Huge Bank Deal Could Produce Huge Problems

First Interstate Bancorp’s proposal to merge with BankAmerica raises anew the old issue of bigness in American business and whether it is, as critics have argued, clear evidence of badness.

The issue became a hot one about two decades ago with the early efforts of consumer and other activist groups to make business more responsive to the public. The argument then was that bigness bred arrogance and monopolistic behavior. The assumption was that it meant power, and that power meant potential for abuse. The bigness-is-badness crowd was dismissed by the business community and by many others as having a simplistic view of the economy. Bigness to them meant efficiency and cost savings based on greater volume.

Now the bigness question has been turned on its ear and has become much harder for business to dismiss. The main concern now is not whether bigness breeds strength but rather whether it breeds weakness. Critics, even within business itself, wonder whether an enterprise can get too big and complex for even the most nimble of managers to control and direct.

That is the most worrisome problem surrounding the potential merger of BankAmerica with a sounder, but much smaller, banking institution. Will putting two banks together, one of them deeply troubled with bad loans and a high-cost branch network, create any real benefits? If market share is the decisive factor, then getting bigger obviously will help. Putting more capital behind the loan portfolios should ease some pressure on BankAmerica. More resources could enhance its ability to provide a broader range of services in what has become a fast-changing industry.

Unfortunately, however, those factors aren’t the only ones. A bigger factor, the one that experts will have a tough time quantifying in dollars, is whether two huge entities involving tens of thousands of people can be molded together quickly and smoothly enough to realize the other potential benefits.

Recent history raises some doubts. In industry after industry, companies that have grown through big mergers have found themselves in financial difficulty. Too often they have relied on a match-up of product lines that looked good on paper only to discover that business is not just factories and products. It is also people.

Individuals are different, and groups of individuals have different characteristics. Some corporate bureaucracies are used to a relatively relaxed leadership giving considerable room to individuals to make decisions and mistakes. Others are more authoritarian. Both systems, operated correctly, work. But they don’t operate well when mixed together. Moreover, to achieve the cost benefits of the post-merger bigness, most of these fast-growing giants have been forced to make wholesale personnel cutbacks. Combine that with mixed-up management procedures and the result is a collapse in morale.

Chevron, which took over Gulf, is a long way from realizing the full potential of that move and has had to trim other parts of its business to help lighten the debt load. BankAmerica itself acquired troubled Seafirst in Seattle three years ago amid high hopes of a quick contribution to the big bank’s bottom line. Those contributions may finally be coming, but only after a couple of years of pain.

If the answer for BankAmerica is to merge with another smaller but financially sounder bank, the question that must be considered first is how quickly any benefits can be realized. Sam Armacost, who said Friday he would resign as BankAmerica’s chief executive, had been hard at work on ridding his bank of needless expenses for several years. Yet, bureaucratic resistance and concern for people and morale frustrated Armacost’s efforts.

First Interstate’s Joe Pinola, on the other h a nd, has had more success. His tougher hand has produced a major streamlining of his bank, sometimes at the expense of morale but at least to the benefit of the bank’s overall strength.

Would such a direct approach work on a bureaucracy 2 1/2 times as large as the one Pinola confronted at First Interstate? Or would the result simply be a bigger troubled bank?