accelerating wave of consolidation in the financial-services industry. The merger creates a banking and financial services franchise extending from California to Ohio, with little overlapping operations. "We both compliment each other in our strengths and our challenges," SAID Jerry Grundhofer of Firstar, who compared the match to a fairy tale. "We get more scale in the businesses where we have strengths and in the businesses where we both are challenged we get help. It couldn't be a better fit."

Jack Grundhofer, head of U.S. Bancorp left little doubt that his bank's challenges were a driving force behind the merger. He told investors and reporters that the bank needs to be bigger to make necessary investments in technology. But he said it was taking longer than expected to grow after problems in the consumer and small-business banking business; problems that hurt U.S. Bank's stock price, which, in turn, enabled the smaller Firstar to become the acquirer.

"The conclusion from these things was that we should look at combining with a partner where we would have those strengths that we were lacking," said Jack Grundhofer.

The new company will combine Firstar's reputation for strength in consumer and small-business banking, with U.S. Bank's profitable, fast-growing specialties, such as investment banking, and corporate credit cards.

Investors have speculated about the prospect of the two banks combining for a long time, the complementary businesses and geography made a good business case for a deal, with the Grundhofers brotherly ties adding human interest.

Jerry Grundhofer will be president and CEO of the combined company. Jack will be chairman until his planned retirement at the end of 2002.

Banking industry analyst Jay Tejera of Ragan McKenzie says the two have worked together before earlier in their careers, and they have a similar approach but differing styles.

"Jerry is much more of a motivator and a cheerleader. It's very easy to like Jerry Grundhofer. Jack is the kind of guy you'd want in a foxhole with you, but he's just a tougher kind of individual. And as he was joking, Jerry was his mother's favorite son," said Tejera.

The combined company will be the nation's eighth-largest bank by assets. Industry consolidation has cost Minnesota the headquarters of several major financial-services companies, including the new Wells Fargo, GreenTree Financial, Reliastar, and Dain Rauscher. And Tejera says U.S. Bank's future as a Twin-Cities headquarters firm was not guaranteed.

"That headquarters, that name, all the ripple effects that go with it, could have migrated to another market. U.S. has one of the top two or three franchises in the country. And that certainly attracted Firstar. Those headquarters could have gone anywhere," he said.

Combined, the two employ 12,000 in Minnesota. With an extremely tight labor market and protracted cost-cutting, officials say they expect minimal layoffs, and that the Twin Cities may see a net job gain. However, some Twin Cities' bank branches will be sold off to avoid anti-trust concerns, 10 to 15 by one estimate.

And while there's much for Minnesota to cheer in the deal, investors grumped. Shares of Firstar dropped 10 percent. Banking industry consultant Bert Ely says investors may be disappointed on both sides of the deal.

"That Firstar is overpaying, and then on the U.S. Bancorp side, (there is) a sense that this transaction was not the best deal for U.S. Bancorp stockholders. In fact, one of the things that's going to be interesting is to see if any shareholder suits get filed over this deal," Ely said.

Observers say it's unlikely the deal will fail. If it goes through, Minnesota will have come out on top in a merger that could have cost the state a key corporate asset, the headquarters of one of its oldest and biggest financial-services firms.

Bill Catlin covers the business beat for Minnesota Public Radio. You can reach him at bcatlin@mpr.org

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