Clash of Egos Prevented Secret Merger of S&Ls; CalFed, GlenFed

Two of the nation’s largest savings and loans, California Federal and Glendale Federal, nearly agreed to merge several weeks ago, but negotiations broke off at the 11th hour, The Times has learned.

“They got right up to the altar before it fell apart,” said one thrift industry official who was privy to the negotiations, adding that the problems were “purely ego.”

Sources said the talks failed primarily because Norman M. Coulson at Glendale Federal balked at reporting to John R. Torell III at California Federal in the newly merged organization. The two men are chairmen of the California-based thrifts.

The talks, which reportedly broke off in late April or early May, also apparently stalled over which company would bear most of the layoffs that would have followed the merger.

The existence of the secret merger talks resulted from interviews with six investment bankers and industry officials, all of whom declined to be identified. Spokesmen for both firms declined to comment, saying they did not respond to “rumors.”

Lukewarm Respect

Had the merger succeeded, it would have created the largest savings and loan in the country, with about $50 billion in assets. The merger would have blended giant financial institutions that have much in common. They are roughly the same size, are moderately profitable and receive lukewarm respect from investors.

“They’re not looked at as top-tier companies,” said Allan G. Bortel, an analyst for Shearson Lehman Hutton.

Both are saddled with several hundred million dollars in intangible assets, known as goodwill, which will require each to raise capital to meet tougher standards being debated by Congress as part of President Bush’s bailout plan for the thrift industry. Most of the goodwill was created by thrift regulators in the early 1980s as an accounting technique to facilitate interstate mergers between healthy and failing thrifts.

Both firms now operate as principal subsidiaries of a holding company, and both recently changed their names to distance themselves from the money-losing industry in which they operate. Glendale Federal Savings & Loan was renamed Glendale Federal Bank, and California Federal Savings & Loan changed its name to California Federal Bank.

Forecast of Big Mergers

Although the deal was not completed, industry insiders say there will be a rash of mergers and acquisitions in the months and years ahead as big California thrifts struggle with increasing competition and the proposed tougher capital requirements.

Some industry experts believe that very large financial institutions with low costs will dominate the banking industry in the 1990s and be more attractive to investors. “There are lots of rumors and preliminary (merger) conversations going on,” one longtime industry insider said. “You’re going to see a lot more of this.”

Among the possible buyers are commercial banks from New York that want major footholds in the fast-growing California banking market. The pending thrift bailout legislation would allow commercial banks to buy healthy thrifts within two years at the latest.

Mergers between equals within the thrift industry also make sense if the companies have overlapping markets, as California Federal and Glendale Federal do in California and Florida, according to a top executive at one California thrift.

The overlaps would allow the merged company to reap large savings by closing unnecessary branch offices and firing employees as it vastly expanded assets and deposits. “There are huge economies of scale,” the executive said. “Those kinds of mergers between equals make sense.”

Although a merger between California Federal and Glendale Federal had undeniable appeal, it fell apart on prickly details.

The proposed merger called for Coulson to head the savings and loan operations and Torell to be chief executive of the holding company, which was to run the ancillary non-thrift operations in insurance and consumer banking.

Coulson was to report to Torell, who would then answer to the board. But Coulson apparently balked at the chain of command, saying he also wanted to report directly to the board.

In addition, officials at California Federal and its holding company, CalFed Inc., balked when they learned that their employees would bear the brunt of proposed layoffs and branch-office closings designed to cut costs by at least $80 million a year, sources said.

‘Why Would CalFed Do This?’

“Remember,” one thrift executive said, “for this to work, there would have to be a huge reduction in (general and administrative) expenses.”

Not everyone agrees that such a deal makes sense. One investment banker predicted that the merger would have sparked a revolt among the shareholders of CalFed, which he said is easily the stronger of the two financial institutions:

“The real question is: Why would CalFed want to do this?” he said. If the deal is not completely dead, he added, “it should be.”