Ken Lewis lacked the most important trait that a banker needs to produce respectable returns: temperament. While the former CEO of Bank of America (NYSE:BAC) prided himself on the shrewdness of his deal-making, the reality is that he was horrible at it.
The remnants of Lewis' failures will forever haunt Bank of America and its shareholders. Beyond his decision to purchase Countrywide Financial in 2008, which has cost the bank hundreds of billions of dollars in losses, legal expenses and foregone profits, he had an almost unparalleled knack at overpaying for acquisitions. This has permanently saddled the nation's second-biggest bank with more goodwill, an intangible asset found on the balance sheet, than any of its peers.
Bank of America's 2003 acquisition of FleetBoston Financial serves as a case in point. "The opportunity to merge with Fleet is unique," Lewis said at the time.
From the Bank of America perspective, we will have the leading market position in Massachusetts, Rhode Island, Connecticut and New Jersey as well as a powerful retail platform in New York City, upstate New York, New Hampshire and Maine. From a broader perspective, we are building a company that will deliver more financial service capabilities to more Americans than ever before in our nation's history.
The deal was also "unique" because the egregious price Bank of America paid for FleetBoston translated into more than $30 billion worth of goodwill that has weighed on its balance sheet ever since. One year later, Lewis oversaw the acquisition of credit card giant MBNA. This added another roughly $20 billion in goodwill. And a year after that, Bank of America bought U.S. Trust, which added billions more in the intangible asset that is now acting as an anchor on the $2.1 trillion bank's returns.
Lewis' appetite for overpriced acquisitions stands in stark contrast to his competitors. "To be an acquirer during boom times [is] to be foolish, to commit the cardinal sin of overpaying," wrote author Duff McDonald, summarizing JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon's philosophy toward acquisitions. "But to pick off distressed assets in a lousy economic climate -- that [is] the stuff of the empire builder."
Under Dimon's watch, JPMorgan Chase paid $10 a share for Bear Stearns roughly a year after its stock peaked above $170. Six months after that, Dimon spearheaded the acquisition of Washington Mutual's sprawling branch and deposit franchises for pennies on the dollar.
We use acquisitions as a cost-effective way to help us set the stage to earn the business of more customers. We don't acquire another company simply to get bigger. We never put size ahead of culture. So we get bigger by getting better -- we don't get better by getting bigger. [...]
When it comes to acquisitions, we build relationships that often take years to bear fruit. We look for economies of skill, not just economies of scale. We buy companies and assets we understand. We use conservative assumptions. We acquire only what will benefit shareholders.
Wells Fargo's actions back up its words. Most notably, it paid 70% less than book value to acquire Wachovia in 2008 -- a deal that more than doubled Wells Fargo's size.
But no banker proves the benefit of buying competitors at deep discounts better than M&T Bank's (NYSE:MTB) Robert Wilmers. Since becoming CEO of the Buffalo, New York-based bank in 1983, Wilmers has gone on shopping sprees during every major banking crisis. He bought a bank in the wake of Black Monday in 1987, multiple thrifts during the savings and loan crisis, a bank during the Asian and Russian financial crises of the late 1990s, and two large financial firms in the wake of the financial crisis.
These acquisitions haven't just fueled M&T's growth over the years, they've also produced spectacular returns. Over the last 33 years, essentially all of which have been under Wilmers' watch, M&T Bank has returned more than 18,000% to shareholders. That's more than four times greater than the next best return generated by a sitting bank CEO.
M&T Bank CFO Rene Jones best summed up the lesson in all of this: "In an industry as competitive and commoditized as banking, even small capital allocation mistakes are impossible to make up for in your operations," he told me.
For better or for worse, Bank of America now understands this better than any bank in the country. This isn't to say that the Charlotte, North Carolina-based bank can't yield a tidy profit for investors, given its incredibly low share price. But it does mean that you wouldn't want to buy its shares under the mistaken belief that it will one day compete on a level playing field against the likes of JPMorgan Chase, Wells Fargo, and M&T Bank.