Wells' Patience With Wachovia Paying Off - TheStreet

Wells' Patience With Wachovia Paying Off

If banking M&A integration were a race, Wells Fargo would be the tortoise, while JPMorgan sprints ahead in hare-like fashion. For investors, it's worth asking: Does slow and steady really win the race?
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SAN FRANCISCO (

TheStreet

) -- If banking M&A integration were a race,

Wells Fargo

(WFC) - Get Report

would be the tortoise, while

JPMorgan Chase

(JPM) - Get Report

sprints ahead in hare-like fashion.

For investors, it's worth asking: Does slow and steady really win the race?

JPMorgan isn't necessarily the poster child for acquisitions, but the firm has been able to complete two substantial integrations, of

Bear Stearns

and

Washington Mutual

, in just over a year. WaMu alone had $310 billion in assets and over 2,200 branches.

Wells Fargo, on the other hand, plans to take at least three times as long for a slightly larger task.

Its acquisition of Wachovia included $112 billion more in assets and 1,125 more locations than WaMu. The deals were announced just two weeks apart from one another in the fall of 2008. Yet as JPMorgan announced the completion of its WaMu conversion on Nov. 2, Wells was just starting branch conversions in a single state: Colorado. Five other overlapping states -- California, Arizona, Illinois, Nevada and Texas -- are to be converted early this year, and other states will follow throughout 2010.

"They did a test in Colorado to see what worked," says Dennis Nason, a former Wells Fargo banker who now runs an executive search firm. "They're in it for the long-term rather than the quick buck and the quick turnaround."

Wells executives emphasize that the branch conversion process isn't the only factor in an integration, nor is it the most important one. CEO John Stumpf noted that his team "spent a lot of time on the plumbing and wiring" behind the scenes last year, transitioning systems, making staffing decisions, and implementing an evolving business strategy.

The integration is tracking far better on cost savings and revenue generation than the firm initially forecast. Executives also see plenty of opportunity to offer Wachovia customers a host of products from the combined franchise, and vice versa.

Still, retail branding is the most visible sign of an integration's success - something Wells executives appear to be aware of, even if they refuse to hasten the process.

When NAB Research analyst Nancy Bush asked about the lengthy conversion during a conference call this month, Stumpf acknowledged that "people tend to focus... on the retail side." He also promised a "big push from a signage perspective" in Wachovia's East Coast territory later this year. Bush had noted that in her home state of New Jersey, the Wells Fargo brand "isn't really visible yet."

"It will be coming to New Jersey," Stumpf responded serenely. "Every day, we get one day closer to that."

A Hare-Like History of M&A

In discussing the Wachovia integration, the word Norwest is often invoked -- a name that has largely been forgotten, though it too took a few years to disappear.

Norwest was a Midwestern banking titan, which engulfed Wells Fargo during an acquisition spree more than a decade ago. The combined entity retained Wells' time-tested stagecoach brand, but much of the management -- including retired Chairman and CEO Richard Kovacevich -- hailed from Norwest's Minneapolis headquarters. Their slow and steady tactics have endured, as has the sales culture.

"I think the management team of Wells is one of the best in the industry," says John Chrin, a Lehigh University fellow, who advised on the Wells-Wachovia deal as an M&A banker at JPMorgan. "They have never been afraid to go against the grain and go against the conventional."

Indeed, Wells Fargo has a reputation for doing things "the right way" even if it's not the popular way -- whether in dealing with regulators, customers or the investor community. (The bank had its very first earnings conference call this month.)

Executives place an internal emphasis on cross-selling -- offering additional products to consumers -- to boost revenue and profit. However, the push is portrayed to customers as part of a service culture. In effect, all parties walk away happy: The company with increased market share, and the customer with products that suit his financial goals.

"I'm a Wells Fargo private-banking customer and my experience has been entirely positive with respect to internal communications and cross selling," says Walter Mix, a banking consultant at the firm LECG, who was once a regulator in Wells' home state of California. "In fact, I've been surprised at how well they've executed on some of the things I've been involved with."

Instilling that culture in the Wachovia footprint may be a more difficult task than replacing awnings and logos. NAB Research's Bush, who is a Wachovia customer, said in an interview that the bank is "great with service but not proactive" in driving new business. For instance, when her high-interest-rate CD expired, she wasn't offered a high-yielding alternative. In such cases, customers looking for the best yields or loan terms will simply take their money elsewhere.

The Wells Fargo team recognizes this, and attributes it to a lack of staffing. It is working to resolve the problem with new hires at Wachovia centers. Whatever the case, it presents an opportunity to gain additional business. The cross-sell ratio on the legacy Wells side of the business is 5.95, while on the Wachovia side it's 4.70.

"There is a delta," says Stumpf. "It doesn't sound like a lot, but multiply that times 11, 12 million households, it is a lot of products."

Who's Winning The Race?

The Wachovia acquisition is turning out to be much more profitable and much less costly than initially assumed. Even the prospects of Wachovia's most toxic Pick-A-Pay loan portfolio have improved, due to seemingly successful mortgage modifications.

Management raised estimates for "accretable yield" on Wachovia's impaired portfolio by $4.2 billion, or 40%, over the course of 2009. The metric measures how profitable the loans will be, by calculating the difference between cash flow and market value.

In terms of cost, management initially assumed that the integration process would run roughly $7.9 billion over three years. Wells now expects to spend $5 billion, tops. The firm booked 42% of those costs last year, and expects to break even on them in 2010, due to merger-related savings.

"The merger with Wachovia is exceeding all of our expectations," said Stumpf.

The most logical way to compare Wells' performance is to look at JPMorgan-WaMu, since

Bank of America's

(BAC) - Get Report

crisis deals were different and more complex. Still, it's not an entirely fair comparison. In the case of Washington Mutual, the bank had actually failed as customers raced to withdraw their funds. It may have been more important for JPMorgan to wipe away the impression of that failure, and install its own brand of security and safety in retail locations as quickly as possible.

"My experience has been, the quicker the better in changing over and rebranding," says Mix, the banking consultant with LECG, though he notes that integrations have to be assessed on a case-by-case basis.

Though Wachovia was also at the brink, it didn't actually fail, and customer retention has apparently been better. As of Dec. 31, JPMorgan had lost 3% of its deposits on both an annual and quarterly basis, a trend it attributed mostly to the run-off of high-interest-rate CDs from the WaMu franchise. By contrast, Wells Fargo had boosted deposits by 6% on a quarterly basis, and 20% on an annualized one, though it faced the same hot-money CD headwinds.

Chrin notes that short-term savings and synergies of mergers are often overstated, and that it can be "disastrous" to lose customers and key employees simply to save time.

"To slam things together isn't always the best," says Chrin. "Ten years from now, no one's even going to remember it took an extra year."

-- Written by Lauren Tara LaCapra in New York

.