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One for the money.

With Banc One's stock price under pressure, John McCoy's acquisition drive has stalled. Yet as interstate restrictions erode, the bank remains positioned to become one of the few truly national players.

Banc One's John Bonnet McCoy has banking in his blood. His grandfather, John Hall McCoy, is revered in corporate legend as a man who was driven from the helm of forerunner City National Bank and Trust only when a fifth heart attack killed him at age 71. During the Great Depression, when most bankers lent money at whatever interest rate they could get, John H. earned the nickname "5 Percent McCoy," because he stubbornly insisted that the quality of service he provided rated a premium.

His son, John Gardner McCoy, whose portrait hangs in a hallway of Banc One's executive offices in Columbus, OH, took over CNB in 1958 and ruled with an iron-fist and an explosive temper that prompted employees to speculate that the "G" in his middle name stands for God. John G., who handed the reins to his son in 1984 but remains chairman of the bank's executive committee, presided over the formation of the Banc One holding company in 1968 and launched an acquisition drive unsurpassed in the annals of U.S. banking. Banc One installed the first ATM in the U.S. in 1970, was the first bank outside California to market BankAmericard (precursor to Visa) in 1966, and became the first bank processor of Merrill Lynch's cash management account in 1977.

But it has been under the guiding hand of third-generation banker John B. McCoy that Banc One truly has come into its own as an acquisitions machine, gobbling up assets from California (a tiny presence) to Arizona to West Virginia and positioning itself as one of a handful of institutions with a genuine shot at becoming a truly national bank. In the generation since it was formed, Banc One has acquired more than 100 banks, becoming an $83.4 billion-asset company with 50,000 employees in 13 states. M&A hit a record $22.5 billion last year, eclipsing the previous record of $22 billion set in 1991. Net income jumped a whopping 30 percent last year to $1.14 billion, while return-on-assets was an impressive 1.53 percent.

"In making an acquisition, we look for something to build, "McCoy says, leaning forward, hands on the table, in the bank's cozy executive dining room, a lemon-yellow chamber with white, country-style, clapboard trim. "We like to buy an average bank and make it a great bank." Picking his way through a noon luncheon of chicken salad and coconut-cream pie, McCoy pauses, seeking the precise words to convey Banc One's secret to success. "We're big on retail and middle-market business, partly because it's so predictable," he says. "And we won't dilute shareholder value. Our thing is putting numbers on the board. But we do that by hitting singles."

Though Banc One was hot and hungry when McCoy took over from his father as CEO in 1984, and as chairman in 1987, he has raised the game to a new level, treating acquisitions as an ongoing line of business, using information technology to grind out cost efficiencies in new affiliates, and generating profits in many cases months ahead of market expectations. For the first time in his tenure as CEO, however, the Midas touch deserted McCoy late last year. Investors, jittery about Banc One's portfolio of derivatives--most of them in the form of interest-rate swaps--drove down the price of the stock more than 25 percent to around $32 a share, where it remains mired. The sell-off forced Banc One to cancel a stock-financed deal for Nebraska's FirsTier Financial and prompted speculation on Wall Street that its acquisition drive at least temporarily had ground to a halt. McCoy insists his bank remains in the M&A hunt, though the underbrush has thickened considerably. He adds that the dismantling of interstate banking regulations and competition with other superregionals, such as NationsBank, will continue to drive industry consolidation and create acquisition possibilities.

As a manager, 50-year-old McCoy represents a sometimes contradictory agglomeration of styles, at once both formal and informal. Officers recall how McCoy and a fellow executive dressed up as the Blues Brothers at an internal marketing conference, dancing across a stage to a rhythm-and-blues tune, then flipping dark sunglasses to the audience. For a meeting with investment bankers, he donned a basketball uniform with the Banc One logo to underscore the discipline and drive necessary to banking success. Yet behind closed doors, he is given to gray flannel suits and stickpins, and he clings to anachronistic rules handed down from his father, such as a taboo on employees drinking coffee in Banc One offices, and a ban on coming back to work after imbibing alcohol at lunch.

McCoy also parts from his peers in his grasp of information technology and the fact that he rose through the ranks on the operations side of the business, while most senior banking executives are grounded in lending or finance. In an overregulated industry, McCoy says, technology is perhaps the only way to gain a true competitive advantage. Though relatively autonomous, local banks are linked to mission control in Columbus through a sophisticated financial-reporting system that allows corporate executives to track some 40 different performance ratios. At the branch level, more than 500 so-called Personal Investment Centers offer a mix of mutual funds, brokerage services, and some insurance products. Information systems that drive the centers place key information at the fingertips of customer-service representatives, helping them to make credit decisions and tweaking them about cross-selling opportunities. But to fully take advantage of new technology, McCoy acknowledges that he must turn bean counters into salesmen and weatherproof the bank against the cultural change that will follow. "Some people go into banking because they don't want to sell," he jokes. "Some of our people will make it, and some won't."

Moving forward, McCoy says he must regain investor confidence by continuing to chalk up superior earnings and double-digit ROAs. He's likely licking his chops, anticipating the abolition of remaining barriers to interstate banking. "It will happen," he says in an interview with CE Managing Editor Joseph L. McCarthy. "The only question is: 'Will it happen in three years or a dozen?'" McCoy also will buck the trend among some competitors, such as NationsBank, to crack or re-enter the global, wholesale arena. "It's funny when an investment banker says: 'We have a bank in Russia, are you interested in buying?' We say: 'Russia, OH?' We're still only in 13 states. That means there are 37 more in which we can do our thing."

EMPIRE STATES

Banc One has a far-flung string of 80 banks in 13 states. In making acquisitions, have you found it difficult to gain mastery over so many different markets?

First of all, because we're overwhelmingly focused on the retail side, there's a common denominator wherever we go. Everyone you talk to about making an acquisition says, "You don't understand my market." But I think the record shows that in most cases, we do understand. We find similarities in the retail culture wherever we go, whether that's in Texas, Indiana, or Arizona.

Once you've entered a new market, how do you move to bring an acquisition up to speed?

Let's say we move into Denver. We'll ask ourselves: "Which of our markets is that most like? Is it like Columbus, OH? Or is it like Indianapolis or Cleveland? We look carefully at the demographics. We compare the new market to what we're doing in a first cousin. How many credit cards per thousand depositors does a market have? Should we be making more of an effort to cross-sell certain products?

SELECTION CRITERIA

What criteria do you use in making an acquisition?

We buy things we understand, so we rarely get any surprises. Bank of America recently bought Continental, a wholesale bank, which for B of A was a very good fit. If we had bought Continental, we wouldn't have known what to do with it. In making acquisitions, so often where people get into trouble is when they think that because they have such great managers, they can do anything. And they go off into a field where they know too little. American Express demonstrated that with its Firemen's Fund purchase. It's sort of interesting that the day Sandy Weill buys the operation, it's fixed. But it's no great shock; after all, he understands how to run that business.

We also look at proxy statements to pinpoint banks headed by CEOs in their 60's. Sometimes when a banking company is faced with that situation, it begins to think more seriously about selling. Conversely, few banks with a 45-year-old at the helm are shopping themselves.

So, in a sense, you're checking the obituary column in the industry.

Right.

Any other criteria?

We look for something to build. We like to buy an average bank and make it a great bank.

In addition, we're not going to buy anything that's more than one-third our size, because we don't want to risk that much capital. We've done some studies that say if we bought something that was a third of our size or smaller, and it turned out to be a disaster, we would have the capital to fix it. Our thing is putting numbers on the board. But we do that by hitting singles.

By contrast, when the old Citizens & Southern bought Sovran Financial a number of years ago--supposedly a deal involving banks of equal size--Sovran turned out to have a lot more real estate problems than anybody thought. As a result, C&S ended up in trouble.

Meanwhile, we also look for good management. We're not looking to fire a president the first week after an acquisition.

THE CEO FACTOR

Is there any way to quantify management skills?

In completing due diligence before a transaction, you have a chance to get in and get a feel for a CEO's numbers. But in negotiating, you also learn a lot about a person. Negotiation is a form of crisis. Under such conditions, you learn about a person's capacity to handle change. The chief executive sets the tone of a company. In acquisitions, we think CEO-to-CEO communications is critical.

Partly because of the derivatives flap, the price of your stock last year dropped some 25 percent to $32 a share, where it remains stuck. That led you to back out of your recent attempt to acquire Nebraska's FirsTier Financial, and prompted analysts to speculate that at least temporarily, your acquisition drive has come to an end.

There's only so much you can pay for a bank. And there's only so much you can make a bank earn. So when our share price dropped, we dropped the deal. Our earnings per share would have been diluted.

Overall, I think the street understands what we did. In fact, many analysts said, "Hey, Banc One did exactly what we thought it would do. The decision reaffirms its pricing philosophy." So analysts won't pick up the paper one day and find out we've paid way too much for something. We're talking about consistency, and that's what both investors and analysts like to see.

If our stock had been trading at $32 a share instead of $42 a share, we would never even have considered FirsTier. There are many transactions that never meet the public eye. For every deal we make, there are three or four that we don't make. Because of our reputation, some people think we buy everything in sight. That's just not so. In acquisitions, we have built a purchase discipline.

In an all-out bidding contest, we're generally not successful. In nine of our last 10 transactions, we've been approached, and there hasn't been any competition. That was the case with FirsTier. It picked us because it felt that culturally we would be a good match. It also picked us, because we keep people instead of getting rid of them, and we give them a fair degree of autonomy.

OPPORTUNITIES KNOCKING

Aside from the FirsTier transaction, the broader question is whether or not Banc One stock currently is low enough to price you out of other transactions.

Our price-earnings ratio is still in the top 10 among banking companies, so we are as competitive as anybody else. Acquisitions in this industry have slowed, because most banks are in good shape. Usually when a bank is earning money, it's not as interested in selling.

Do potential takeover targets tend to value themselves unfairly on the high side?

Things run in a cycle. When we were priced at 250 percent of book, we were able to pay 250 percent of book. When we're priced at 190 percent of book, it's a different story. Broadly speaking, there will be fewer deals for the next 12 months. But as barriers fall on interstate banking, we'll see some interesting opportunities.

CLEARING THE HURDLES

You've been somewhat vocal about the regulatory barriers to making acquisitions in the banking industry. What bothers you most in that regard?

It takes six months to do a transaction in the banking business. Northrop bought General Dynamics the other day, and that deal will receive approval within 30 days. In addition, when you're highly regulated, you have a harder time attracting talent. In my recruiting forays to business schools, I find that not many people are interested in working with public utilities.

You're bullish on R&D. What role does technology play at Banc One?

In a highly regulated business such as banking, technology--specifically data processing--is one of the only ways to gain a competitive advantage. As a result, we were one of the first in the credit-card business, and today we are the third largest Visa processor in the country. We were a leader in ATMs, and we were one of the first to combine multiple accounts on a single statement. We're also high on debit cards.

Ideally, you use technology to sell. That's why we're investing heavily in our so-called Personal Investment Centers, which offer an array of non-traditional banking services at the branch level. Information systems are the lifeblood of these PICs; branch personnel can't sell products unless they have data at their fingertips. They need to know the full array of customers' account relationships at the point of sale in order to present them with appropriate investment options.

EXPERIMENTAL NOTIONS

What are your criteria in deciding whether to start or proceed with a technology project?

We spend between 3 percent and 4 percent of our pretax profit on R&D, thus continually reinvesting in the franchise. Toward that end, we maintain a willingness to try new things. You win some, and you lose some. We made $14 million on electronic tax filings last year. But we probably hold a world's record in home banking: All three of our attempts over the last 20 years haven't worked. But even if an experiment doesn't work, we typically learn something valuable.

What's the toughest part of adjusting to new technology?

To get the most out of the PIC technology, for example, we have to learn how to turn bankers into salespeople. I joke that one of the reasons people become bankers is that they don't want to sell. So we need to emphasize training, but it's a battle. Some of our people will make it, and some won't.

What's the outlook for banking reform? Particularly in terms of interstate branching barriers, do you think change will continue to come piecemeal through reinterpretation, or will the walls come down in a single stroke through legislation?

My answer depends on what day of the week you ask me. There is a growing understanding that you can't have a strong country without a strong banking system, and that nationwide banking would help the industry. The caliber of people Bill Clinton has placed in key positions--such as Comptroller of the Currency Eugene Ludwig--has helped. And there's every indication the president will sign the Interstate Banking Bill.

Eventually, we will have the ability to compete nationwide with brokerages and other firms to sell all the products our customers want, including insurance, mortgages, and annuities. We want to have the capability to be a full-fledged financial planner for our customers. The only question is: "Will it happen in three years or a dozen?" Our job is to prepare for the changes that will continue to take place in the financial-services business. Our focus is to ensure that our people are ready.
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Copyright 1994, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:interview with Banc One CEO-Chairman John B. McCoy
Author:McCarthy, Joseph L.
Publication:Chief Executive (U.S.)
Article Type:Cover Story
Date:Jun 1, 1994
Words:2759
Previous Article:Work ethics.
Next Article:Winning the Baldrige Award.
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