Local Corporate Combinations Haven’t Always Been Pretty, But They Seemed to Work Out in the End
Whether termed as mergers or acquisitions, the deals often are touted as a positive step that will benefit both companies, gaining market share, growing revenues, all the while raking in higher profits.
The predictions, however, don’t always pan out. Often the combinations entail job cuts, the loss of headquarters offices and even customers.
In some cases, as in the much-touted coupling of Daimler-Benz and Chrysler Corp. completed two years ago, the negative effects can spur lawsuits. In the Daimler merger suit filed last week, requested damages are set at $8 billion.
The San Diego area has seen some corporate acquisitions that may not have turned out exactly how the partners intended. Here are a few examples.
When First Interstate Bank announced its acquisition of San Diego Trust and Savings Bank in 1993, the Los Angeles-based lender was looking to gain a stronger foothold in the San Diego market. But the clash of corporate cultures caused an upheaval of customers and a loss of goodwill that hurt the acquiring bank.
Lee Lambert, then a branch manager at San Diego Trust, said not only was the sale of the bank a complete surprise, ultimately it cost hundreds of jobs and thousands of customers who didn’t like the reduced service of First Interstate.
“There was a definite drop-off in service levels,” said Lambert, who now makes his living as a loan sales agent.
About the time the deal was announced, deposits at the Laurel Street branch he managed were around $110 million. By the time he left the branch in early 1995, that amount had shrunk to about $75 million, Lambert said.
The change from a traditional bank that prided itself on high customer contact to a much larger, multi-state bank that centralized many of its operations caused customers to seek alternatives for their business, he said.
In a sign that the service cuts had reached almost comic proportions, Lambert recalled in one of the last branches he managed, new customers requesting a checking or savings account were directed to a desk where a telephone was connected to some other outside office.
The loss of jobs was also much more than what was initially projected. The deal was supposed to affect some 600 jobs, mostly overlapping positions with First Interstate. But when everything was completed, the number of employees who left the bank was closer to 1,000 from the pre-acquisition total of 1,600, he said.
Yet the worst consequence of the First Interstate deal was the loss of yet another large financial institution headquartered in San Diego. The acquisition followed on the heels of the failure of three major savings and loans , HomeFed Bank, Great American Bank and Imperial Savings.
Lambert said because of First Interstate’s size, it was less likely to make the type of smaller business loans San Diego Trust had made. “They wouldn’t do an accounts receivable (loan) for under $100,000,” Lambert said.
The acquisition also meant the loss of a company that was a big community underwriter, he said.
“As far as the community is concerned (the acquisition) was definitely a negative,” he said.
Yet not all were so quick to judge the deal as a bad one.
John Nersesian, then San Diego Trust’s senior vice president in charge of business lending, said First Interstate did its best to retain customers and employees, and for the most part, those employees who were cut found better jobs.
“I don’t know anybody who didn’t land reasonably well because we were trained so well,” Nersesian said.
Nersesian himself moved after four months to take a job with North Island Federal Credit Union, and has been there ever since. “They came after me, and I decided it was a better long-term fit.”
– Withdrawing Community From The Bank
Culture clashes over customer service approaches were also evident once the acquisition of La Jolla Bank & Trust by Los Angeles-based Security Pacific Bank occurred in 1990, and of Torrey Pines Bank by Wells Fargo in 1989.
“I think it’s fair to say that a lot of the bank’s clients went through a real culture shock when their bank was taken over by a larger organization where a lot of the hands-on service was removed from the process,” said Margaret Oppliger, a former branch manager of La Jolla Bank & Trust.
Oppliger said while Security Pacific made job offers to some of the purchased bank’s employees, many senior executives left the bank to take similar positions with other community banks and often took their best customers with them.
Similarly, when Torrey Pines Bank was purchased by Wells Fargo Bank in 1989, a much different way of doing business was imposed, said Gary Votapka, Torrey Pines former senior vice president and now president of Temecula-based Mission Oaks Bank.
Although a big part of the local bank’s customers were involved in real estate, Wells Fargo made it clear it wasn’t interested in retaining that type of business, Votapka said.
Realizing the San Diego real estate market had already peaked and headed south, the bank embarked on a concerted strategy of “inviting” some of its biggest customers to leave, he said.
Votapka said in hindsight, Wells Fargo was ahead of the curve and reduced its loan losses, so what appeared as a negative in the short term actually benefited the bank’s bottom line.
– Other Fields Affected By Acquisitions
At the time it was purchased by Eli Lilly & Co. for $330 million in 1985, Hybritech Inc. was San Diego’s largest biotech company with about 700 employees, including some 500 locally.
In announcing the purchase, then-chairman Ted Greene was quoted as saying, the deal “was good for our shareholders. And we are a perfect complement to Lilly.”
Yet one of Hybritech’s founders, Howard Birndorf, who left the company some two years earlier to help launch Gen-Probe Inc., another biotech firm, labeled Lilly’s purchase as one that proved to be detrimental to most employees.
“Lilly had a diagnostic division but they really didn’t know our business,” Birndorf said.
As the larger company brought in its own managers and ways of operating, most of the best employees left.
“They did not know how to run a small company. Lilly tried to impose their processes on a little company and it sort of ruined the creativity. Almost anyone who was any good left,” Birndorf said.
In 1995, Lilly sold its Hybritech division to Beckman Instruments in a deal that a Lilly spokesman said made “the most sense” for employees of Lilly and Hybritech.
Beckman proceeded to divest itself of most of the company’s operations, laying off most of the staff in the process. In October 1998, Beckman said it would close down its last plant, which had about 150 employees.
– Deal Results In Some Positives
Although Lilly wreaked havoc on Hybritech, Birndorf said the positive from the deal was former employees went out and started some of the area’s more successful biotech firms, including Gen-Probe, Amylin Pharmaceuticals, Pyxis, Gensia, Idec Pharmaceuticals and Ligand Pharmaceuticals.
Sol Price launched what was one of the most successful retail concepts with his Price Club stores in 1976. By 1993, it had grown to the second-largest such chain with 94 stores, behind only Sam’s Club. Then it announced a merger with the third-largest warehouse chain, Costco Wholesale of Kirkland, Wash.
Despite Price Club being slightly larger and the originator of the warehouse concept, the PriceCostco headquarters ended up being located in Kirkland, with CEO Jim Sinegal running the show. Robert Price, Sol’s son, took over as chairman.
Yet within 14 months, disagreements between Price and Costco executives arose on how to deal with Price Club’s extensive real estate holdings and its Mexican stores.
The solution was for Price and Costco to part ways. A new company was spun off from the existing PriceCostco called Price Enterprises, which consisted of about $600 million in mainly real estate assets.
Price didn’t view the loss of what was once San Diego’s largest public company as a negative.
“In retrospect, nothing went wrong,” he said. “Our interests diverged. I was more comfortable in an environment where I could continue to be more entrepreneurial.”
Bruce Ahern, a local high-tech consultant, said a critical aspect of paving the way for any successful corporate acquisition is ensuring the top CEOs are comfortable with their new roles.
“A lot of the time, it simply comes down to personalities,” Ahern said.
More acquisition deals are prematurely scuttled when the larger entity comes in and gets rid of nearly the entire executive team that helped make the smaller company an attractive target, he said.
“Most times, the top executives are given a one-year contract, stock bonuses, and at the end of the year, they kiss them goodbye,” he said. “But frequently, the guys they just got rid of are the ones who are holding the launch codes for everything.”
