2.19.2008

Dick Kovacevich: Merger advice

Neal St. Anthony: Merger advice from a man who's been there, done it right

Excerpt:

Kovacevich put together a string of mergers, capped in 1998 by Norwest Corporation's stunning acquisition of the larger Wells Fargo.

Most bank mergers were disasters because they focused most on short-term cost cuts that were designed to please Wall Street analysts and investment bankers. Too often, they aggravated overworked employees and shortchanged customers, many of whom fled to smaller competitors.

"Revenue is the gift that keeps on giving," Kovacevich said in an interview last week. "My belief is that you should never do a merger unless revenue growth of the combined companies in the future will be greater than the sum of the two had they remained independent.

"Many times you see cost cuts, but revenue goes down because you cut the heart out of the service. Many mergers have resulted in less revenue. In about 80 percent of mergers, the stock of the buying company goes down."

A lot of big bank mergers were premised on promises to Wall Street that the buyer would cut up to 30 percent of the acquirer's costs within a year. Running against conventional wisdom, Kovacevich, in his capstone Wells Fargo deal, told Wall Street he would cut 6 percent of cost over three years.

"The employee has got to be the No. 1 stakeholder," Kovacevich said. "You should have seen eyes roll when I would talk to employees [at the outset of a merger] about our competitive advantage," Kovacevich said. "And we reduced some positions over time. But they saw how we did it. And we listened to them. And we did stop some things that weren't working ... employees watch what you do, not what you say.

"I'm not expert in airlines, but it is about that pilot and flight attendant. We've proven in banking, if they don't like coming to work every day, it won't work."


Comment: The last sentence is sound organizational advice!

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