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News > Deals
Firstar buys U.S. Bancorp
October 4, 2000: 2:57 p.m. ET

Milwaukee bank paying $21.2B stock for larger rival, forming No. 8 U.S. bank
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NEW YORK (CNNfn) - In the second major U.S. banking merger this week, Firstar Corp. agreed Wednesday to buy its larger Midwest rival U.S. Bancorp for $21.2 billion in stock, broadening its package of financial service products and creating the country's 8th-largest retail bank by assets.

The acquisition, which comes just two days after FleetBoston Corp. struck a $7 billion deal to purchase Summit Bancorp, will create a Midwest banking power rivaled only by Chicago's Bank One Corp. (ONE: Research, Estimates) with more than $160 billion in assets and 2,200 branches stretching from California to Ohio. It also reunites the Grundhofer brothers, Firstar's Chief Executive Jerry and U.S. Bancorp's Chairman and CEO John, under one roof.

graphicWhile Milwaukee-based Firstar (FSR: Research, Estimates), actually the smaller of the two institutions with $74 billion in assets compared with U.S. Bancorp's $86 billion, is technically the acquirer, the companies agreed to keep the U.S. Bancorp name and Minneapolis headquarters after completion of the deal, expected during the first quarter next year.

Company officials said the combination was driven by the desire to combine Firstar's strong retail banking network with U.S. Bancorp's diversified, high-growth product line.

"We are absolutely salivating at getting into [U.S. Bancorp's] high-growth markets," said Jerry Grundhofer, who will serve as the combined company's president and CEO. "They have businesses that are growing substantially. Where they have acknowledged they have had some struggles is on the consumer side. We have that."

Depressed stock price forced sale


Terms of the agreement call for Milwaukee-based Firstar to issue 1.265 shares of its stock for each U.S. Bancorp (USB: Research, Estimates) share. Based on Firstar's closing price Tuesday, the deal values the Minneapolis-based bank at $28.15 per share, a 21 percent premium over U.S. Bancorp's closing price of $23.19 Tuesday.

Firstar said the transaction will result in cost savings of $266 million annually by 2003, helping boost its 2001 earnings by 7 cents per share, or 3.7 percent, and raise 2002 earnings by 8 cents, or 3.9 percent. Those estimates do not include significant revenue enhancements that are anticipated from the merger.

Firstar does expect to take an $800 million restructuring charge related to the transaction. It also will divest about $500 million in deposits, mostly in the Minneapolis region, where the banks have the greatest overlap.

graphicAnalysts said U.S. Bancorp was forced into a merger by its spiraling stock price, a symptom of its disappointing earnings performance since its predecessor company, First Bank Stock Investment Corp., acquired U.S. Bancorp three years ago. Heading into trading Wednesday, the company's stock was more than 50 percent off its high of 47 two years ago.

"They got into a pattern of under-investing in their franchise to try and boost revenues," said Denis LaPlante, an analyst with Fox-Pitt Kelton.

"It was taking longer than expected to accelerate our revenue growth, particularly in the retail area," U.S. Bancorp's John Grundhofer, who initiated the merger discussions with his younger brother, admitted on a conference call with analysts and reporters Wednesday. "Our currency was too depressed to make the acquisition on our own.

"I didn't win the argument with Wall Street saying give us a little time to invest. I had a credibility issue with Wall Street I had to deal with," he said.

The transaction continues a growing pattern at Firstar, which has now made three major acquisitions in three years -- buying Grundhofer's Star Banc in 1998 and Mercantile Bancorp in 1999 -- each time purchasing an institution that was underperforming financially for what analysts considered was an attractive price.




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The challenge now, analysts said, is delivering on its turnaround promises, where Firstar has generated mixed results.

"The main challenge here is that critics will say they haven't demonstrated the revenue growth they've promised in the past," LaPlante said. "But we like the transaction. We're comfortable with the premium and the management after the merger will be a very strong one."

Jerry Grundhofer was more direct in responding to such concerns.

"Since 1993, we have never disappointed in a quarter," he said. "We don't intend to have that happen."

A diversified revenue stream


Along with U.S. Bancorp's expansive retail presence, the merger gives Firstar access to U.S. Bancorp's leading corporate trust service unit, which essentially manages stock dividends and bond payments for corporations. It also gains U.S. Bancorp Piper Jaffray, a brokerage subsidiary specializing as a leading underwriter of initial public offerings for technology firms.

Following the merger, corporate financial services will account for nearly 30 percent of the combined company's revenue while consumer financial services will account for 38 percent. Fee income also will represent roughly 43 percent of the new U.S. Bancorp's revenue stream, helping reduce the market volatility caused by shifting interest rates.

"It changes our company," Firstar's Jerry Grundhofer said. "Hopefully it will change our [price-to-earnings] ratio as well."

graphicLike most large- and mid-sized banks, Firstar has seen its stock suffer in recent months as investors, spooked by rising interest rates, largely abandoned the banking sector. Even a plethora of mergers involving U.S. investment banks recently did little to resuscitate prices among traditional banking stocks.

However, analysts believe those depressed prices may once again open the door to renewed consolidation in the industry, particularly considering the acquiring bank cannot justify most mergers as being accretive to earnings, after nearly a year of relatively dormant activity.

FleetBoston's (FBF: Research, Estimates) purchase of Summit (SUB: Research, Estimates), which will create the No. 7 U.S. bank with $220 billion in assets, was the first sign that wave was building, analysts said.

"It's time for the merger and acquisition activity to increase here," said Andrew Collins, an analyst with ING Barings. "It's largely been proven acquirers that have done these deals and generally at very low [premium] multiples."

Jon Arfstrom, banking analyst with Dain Rausher Wessels, said the next wave of consolidation should come from the mid-size banks, which will have a tougher time competing if they stay independent. (490K WAV or 490K AIFF)

U.S. Bancorp shares gained $1.38 cents to $24.56 shortly before noon Wednesday while Firstar lost $2.31, or more than 10 percent, to $19.94. Back to top

  RELATED STORIES

Firstar to buy Mercantile for $10.6B in stock - April 30, 1999

FleetBoston buys Summit for $7B in stock - Oct. 2, 2000

When it comes to banking, bigger isn't always better - Oct. 4, 2000

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.