Wells Fargo and Security Pacific Talked Merger : Banking: The discussions were informal and no more are expected, Security says. The Gulf War and the economy dim prospects for such a deal.
Security Pacific Corp. confirmed Tuesday that it held informal merger talks with Wells Fargo & Co. late last year, but it said the discussions ended and no further talks are expected.
San Francisco-based Wells Fargo & Co. would not comment on the report of the talks, which appeared in Tuesday’s Wall Street Journal. Security Pacific, seeking to downplay the talks, said it has held several similar discussions with Wells Fargo during the past 25 years.
The Journal report said the banks discussed a stock transaction. The report also said the two sides discussed having Wells Fargo Chief Executive Carl E. Reichardt run the bank for a few years, eventually moving aside for Robert H. Smith, chief executive of Los Angeles-based Security Pacific.
The prospect of a merger between the two institutions is intriguing to investors who have long expected mergers among California’s banks and thrifts as institutions seek to cut costs, raise profits and bolster capital. A merger would create the state’s largest bank and the nation’s second largest, after Citicorp.
But prospects for a merger soon are uncertain. The slumping economy and Persian Gulf War have clouded the outlook for all banks, especially ones such as Security Pacific and Wells Fargo that bet so heavily on riskier commercial real estate and corporate buyout loans. A growing number of analysts and economists see dimmer prospects for California’s economy, its real estate market and its banks. “The biggest ‘poison pill’ any bank has in these times is its loan portfolio, even when they want a merger,” said Sanford C. Bernstein & Co. bank analyst Ronald I. Mandle.
Such a merger also would pose other problems, not the least of which is selling the idea to employees. Thousands of workers typically lose their jobs when big banks merge. With the state’s unemployment rate rising, maintaining morale amid layoffs could be difficult.
Regulators and shareholders also could prove skittish. And tough decisions would have to be made over which executives will run the new institution, which bank’s employees will bear the brunt of the layoffs and what name to call the new bank.
Wells Fargo’s stock jumped $2.25 a share Tuesday to close at $56.875. Security Pacific stock rose $1.625 to close at $22.
Analysts and investors rated as 50-50 the odds of an eventual merger, adding that they would not be surprised if all of the state’s major banks and thrifts have informally discussed merger possibilities with each other. Two of the state’s biggest savings and loans--Glenfed Inc. and CalFed Inc.--nearly merged two years ago.
“My guess is that everybody talks to everybody these days,” said one senior California banking executive.
Security Pacific and Wells Fargo have been intense rivals for years. Some former Security Pacific executives describe the bank’s fixation on Wells as approaching an obsession. “Whenever we would do something or think about doing something, the first question always was ‘What is Wells doing?’ ” one former Security Pacific executive said.
Security Pacific’s Smith and Wells Fargo’s Reichardt have talked openly about wanting to merge with First Interstate Bancorp in Los Angeles. Although he downplays it publicly, Smith is said to have once been keenly interested in combining with Chemical Bank in New York.
The biggest factor working in favor of a Wells-Security Pacific merger is the prospect of huge cost savings from a larger, more efficient firm. Donald K. Crowley, a bank analyst in San Francisco for Keefe, Bruyette & Woods, said he estimates that as much as $1 billion in expenses could be trimmed, judging by the savings in Wells Fargo’s 1986 acquisition of Crocker National Bank.
But Wells Fargo and Security Pacific are showing signs of problems that could worsen this year, many investors and analysts believe. Security Pacific lost a huge $358 million in the fourth quarter, caused by disbanding its merchant banking operation and problems with loans in Australia and Arizona. Wells Fargo last week reported a sharp increase in problem corporate buyout loans and loans on commercial buildings 25% or more vacant.
One former Security Pacific executive said he believes that Smith would be very wary of a merger if he had the slightest concern that Wells Fargo’s corporate buyout and real estate loans could sour.
“He’s going to say, ‘Am I going to bet the franchise on this?’ ” the executive said. “Bob Smith is not that kind of gambler.”
Spending Share Prices Higher Price per share, daily closes Tuesday close: Wells Fargo: $56.875, up $2.25 Security Pacific; $20.50, up $1.625
