Union Bank Acquisition: a Delicate Blend of Cultures : Japanese-Style Management at Cal First Sharply Different From New Partner’s Independent Ways
The only task harder than finding two banks as different as California First Bank and Union Bank may turn out to be combining them into a single, efficient institution.
When Cal First completes its acquisition of Union at the close of business today, executives of the new organization will confront a job of huge proportions. And they will have to perform it under careful scrutiny on an international stage.
“This is a very unique merger--or, I should say, acquisition--because each bank can contribute unique strengths,” said Seishichi Itoh, the president and chief executive of California First, who will hold the same top spot in the combined bank. “Obviously we have to carry out the integration with great care and deliberation.”
The reason Itoh stumbled between merger and acquisition goes to the heart of the transaction and illustrates one reason this is likely to be the most watched bank merger in California history.
It is not the biggest acquisition. In 1986, Wells Fargo bought Crocker National Bank from its British owners for $1.1 billion. But that was a clear-cut acquisition involving two San Francisco-based banks with similar business lines and strategies--and with Wells clearly in command.
Cal First and its parent, Bank of Tokyo, are buying Union Bank from Britain’s Standard Chartered for $750 million in a deal that will create a $15-billion bank, California’s fifth-largest.
But the astute Japanese recognize that this deal must be treated as a merger of equals because of the valuable and delicate nature of Union’s business-banking franchise. Even the name of the merged institution will be Union Bank.
And in this case, the corporate cultures and banking strengths differ dramatically. The ultimate success of the Cal First-Union merger will depend on integrating them without damaging either institution.
“When you have a merger of companies that have substantially different cultures, as these do, it does present particularly strong challenges,” said James B. Bemowski, a principal in the Los Angeles office of McKinsey & Co., a leading international management consulting firm.
Cal First, which is based in San Francisco, is the state’s sixth-largest bank and caters primarily to individual customers, although its clients include 70% of the Japanese-owned businesses in California.
On top of the consumer orientation is a heavy overlay of Japanese management. The Cal First hierarchy is dominated by Japanese nationals rotating through California from the home office. Decisions are made by consensus, in constant consultation with Tokyo.
Los Angeles-based Union Bank deals almost exclusively with the small and medium-sized companies that form the rich middle market in commercial lending and bank services. Union’s success depends largely on personal relationships between its loan officers and the businesses they serve.
Unlike opening an individual checking account at a bank, these companies depend on the bank to provide key financial advice and to understand the workings of their business. They also rely more heavily on their bankers than do major companies, which have sophisticated money managers in-house and raise money more frequently through public offerings.
After buying Union in 1978, Standard Chartered was pretty much an absentee landlord. As a result of these factors, Union’s line officers have greater independence than most bankers and, through a pioneering incentive program pegged to individual performance, they are paid better than most.
Several Union insiders said in interviews that any sign of a heavy-handed attempt by the new owners to rein in that independence, such as restricting the flexibility of account officers or imposing arbitrary lending limits, will send employees stampeding for the exit doors, with as many customers in tow as possible.
Three of the nine executive vice presidents at Union are exiting today, and several lower-level managers reportedly have departed or plan to go. One mid-level manager in the downtown headquarters said, “Resumes are flying all over the place.”
Along with receiving job feelers from Union employees, bankers at rival institutions say they are seeing signs of customer defections from Union.
“We have seen some concern on the part of customers of Union Bank about another change in ownership and an interest in discussing their banking requirements with our bank,” said Robert W. Kummer Jr., chairman of First Business Bank in Los Angeles, an aggressive institution that targets the same middle market clients as Union. “We anticipate some new business as a result of the Cal First acquisition.”
Cal First officials play down talk of losing customers or employees, accusing some competitors of exaggerating the situation in an attempt to exploit the change of ownership.
Proceeding Cautiously
“Our focus groups and our research and our discussions with our customers indicate the same thing to us, and that is that most are taking a wait-and-see attitude toward this changeover,” said Larry Boggs, vice president and chief spokesman for Cal First.
Itoh and Boggs stressed in separate telephone interviews that Cal First is proceeding cautiously to maintain customer confidence and continuity at both institutions.
Joint management teams from the banks have been planning the integration for several months. One key attempt to maintain stability at Union was the decision to put Donne P. Moen, a veteran Union executive, in charge of the UB Division of the new bank.
The division will essentially be the old Union Bank, operating out of Los Angeles. Cal First’s retail operation will be contained in the CFB division, with headquarters in San Francisco. Itoh said the two divisions will run with a high degree of autonomy for a year or more while details of the integration are worked out.
Eventually, of course, the divisions will have to be integrated and staff levels cut for the new organization to recognize the economies of scale that are essential to any successful merger or acquisition.
For instance, the two banks operate five data processing facilities between them, and Cal First officials acknowledge that that is too many for efficiency. But for now, Boggs said, plans call for eliminating only 640 jobs--about 8% of the total combined staffs--mostly through attrition, over the next two to three years.
Anxiety over job security is not confined to Union employees. A junior-level manager at Cal First said people there are worried that they will be replaced by Union employees as the integration proceeds.
Some Terminations
Boggs said managers from both banks will be evaluated in areas where there is overlap, adding: “In some cases, there probably will be some California First people who will be found not to be stronger. We will keep the best fit and qualified for the job. It really is a merger.”
Efforts will be made to find new positions for people shifted out of their present jobs, but Boggs said there are likely to be some terminations, chiefly in administrative positions.
There is very little overlap of branches, mostly because Union has only 32 regional offices. Boggs said the only duplication appears to be offices across the street from each other in downtown San Diego. One, he said, will eventually be closed.
Despite assurances of autonomy, few industry observers or Union insiders expect the Japanese to abandon the tradition of hands-on management that they have brought to virtually all of the U.S. operations they have acquired, particularly when the stakes are so high.
The purchase of Union Bank represents the largest investment in a U.S. financial institution by the Japanese, and it comes at a time of rising sentiment in some sectors of the United States that the Japanese are buying too much of America.
The Federal Reserve Board approved the acquisition by a vote of 5 to 1, with dissenter Martha Seger arguing that Japanese banks have been allowed to acquire U.S. institutions while U.S. banks are denied similar opportunities in Japan.
The deal also represents an ambitious attempt by Bank of Tokyo to penetrate the middle market among U.S. companies in California at a time the turf is being hotly contested by at least a dozen domestic banks. The middle market, where bank fees and loan profits are high, has eluded Japanese bankers so far.
Long Ties in State
As a result, the transaction will be watched closely on several levels in both countries.
Bank of Tokyo has been the most international of Japan’s banks for decades and is probably the best equipped to make the merger work. It is much larger abroad than in Japan and has operated in California for more than 100 years. Its Cal First subsidiary was founded in San Francisco in 1952 and is 77% owned by the Bank of Tokyo.
Cal First has assets of $6.3 billion and 135 branches throughout the state. A big majority of its staff of 3,845 is American, but insiders acknowledge that key policies bear the imprint of Tokyo, and the most powerful executives are Japanese nationals.
Union Bank was founded in Los Angeles in 1914 and remained independent until 1978, when it was acquired by Standard Chartered. The acquisition was part of the British invasion of California banking, and the closing of the Union sale symbolizes the British exodus.
Union has had difficulties in recent years, particularly with substantial losses on real estate loans, and its profits have dipped. But the state’s fifth-largest bank retains a reputation as a leading middle-market bank, with assets of $8.7 billion and 4,120 employees concentrated in Southern California.
Standard Chartered put Union on the block in late 1987 to raise money to deal with financial difficulties at the home office in London. After Wells Fargo declined to meet the British price, Bank of Tokyo struck a deal last spring to buy the bank.
Dual Operation
The new bank will be legally Union Bank when it opens for business Tuesday. But the signs on the Cal First offices will not be changed until early next year when the bank begins to market itself as the new Union Bank.
While the official headquarters will remain in San Francisco, from a practical standpoint the bank will be run out of Los Angeles and San Francisco jointly, and Itoh said he expects to divide his time between the two cities.
Bank of Tokyo will have a 77% interest in the new bank, and the new board will bear its dominant imprint. However, there will be some directors from the old Union on the new board and at least two new directors from minority groups as part of a pledge by Cal First to increase minority representation in the institution.
The chairman will be Tamotsu Yamaguchi, 58, a top executive in the United States for the Bank of Tokyo. Itoh and several other Japanese nationals will also be board members, an indication that even in this deal there will be a first among equals.
