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SMALL BUSINESS | JAMES FLANIGAN / ON SOUTHERN CALIFORNIA

Currency of Mergers

Bank Takeovers Reflect Area Surplus of Financial Services

March 18, 1998

Why do corporate chieftains boast like football players after a touchdown when announcing a merger deal? "It's a unique and tremendous combination," said Kerry K. Killinger, chairman of Washington Mutual Inc., of the proposed acquisition of H.F. Ahmanson.

Unique is the wrong word. The Ahmanson deal announced Tuesday is big, and maybe poignant for fans of Southern California history, but it's only the latest in a long line of mergers and acquisitions that have changed the regional banking landscape.

It won't be the last of the mergers either. There is a great surplus of capacity in the financial service industries, meaning more banks, brokers and other institutions are looking to attract the consumer's deposit dollar, to make the mortgage or home equity loan or to give credit to small businesses.

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And there is a surplus of banks in Southern California just because the region has a vibrant business climate and a large population. The acquisitions of Southern California banking institutions are a response to this region's strength, not its weakness.

The Ahmanson deal will make one competitor bigger, and that will affect other lenders. Bank customers on balance will benefit from the deal. To see why, look at the deal, the history and the background of consolidation.

Washington Mutual, or WAMU as it's known after the letters of its ticker symbol, will grow to $150 billion in assets by acquiring Ahmanson.

The deal carries emotional meaning for Southern California because it will complete Killinger's sweep up of the once mighty regional thrift industry. Last year, WAMU won Great Western Bank in a competition with Ahmanson. It acquired American Savings two years ago and will also acquire Coast Federal Savings & Loan in the deal with Ahmanson.

Importantly, the deal makes WAMU roughly as large as Bank of America in the retail business of taking consumer deposits, making mortgage and home equity loans.

That means WAMU bypasses Wells Fargo in size, which makes Wells Fargo a target of acquirers such as NationsBank or Banc One, says analyst Donald Destino of Jefferies & Co. He's referring to major national banks that have opened offices in the rich California market but are thought to need major acquisitions to really be players in this region.

But size by itself won't guarantee that WAMU will be successful in a competitive landscape. To be successful, it will have to achieve the cost-savings of the merger by closing branches, firing employees and eliminating duplicate facilities. But then it will have to plow those savings back into marketing to customers.

That is where small banks think they will be able to compete with the new giant WAMU, by giving friendlier service to customers. Downey Savings & Loan in Newport Beach, one of the remaining S & Ls based in Southern California, has been capitalizing on defections from Ahmanson's Home Savings. "The public is upset with all these big mergers," says Maurice L. McAlister, Downey's chairman. "We're experiencing their frustration with the mergers like you wouldn't believe."

Commercial bankers such as Russell Goldsmith, president of City National Bank, which serves small businesses, says, "Our business is serving the needs of entrepreneurs, and that won't be affected by mergers of this kind."

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But such complacency could be dangerous. Ultimately, customers are attracted by lower prices, says Don M. Griffith, chairman of First Coastal Bank in El Segundo. "As WAMU cuts costs, it will be able to make loans at better rates to consumers. Nobody can sit back and say they won't be affected competitively."

The merger will directly confront a leading mortgage lender such as Countrywide Credit Industries, the nation's second-largest mortgage company--after Norwest Corp. of Minneapolis. The WAMU-Ahmanson merger results from weakness, not strength, says Angelo Mozilo, Countrywide's president. WAMU and Ahmanson "had to merge because their costs were too high to compete."

But Mozilo is aware that the consolidation of WAMU and Ahmanson will make a stronger competitor in the mortgage market. It will probably be better for the consumer, he says, because the more intense competition will tend to lower mortgage rates.

The point for the consumer, says Mozilo, is that there is a lot of money in the marketplace for mortgages. Mergers don't reduce competition.

Some bankers noted that Southern California would have been better off if Ahmanson, instead of WAMU, had been able last year to acquire Great Western Bank. "Losing another headquarters is not good for Southern California," said George Graziadio, chairman of Imperial Bank, an Inglewood-based regional business bank. He was referring to the proposed firing of 3,500 employees and closing of branches.

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