MILWAUKEE - Firstar Corp., led by Chief Executive Officer Jerry Grundhofer, said yesterday that it had agreed to buy U.S. Bancorp, run by his older brother John F. Grundhofer, for about $19 billion in stock to create the eighth-largest U.S. bank.
Firstar will exchange 1.265 shares for each of U.S. Bancorp's, valuing the Minneapolis-based bank at $25.30 a share.
The combination unites the Grundhofer brothers, who spent the past decade separately building two of the Midwest's largest banks. John Grundhofer earned the nickname "Jack the Ripper" for his aggressive cost-cutting strategies.
Milwaukee-based Firstar bought Mercantile Bancorp, which is not related to Baltimore-based Mercantile Bankshares Corp., last year for $8.9 billion. In U.S. Bancorp, Firstar is buying an even larger bank that has struggled in the past year to boost revenue and profit. Twice recently, U.S. Bancorp warned that earnings weren't meeting expectations as interest rates rose and deposit growth slowed.
Shares of Firstar fell $2.25 to $20 in trading on the New York Stock Exchange as investors worried that the company is taking on too much in making the purchase. U.S. Bancorp rose $1.81 to $25.
"They're making this acquisition right on the heels of the Mercantile acquisition," said Frank Barkocy, an analyst at Keefe Managers Inc., which recently sold its Firstar holdings. "They have not yet demonstrated that they can grow the revenue, either at the old Firstar or at Mercantile. I think a lot of people are surprised they're moving so soon."
The brothers will work together for the next two years, with Jerry Grundhofer, 56, retaining the titles of chief executive officer and president, and John Grundhofer, 61, serving as chairman until he retires at the end of 2002. John Grundhofer said in an interview that he proposed the combination to his brother last month.
"There's not a lot of sibling rivalry there," said Andrew Collins, an analyst at ING Barings. "They are not your typical brothers."
Where John Grundhofer has focused on cutting costs, Jerry Grundhofer has boosted profit at Firstar, which has $74 billion in assets, with an incentive program that rewards executives for increasing returns.
The different management styles produced different results, with U.S. Bancorp's stock recently trading at 11 times analysts' estimates for its earnings this year and Jerry Grundhofer's Firstar trading at 13 times estimates. The difference in stock price ultimately allowed the younger Grundhofer to buy his brother's larger bank.
"It was taking longer than expected to accelerate growth," John Grundhofer told analysts and investors in a conference call. "Our currency was too depressed to make an acquisition on our own."
The companies expect to close the transaction in the first quarter, at which point they will operate under the U.S. Bancorp name and have about $160 billion in assets. The bank will be based in Minneapolis.