BY JEFF McKINNEY
The Cincinnati Enquirer
After pumping millions of dollars into a restructuring that didn't take, major shareholders in Firstar Corp. urged the Milwaukee bank to consider a merger, which it ultimately agreed to with Cincinnati-based Star Banc Corp.
C. Paul Johnson, a Firstar director who owns about 1.6 million shares in the Wisconsin bank, said he became increasingly uncomfortable with the bank's wish to remain independent after its turnaround program raised questions over its long-lasting effects on Firstar's lagging earnings and stock price.
Firstar, Milwaukee's second-largest bank, agreed this month to merge with Cincinnati's second-largest hometown bank based on assets. The stock deal, valued at $7.2 billion, will create the nation's 23rd-largest banking company with assets of $36.4 billion. But it will cost Cincinnati a headquarters; the combined company, to keep the Firstar name, will be run out of Milwaukee.
TOP TEN BANKING DEALS OF 1998
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Banks.................Value when announced
*In billions
Travelers-Citicorp ...................$82.54
NationsBank-BankAmerica.........$66.62
Wells Fargo-Norwest ..................$31.17
Banc One-First Chicago NBD ......$29.51
Star Banc-Firstar ........................$7.36
Regions Financial-1st Commercial ..$2.7
Union Planters-Magna Group ........$2.24
First Hawaiian-Bank of the West ....$.952
National City-First Wayne Nat'l * ....$.847
Star Banc-Trans Financial............$.696
*Deal completed
Source: SNL Securities LC
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Mr. Johnson, a Firstar director since 1995, said in a telephone interview from his Chicago office that he thought that Firstar needed to reconsider its independence after it continued to post lackluster quarterly profits following the three-year restructuring. And another Firstar director, William Wirtz, was reported by the American Banker to have pushed for the sale of the company, though he has publicly denied such reports. Mr. Wirtz, owner of the Chicago Blackhawks professional hockey team, owns almost 3 million shares in Firstar -- an investment valued at about $100 million two days before the deal was made public and now worth around $150 million.
Mr. Wirtz didn't return calls for comment.
"Roger (Fitzsimonds, Firstar's chief executive) must have realized that the deal like he structured with Star was a better option than remaining independent, considering the alternatives he had," Mr. Johnson said.
Industry analysts said those alternatives were few: Firstar could remain independent and risk continued sluggish earnings growth; sell to a friendly buyer, as Star turned out to be; or risk a takeover that could have resulted in deep cuts to its franchise. Though executives at Firstar or Star would not comment on how the deal was reached or which bank made the first move, Mr. Johnson said Firstar's business options to improve investor returns were limited.
Mr. Fitzsimonds, who will remain Firstar's chairman when the merger is completed, has been under pressure in recent years from Wall Street, shareholders and even its own directors, to improve the company's performance.
Analysts said that pressure in an environment of industry consolidation that is yielding megadollar deals, likely forced Mr. Fitzsimonds' to recommend that the board consider a sale.
DEPOSIT MARKET SHARE OF MERGED STAR-FIRSTAR
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Market....................Share........Rank
Bowling Green, Ky. ...36.4%.......1
Chicago ....................1.3%.........11
Cincinnati ...............14.7%..........3
Cleveland ..................4.3%..........6
Columbus ..................4.3%..........5
Dayton, Ohio...............6.2%..........5
Des Moines, Iowa ......6.9%..........6
Eau Claire, Wis. .......11.1%..........3
Green Bay, Wis. ........7.6%..........5
Lexington, Ky. ............4.7%..........8
Louisville ..................6.4%..........4
Madison, Wis.............15.4%..........2
Milwaukee ................19.4%..........2
Minneapolis ...............5.9%..........4
Phoenix ...................0.7%..........9
Sioux City, Iowa ......13.5%..........4
Source: SNL Securities LC
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"There were some sizable shareholders who became very displeased with the bank, particularly after its earnings slowed and revenue growth showed no significant signs of improving," said Jerry Cronin, vice president of research at McDonald & Co. in Cleveland. Mr. Cronin and other analysts concluded that much of that investor frustration was rooted in Firstar's inability to keep pace with other Midwestern banks' profits, which were growing at a double-digit pace. Firstar's shares had been stuck in the $30s during the months leading up to the deal.
Firstar's dilemma began in 1995, after it said it would begin a restructuring aimed at adding $140 million in annualized pretax earnings by June 1997. One of the company's primary goals was to improve its efficiency ratio -- the percentage of revenue paid out as expenses -- to 55 percent or less by 1997 from 61.4 percent in 1995. As part of the restructuring that began in 1996, Firstar eliminated 2,500 jobs, or about 25 percent of its work force. But even with such cuts, the restructuring fell short, analysts said.
For example, Firstar net interest revenue for 1997 -- the biggest contributor to a bank's profitability -- stood at $750.4 million, essentially the same as in 1996 and up just 3.5 percent from $726 million in 1996.
Moreover, Firstar's share earnings had risen at annualized rate of 8 percent in the past three years. By comparison, other Midwestern banks -- including Ohio's Star, Fifth Third Bancorp and Banc One Corp. -- posted share earnings increases of 12 percent to 15 percent in that period.
Experts said those numbers made investors itchy and might have prompted major stockholders to step up pressure on management to take action.
"Roger was faced with a decision of who he could choose to buy the company, or risk getting someone who might not have been as friendly," Mr. Cronin of McDonald & Co. said.
In Star, analysts said, Firstar found a partner that not only paid a hefty 44 percent premium for the company's stock but agreed to concessions to benefit its employees and city of Milwaukee. The combined company will keep the Firstar name, be based in Milwaukee and experience no branch closings because there is no overlap between Firstar's and Star's operations. Mr. Fitzsimonds will serve as chairman for two years after the merger is completed. For Firstar, analysts said, that is welcome news because most of its 3,200 employees of a total work force of about 7,800 people are employed in Milwaukee at branch offices. When the banks announced the deal July 1, they said some cuts will be made in senior management and duplicate operations, but the reductions won't be as massive as those that typically have accompanied other bank mergers.
The combined companies will employ about 14,000 people. Though it's undetermined how jobs will be eliminated, Firstar and Star expect to cut costs by $174 million in two years. Star said the new company will take a $325 million charge this year to cover merger-related costs.
But analysts said an offer from another bank -- Minneapolis-based U.S. Bancorp was viewed as the most logical candidate -- would also have made sense for Firstar. The reason: U.S. Bancorp, with a market value of $33 billion, could have easily bid as much -- if not more -- than Star and likely could have achieved more in cost savings because its branch system overlaps with portions of Firstar's.
Ironically, U.S. Bancorp's chairman is John Grundhofer, brother of Star Chairman and CEO Jerry Grundhofer, who also will become president and chief executive of the combined Firstar operation. Analyst Ben Crabtree of Dain Rauscher in Minneapolis, who has monitored Firstar for 10 years, said Mr. Fitzsimonds was focused on social and community issues as well as financial considerations when the agreement was hammered out with Star.
"He had to juggle between getting a good price, but at the same time avoid someone who would take a meat ax to his employee roster and move everything out of town," Mr. Crabtree said.
