"...Wall Street buys into whatever earnings figures management feeds it." [analyst, reacting to First Union's second recent sharply downward revision of earnings eastimates]
May 26, 1999
MARKET PLACE
Warning by First Union Draws Heap of Scorn
By TIMOTHY L. O'BRIEN
In glitzy, futuristic television advertisements, First
Union Corp. has been proudly promoting itself as
"The Mountain." But the ground beneath that
mountain is trembling.
First Union, the nation's sixth-largest bank, which
was built through pricey, rapid-fire acquisitions,
stunned investors and employees Tuesday when it
warned that profits for the second quarter and the
year would fall far below previous estimates and that
1999 would be less profitable than 1998. It was the
second time this year that the bank, based in
Charlotte, N.C., has had to revise its earnings
estimates sharply downward -- leaving the bank's
credibility in tatters, its financial outlook clouded
and its ability to remain independent in doubt.
"For years I complained about the prices they paid
for acquisitions, but I always said they ran a good
bank," said Thomas Brown, a money manager with
Tiger Management in New York. "But now they're
having serious problems running the basic bank --
the wheels are coming off the cart."
The bank, citing difficulties generating revenue and
looming problems in its loan portfolio, said earnings
for the year would be $3.3 billion to $3.4 billion, or
$3.40 to $3.50 a share. Those figures are well below
revised projections made by the bank in January that
caused bank stock analysts to lower their estimates
to $4.02 a share for the year, from $4.29. Last year,
First Union earned $3.7 billion, or $3.77 a share.
The stock market was unforgiving Tuesday. In
almost seven times the normal trading volume, First
Union shares plunged 8.6 percent, to $45.625, the
biggest drop in eight years and well below the stock's
52-week high of $65.9375.
First Union, along with its rival, Bank of America
Corp., has been one of the most free-spending
acquirers in banking. Its acquisition spree has
contributed to a merger boom that has put the bulk
of the country's banking assets at a handful of banks
with national ambitions.
So heated is the competition between First Union's
chief executive, Edward Crutchfield Jr., and Bank of
America's chief executive, Hugh McColl Jr., that
each appears to be trying to outdo the other with ever
bigger purchases. Their rivalry even extends to
dueling skyscrapers. First Union is building a
30-story office tower in Charlotte and has hinted that
a 100-story tower may be on the way. Bank of
America is busy erecting a 45-story skyscraper in
Charlotte.
But the towering First Union facade cloaks a failure
to attain the financial goals promised in its merger
binge, mounting managerial woes and low morale
amid the layoff of thousands of workers -- layoffs
deemed necessary for the bank to meet earnings goals
associated with acquisitions.
First Union's $17 billion takeover of Corestates
Financial Corp. last year was one of the most
expensive in banking history relative to the size of
the target. First Union acknowledged Tuesday that a
financial payoff from that merger "lags original
expectations."
Last year, First Union also bought Money Store Inc.,
which lends to people with troubled credit histories,
for $2.1 billion. In a maneuver criticized by many
stock analysts, First Union later took a $2.2 billion
"accounting adjustment" for the takeover that
allowed it to spread the cost of the acquisition over
25 years and thus avoid an earnings hit. First Union
said Tuesday that the Money Store acquisition had
also disappointed.
Nonetheless, until earlier this year many analysts
were willing to give First Union the benefit of the
doubt and accept earnings projections proffered by
the company.
"This is a tale of ego run amok," Brown said, "and it
says a lot about how easily Wall Street buys into
whatever earnings figures management feeds it." He
was referring to the ego of Crutchfield, who once
derided Brown as "that little red-haired boy" and
banned the stock analyst from company headquarters
because of Brown's skepticism about First Union's
acquisition strategy.
Other analysts were also critical Tuesday of First
Union's performance. "This company has squandered
its credibility with Wall Street," said David Berry at
Keefe, Bruyette & Woods Inc. "You cannot escape
the conclusion that they have trouble doing budgets
over there."
A First Union spokeswoman said Crutchfield was
taking questions only from analysts Tuesday and
declined to be interviewed. But analysts said he had
told them in a conference call that the bank would
now forgo acquisitions because they no longer made
economic sense. But the hunter could become the
hunted with Wells Fargo & Co., Bank One Corp. or
Chase Manhattan Corp. eventually putting the
depressed stock of First Union in their sights.
John Georgius, First Union's president, said in an
interview that his job was secure. He said First
Union's board had supported every acquisition and
was "very confident that our business fundamentals
are solid." He also said his bank had had "many years
of consistent performance" and planned to meet its
revised earnings projections.
Though First Union said it would add $90 million to
$110 million to its loan loss reserves of $600
million, Georgius noted that that figure was still
relatively small given the bank's $130 billion loan
portfolio.
Encouraging investors and analysts to look on the
bright side, First Union made one surprising
announcement Tuesday. The bank, which has
invested so heavily in brick and mortar branches
through its acquisitions, said that its best
opportunities for growth would be on the Internet.
Copyright 1999 The New York Times Company |
