Bank of America’s acquisition of Fleet Bank was controversial; many analysts expressed skepticism of the price of the deal and the bank’s ability to wring value out of the combination. Looking back to comments we cited in a 2003 newsletter: “The head of Citicorp said he thought BofA paid too much. The head of North Fork Bank commented that he looked forward to grabbing disaffected Fleet customers. Executives at one smaller bank…commented on using its size and community presence as a marketing benefit.”
Little more than a year later, BofA has had a strong competitive impact across the old Fleet footprint. That same smaller bank executive sees BofA as a tough competitor and speaks almost wistfully of competing against a much weaker Fleet. On a historical basis, BofA may have paid too much, but they have made that investment pay off.
Why has this been a successful deal? Some factors center on Fleet itself while others relate to BofA’s capabilities and focus.
BofA bought a strong but eroding franchise. While there were many strong bankers across the Fleet footprint, as a company it had managed to alienate large portions of its customer base. Competitors saw Fleet as “the gift that kept on giving”, as customers fled in reaction to indifferent service and increased fees. Whether justified or not, senior management had a reputation as great cost cutters and not great service providers or revenue generators. Fleet management tried to redirect its efforts and become more customer friendly, but, by then, time was running out.
Notably, the multi-state Fleet franchise in the Northeast was truly unique, offering a once-in-a-lifetime expansion opportunity. In some states Fleet provided BofA with dominant local market share on day one of the deal. In other areas, such as in New York City, Fleet’s somewhat limited presence gave BofA a foothold that it is dramatically expanding today.
The customer stayed. While defections certainly occurred, BofA acted quickly and effectively to emphasize its customer orientation. The bank had a strong retail reputation in its footprint and leveraged both its reputation and approach with Fleet. The result is customer additions rather than attritions. Nationally, the bank opened 610,000 checking accounts in the first quarter of 2005 with 79,000 net new checking accounts across heritage Fleet.
BofA executed a well-defined integration system. One of the strongest negative comments about the BofA purchase expressed the view that previous BofA acquisitions had eroded shareholder value. Even if true, it seems that past mistakes have been addressed. Quoted in the Wall Street Journal, Ken Lewis, the bank’s chairman stated, “We’ve never had one [acquisition integration] go so smoothly.” The article goes on to state that BofA generated $437 million in acquisition related cost savings, a factor in the bank reducing its efficiency ratio to below 50 percent.
Perhaps even more important than the numbers is what we hear from competitors and BofA employees. Attributes cited include good service, community awareness, and internal consistency and discipline, among others.
BofA continues to invest. During a casual walk in midtown Manhattan, it is impossible to miss the branch presence of Bank of America. Seemingly overnight, but really over a course of months, the brand with its bright red signage has become highly recognizable.
BofA also possesses the capital and expertise to establish itself in areas it considers important. For example, an article in this week’s American Banker discusses BofA’s assignment of 500 small business specialists to branches; this included placing Fleet’s specialists in banking centers, getting them closer to the customer.
When the deal was first announced in 2003, we thought it made sense for BofA based upon three factors:
1. Fleet’s personnel are on board.
2. The customer will stay
3. Bank of America is highly experienced and very customer focused.
To some degree, we were wrong about number one. Many Fleet bankers saw the acquisition as a great time to cash in on their options, take a package, and go off in another direction; others simply wanted to work for a smaller institution. However, Bank of America’s systemic approach to consumer and commercial banking and the depth of its personnel more than made up for those losses.
Concluding thought. Many studies exist pointing to the value destruction created by acquisitions. However, in this case, picking the right target, executing effectively, and investing for the future have resulted in a combination that should continue to pay off for the BofA shareholder.