Wells Fargo sketches how it'll cut costs

While Wells Fargo & Co. isn't scheduled to officially seal its purchase of Wachovia Corp. until year's end, integration planning is well under way with areas such as legal, finance and treasury already working together, according to recent filings by the banks.

The San Francisco-based bank has started to lay out where it will get $5 billion in annual cost cuts, about 10 percent of combined expenses. High-level plans have been drafted for key businesses, and Wells is working to impose its own lending policies, according to a Wells presentation this week.

Wells is likely to cut jobs in Charlotte but hasn't provided specifics. It signaled this week, however, that it will pare areas such as corporate and investment banking. For Wachovia employees, long in the driver's seat during their bank's decades of acquisitions, it's an unfamiliar position – following another bank's procedures for implementing a merger.

While much is still to be determined, Wells has roughly fleshed out where it plans to get its $5 billion in savings. About $3 billion will come from cuts in overlapping businesses such as general banking and investment banking. Another $1.4 billion will come from reductions in duplicative corporate functions, including jobs and expenses such as marketing and director fees. About $0.6 billion would come from office and branch closures and other cuts.

“Our merger integration decisions will impact certain existing Wachovia facilities (both leased and owned), information systems, supplier contracts and costs associated with the involuntary termination of personnel,” Wells said in a filing last week.

Wachovia occupies nearly 2.8million square feet in eight uptown buildings and is constructing a 48-story, 1.57 million-square-foot building at Tryon and Stonewall streets. It also occupies a 2million-square-foot center in University Research Park.

In the presentation this week, Wells said best practices will be chosen regardless of the company of origin and that doing the integration “right is more important than doing it quickly.”

One of the main focuses is gaining control over key areas such as lending policies on the day the deal closes, the presentation said. Wells laid out a number of steps for bringing Wachovia's credit processes in line with its own, including training Wachovia lenders, liquidating big loans and assigning more troubled loans to specialized “workout” staff.

During a conference call this week, Wells executives played up the bank's ability to meet or exceed cost-cutting targets and to grow future profits, while also maintaining a slow and steady approach to mergers that has allowed the bank to keep customers and top talent. In its best known deal, the 1998 merger with Minneapolis-based Norwest Corp., the companies took about three years to meld operations.

“In the past deals, we've taken our time to make sure the integration was done well,” Wells chairman Dick Kovacevich said in the call. “We expect to use that process with the merger with Wachovia.”

But Wells will face major challenges in bringing together the two companies. Kovacevich acknowledged the Wachovia deal is six to seven times bigger than the Norwest merger. The latest transaction also comes during tougher times for the banking industry, although Wells executives said rough patches often produce the best buys.

Wells agreed last month to buy a faltering Wachovia in a deal initially worth about $15billion, upsetting an earlier bid by New York-based Citigroup Inc. The merger is expected to close Dec. 31 pending Wachovia shareholder approval earlier that month.

Shortly after the merger announcement, Wells chief executive John Stumpf visited Charlotte and other Wachovia hubs in St. Louis, Boston and New York. In the conference call, Stumpf said he was impressed with Wachovia's employees and the similarity in the cultures. He's eager to pair Wells Fargo's sales expertise with Wachovia's customer service reputation in a coast-to-coast franchise that boasts 6,653 branches, more than any competitor, including Charlotte's Bank of America Corp.

Spearheading the transition effort are veterans from both banks. Wells' Pat Callahan, the bank's head of social responsibility, leads the Office of Transition. Her job includes coordinating merger activities as well as mediating and solving any contrasting approaches, according to her bank biography. Callahan, 55, was head of human resources during the Wells-Norwest merger.

Guiding the integration from the Wachovia side is Steve Boehm, formerly president of card and payment solutions. The 52-year-old helped lead Wachovia's 2004 merger with SouthTrust Corp. The banks said neither executive was available to comment, saying it was too early.

In the Wells-Norwest deal, Kovacevich's Norwest acquired Wells but took the San Francisco bank's headquarters and name. A 2004 Stanford University Graduate School of Business case study of the merger highlighted Wells' detailed planning and attention to the values and cultures of both companies.

As part of the merger, Wells eliminated 4,600 jobs, or about 5 percent of the work force, by cutting redundant headquarters and back-office positions, according to the study. But Wells did not take a slash-and-burn approach, instead looking to “retain and retrain” employees for other posts, phraseology the bank is using in the Wachovia transition. In one example, Wells closed a credit card service center in California but offered all of the displaced employees positions in another nearby center.

Wells also focused on communicating with customers and workers, the study found. Officials laid out detailed plans for “communications strategy, goals, general messages and tactics timelines.”

Not all employees, however, bought into the effort, the study said. Some employees felt the integration was too slow and favored form over substance. Norwest “came to Wells Fargo with a ton of processes and everything required more forms and boxes to check,” one employee told researchers. “Norwest's culture slowed things down.”

When the Norwest deal was first announced, Charles O'Reilly, one of the Stanford professors who oversaw the study, said he expected the deal to be a “complete train wreck” but he was proven wrong. He credits Kovacevich's leadership, including his emphasis on culture and on making more sales to existing customers. Kovacevich, 65, is postponing his retirement to help with the Wachovia transition.

“He's opinionated and smart,” O'Reilly said. “He's experienced at this.”