Old Kent Acquisition Shocks Community

May 8, 2002
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Editor’s Note:This is the third story in a 10-part series profiling the Business Journal’s nominees for Newsmaker of the Year.

GRAND RAPIDS – It’s difficult to predict whether the contributions Old Kent Financial Corporation has made to Grand Rapids will far outweigh what Fifth Third Bancorp will bring to town in its place.

As a locally based bank, Old Kent has had a special relationship with this community for 147 years. That relationship will end and a new one will be formed when its acquisition by Cincinnati-based Fifth Third is finalized this spring.

Old Kent has made lots of headlines in Grand Rapids during its long history here – for its dynamic growth, for its philanthropy, and for a track record that includes 41 consecutive years of stock dividends to shareholders.

But the announcement last November of its pending “merger” with Fifth Third in a $4.9 billion stock deal was surprising and among the biggest stories to hit the local scene in terms of impact. That’s why it ranks among the top 10 finalists for the Business Journal Newsmaker of the Year Award. The winner will be announced during a March 8 luncheon meeting of Grand Rapids Rotary.

When Old Kent assumes the name of Fifth Third, the surviving institution gains a significant foothold in both the Michigan and Chicago markets. The combined banks will have $69.1 billion in assets, $43.8 billion in deposits and more than 980 banking locations, primarily in Ohio, Kentucky, Indiana, Michigan and Illinois.

Based on deposits, the Old Kent acquisition elevates Fifth Third to the rank of second largest banking franchise in the Midwest, behind Bank One. On a combined basis, the bank will achieve the No. 3 position in Michigan, which is the 10th largest deposit market in the U.S., with only a 9 percent share in the state, according to George Schaefer Jr., Fifth Third’s president and CEO. That positions the bank firmly in the Chicago market, where it will rank No. 5 with $6 billion in deposits. In Illinois, the bank also will rank No. 5, with about $6.7 billion in deposits.

The Old Kent acquisition adds more than 1 million customers to the Fifth Third franchise, and the incremental franchise area offers the potential for more than 16 million new customers.

It’s Fifth Third’s largest acquisition thus far in that it represents 23 percent of its market capitalization, whereas it has typically acquired banks that represented about 10 percent of its market cap.

Schaefer said Fifth Third had been looking to expand its opportunities in the Michigan and Chicago markets for several years. Although larger than most of Fifth Third’s previous acquisitions, Schaefer said Old Kent was the best all-around opportunity in the Midwest market in terms of market share and potential for growth.

Included in the transaction is Lyon Street Asset Management Co., which will remain in Grand Rapids, and Old Kent Mortgage Corp. Peggy Janei, corporate communications officer for Old Kent, said the fate of Old Kent’s mortgage operations has yet to be determined.

What also remains to be determined is just how much the Grand Rapids community stands to lose and gain in the deal.

The companies’ combined management anticipates cost savings of 20 percent in Old Kent’s total operating expenses this year, which means significant cuts can be expected at local headquarters. Management further projects cost savings of 75 percent in 2002 and 100 percent by 2003.

Like other notable Grand Rapids-based companies that grew up to become community benefactors, Old Kent has a history of giving back to the community year after year. It donated generously to organizations such as the United Way of West Michigan. It dipped deeply into corporate pockets to bring to this community the Old Kent River Bank Run, the Old Kent Classic college basketball tournament and the Whitecaps’ home, Old Kent Park.

Doug Rothwell, president and CEO of Michigan Economic Development Corporation, said Old Kent’s acquisition represents a loss for the area because the degree of community involvement, as well as community investment, tend to change when company headquarters change.

It was a double whammy for Michigan in that respect, given Fifth Third’s purchase of Holland-based Ottawa Financial Corporation, parent company to AmeriBank, in a $160 million stock transaction finalized last December. Ottawa Financial had $1.2 billion in assets and 27 AmeriBank branches serving Holland, Muskegon and Grand Rapids.

But as with the Ottawa Financial Corporation acquisition, Old Kent management is being retained and its top players are stepping into significant roles at Fifth Third.

David Wagner, Old Kent chairman, president and CEO, remains in Grand Rapids as chairman and CEO of Fifth Third Bank/Michigan and also sits on Fifth Third’s board. Old Kent’s Kevin Kabat serves as president of the bank’s Grand Rapids operation.

Wagner said Old Kent had several things it wanted to accomplish in considering the merger, among them an attractive deal for shareholders in regard to both price and quality of stock.

“We needed to join up with a partner with a similar operating philosophy, and we needed to create a partnership that would benefit both our customers and our communities,” he said, adding that the transaction gives Old Kent shareholders a stake in “one of the most successful and growing banking institutions in the country.” The merger increases Old Kent’s financial strength, broadens its product line and positions it to grow more rapidly than ever before, he said.

He pointed to the compatibility between the two companies in terms of their performance records and credit cultures. Their community commitments, he said, are “nearly identical” in that both believe in the importance of local decision-making and strong customer relationships.

Old Kent’s decentralized management structure mirrors Fifth Third’s, Schaefer said. He anticipates the acquisition will allow Fifth Third to grow revenues based on the experience of the Old Kent management team and the attractiveness of the markets in which Old Kent operates. What he foresees is “an ongoing, superior performing institution.”

John Canepa, who spent 30 years with Old Kent, 15 of them as the bank’s chairman and CEO, said at the outset that Old Kent’s board of directors got an attractive price for their shareholders and that the two banks are “a good fit” because of their similar corporate cultures.

“I don’t think any bank is going to pay a large premium for another bank and then come into town and try to destroy the franchise,” Canepa observed. “Obviously, there’s a lot of emotion involved if you’ve been with an organization a long time, but you have to put that aside in today’s environment.”

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