A subsidiary of the Bank of Tokyo agreed Tuesday to acquire Union Bank of California from its British owners in a transaction that will create the second-largest foreign-owned banking company in the United States.
The proposed $750-million purchase of California's fifth-largest bank, which is headquartered in Los Angeles, represents the largest direct Japanese investment in the U.S. financial services industry and is part of a growing Japanese economic presence in the U.S.
More Than a Toehold
"We are seeing greater Japanese participation directly in real estate and setting up their own plants, as well as takeovers and acquisitions," said Nicholas P. Sargen, an analyst at the New York investment house of Salomon Bros. "Their biggest involvement is in the financial sector and the Union Bank acquisition is consistent with their gaining a toehold in the financial marketplace."
The Japanese have more than a toehold in California. The acquisition of Union Bank from Britain's Standard Chartered banking company will mean that the Japanese own five of the state's 10 largest banks. The deal will also eliminate the last British ownership among big California banks.
Bank of Tokyo's California affiliate, San Francisco-based California First Bank, began talks with Standard Chartered in November after the stock market crash sent the price of U.S. banks plummeting. When Standard Chartered first put Union Bank on the block last summer, they had hoped to get at least $1.2 billion for it.
Wells Fargo and the world's biggest bank, Dai-Ichi Kangyo Bank of Japan, also had talks with Standard Chartered but in both cases negotiations broke down over price, said John Pank, director of information for Standard Chartered in London.
The largest Japanese acquisitions of California banks have occurred in the last three years, coinciding with the rising power of Japan's big banks and the increasing overall Japanese investment in the U.S. economy.
The strength of the Japanese banks allows them to infuse U.S. institutions with new capital and back them with their strong credit ratings. The solid credit rating of the new ownership will be a major advantage for Union because it will allow the bank to get a better rate when it borrows money in the capital markets.
California First's president and chief executive, Seishichi Itoh, said he plans no major changes in the operation of Union Bank during a transition period, which means that Union's customers will not be immediately affected by the change in ownership.
Backlash Is Feared
But some Japanese bankers have expressed concern over a possible backlash as a result of the rising investments in the United States. Perhaps in recognition of that, Union Bank will be acquired through the California First subsidiary, which is 77% owned by Bank of Tokyo.
The announcement of the deal did not mention Bank of Tokyo, but a Standard Chartered official said bank executives in Tokyo were involved in the deal from the start and also signed the final letter of intent Tuesday.
Itoh said he conducted the negotiations with the understanding that the Bank of Tokyo itself would provide a portion of the funds for the deal if necessary.
Itoh said California First plans to assume $250 million worth of Union Bank's liabilities as part of the purchase price. He wants to raise the remaining $500 million through a stock offering.
"We would like to expand our shareholders in California," said Itoh, 53, a Japanese national. "Obviously, if we cannot raise the capital here, we will have to go to the Bank of Tokyo to support us."
Subject to Approval
In addition to Bank of Tokyo's controlling interest, a Japanese life insurance company owns 6% of California First's stock and the remainder is traded over the counter. The merger is subject to approval by U.S. regulators and California First shareholders.
Bank of Tokyo, the world's 22nd-largest bank, has expanded dramatically overseas in recent years in an attempt to reduce its dependence on the increasingly competitive foreign-exchange dealing business. It has only 32 branches in Japan but a network of 250 offices overseas, not counting Union Bank's.
California First is the sixth-largest bank in California, with assets of $6.1 billion at the end of 1987. Despite having its headquarters in San Francisco, 97 of its 135 offices are in Southern California.
The bank, which was called Bank of Tokyo until 1975, does business with 80% of the Japanese firms operating in California and invests pension funds for such clients as Fujitsu, Nissan and Mitsubishi Metals. But the bank also has a strong consumer presence beyond the Japanese business community.
Union Bank had 32 offices and assets of $9.1 billion at year's end. Union has carved a niche catering to mid-sized businesses but its profits have been lackluster in recent years.
High Ranking in Size
With combined assets topping $15 billion, the two banks would be the largest Japanese-owned banking company in the United States, a spokesman for the Federal Reserve Bank in Washington said. The second-largest is Sanwa Bank of California, with $5.3 billion in assets.
The largest foreign-owned bank is Marine Midland Bank in New York, with assets of $24.5 billion. It is owned by the Hong Kong & Shanghai Bank.
Itoh said he plans to operate Union Bank as a separate institution during a transitional period.
"As legal entities, they will be one bank," said Itoh. "However, I am going to have two units and we will give Union autonomy until we get acquainted."
He said there are no plans for immediate layoffs and that there is almost no duplication of business between the banks. Union recently cut its staff from 4,400 to 4,200 as part of a pre-sale streamlining; California First has 3,975 employees.
Some to Be Laid Off
A Union executive who spoke on the condition that his name not be used said layoffs are anticipated as the banks merge some operations. But he said bank employees expect the cuts to be far less than if Wells Fargo had acquired Union. Some senior executives at Union also are expected to depart in the coming months, he said.
Sources in the bank have said for months that staff morale was low because of fears of layoffs connected with the anticipated sale of the institution.
Standard Chartered put Union up for sale to shore up its capital position, which had been weakened severely last year by the provisions it made to cover potential losses on loans to Third World nations.
Last month, Standard Chartered sold United Bank of Arizona to Citicorp of New York for $205 million.
The sale of Union Bank is the latest chapter in a story that is changing the face of the U.S. financial industry. Details in Business.