Drip
Portfolio Report
A Final Six Candidate
by Dale Wettlaufer ([email protected])
Alexandria, VA (June 17, 1998) --Norwest Corp. (NYSE: NOB) rebounded $1 7/16 to $35 13/16 today while Wells Fargo (NYSE: WFC) regained $9 3/8 to $355 5/16 as the market continues to adjust to uncertainty over the international macroeconomic and monetary picture. It would be difficult to chalk up all of today's move totally to investors understanding better what the merger of these two companies is all about. In fact, I'm not sure how the market is coming along on understanding the strategy of the merger.
I'm personally trying to figure it out myself. Although I have a thesis on how it's going to work, I personally think that commentators that gravitate to the thesis that the cultures are just too different to work are not really trying hard enough to understand what is going on here. Norwest was definitely thought of as the superior bank coming into this deal, but I think that was due to short-term shareholder return differences and without regard for the longer-term initiatives of Wells Fargo's management. Coming into last month, Wells Fargo generated a five-year compound annual return to shareholders of 30.8% while Norwest generated a five-year annual return of 29%. Over the last two years, though, Wells Fargo returned 24.9% per year while Norwest more than doubled that return with a compound annual growth rate in the value of its equity of 52.7%.
Wells Fargo has definitely been tarred by its experience with the First Interstate acquisition. Since the deal was hostile, it was done with cash, which gave rise to tons of goodwill amortization on the income statement. However, the market has efficiently valued the company looking through that amortization while Wells Fargo has been able to enhance its per-share earnings with share buybacks that have shrunk the share base. Over the last couple years, though, many customers have felt that Wells Fargo didn't treat them well by messing up deposits and losing checks and charging for certain services as well as cutting back on customer services.
I believe that a bank is actually a consumer brand company, as I explained in March (Part 1 and Part 2 of "Banks as Brands") and that pushing customers away or trying to herd them hurts a brand over the long term. People are very sensitive about relationships that involve their money. It's a major reason why people get divorced, and it's a huge reason why they'll drop a bank and never come back again when their financial services provider treats them without the care that is due the customer. A customer has regular contact with his or her financial services provider. Rather than dreading that contact, the provider should look at every contact as an opportunity to increase the customer's satisfaction and brand awareness, and to market services that the customer isn't currently using.
That's something that Norwest understands but Wells Fargo has really struggled with. Norwest has been able to create an atmosphere of pleasing customers with personal service while offering a wide variety of products and services. There's no way in the world that can happen in banking without keeping employees happy. Wells Fargo sounds like it could use a big dose of that throughout the organization. That has to come from the top in an organization and that's one thing that Norwest CEO Dick Kovacevich can bring to the company.
In addition, there's no reason why Wells Fargo's current banking platform cannot be adapted to Norwest's multi-product strategy. I would think the new company will actually have to buy some branches or set up some branches to fill in holes in the Wells Fargo branch network where current points of contact don't offer a possibility for full service. However, there are already Norwest consumer finance stores and mortgage centers that could be converted to Wells Fargo banking centers. It seems as if the market and some pundits are forgetting that Norwest does indeed have a presence in Wells Fargo's home markets and that virtual relationships with certain Norwest customers on the West Coast can now be converted to fuller relationships with the combined company.
Take a look at yesterday's DRIP Port report for a look at how Dick Kovacevich goes about things. In my opinion, the commentary I've seen that says there's no strategy here isn't informed. Kovacevich's strategy in the past has been very clear and I think it applies here. I will even say this now -- I think the combined company is so intriguing that it will definitely be in the final six that we're working our way toward analyzing.
The Pacific Rim is where it's at for the coming century, and this bank will be an important consumer franchise on the West Coast and back across the country. There's no reason it also can't apply its strategies to the fastest-growing international markets in a McDonald's like fashion. Given its capital markets capabilities and its retail operations and marketing experience, I think this company has the tools to excel abroad and in the U.S.
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