Is This Guy The Best Banker In America? Dick Kovacevich turned Norwest into a financial powerhouse with diversification, salesmanship, and teamwork. Now the Wells Fargo merger will give him one of banking's best brands. Can he make it work?
By Bethany McLean

(FORTUNE Magazine) – Bankers at Norwest Corp. can do lots of things that bankers aren't supposed to do. One of them is party, as some 1,500 Norwesters proved during their annual March meeting when they conga-lined their way around the Fantasia ballroom at Walt Disney World's Contemporary Resort in Orlando. Every time a sign saying PARTNERSHARES--Norwest's term for its companywide stock-option grants--lifted, the entire room erupted in earsplitting roars. To the strains of "Hot! Hot! Hot!" CEO Richard ("Dick") Kovacevich high-fived the euphoric hordes of Norwesters amid a blizzard of blue Norwest balloons. Part of the reason for the celebration was that for the first time in history, Norwest's stock was selling at a price/earnings premium to the S&P 500--a rare feat for a bank.

Hot? A Midwestern bank? It sounds like an oxymoron. But consider Norwest's recent huge coup. Its $30-billion-plus merger with Wells Fargo, which was regarded as the last great prize in the quickly consolidating banking industry, makes it clear that Norwest has emerged as one of banking's powerhouses. The combined company will have assets of $191 billion, rank as the nation's seventh-largest bank, and will be No. 1 in businesses in nine of the ten fastest-growing states in the U.S. Though the deal is being billed as a merger of equals--the new bank will keep the Wells Fargo name and San Francisco headquarters--it will be run by Kovacevich (koe-VAH-suh-vitch). "Norwest's management arguably has the most credibility in banking today," says analyst Sean Ryan at Bear Stearns, and the numbers bear that statement out. Norwest is one of only 11 S&P 500 companies to have generated over 15% annual growth in sales, 13% in earnings, and 15% in dividends during the past ten years. Wall Street has noticed: In 1997, Norwest's stock climbed 78%, more than double the S&P 500's increase and almost double the average bank's 40.5%, according to the Keefe Bruyette & Woods index.

Yet Norwest does not have Wall Street's unqualified approval on the Wells merger. Its stock fell some 7% the day the deal was announced. One reason is that the two banks have very different cultures--Norwest is a warm and fuzzy community bank whose revenue growth is among the best in the industry; Wells is known for its cost-management skills and has struggled to grow revenues. Another is that the merger is completely out of character for Kovacevich, who has repeatedly mocked the idea that bigger is better. "It's a total shocker," says Eli Salzmann, the head of research at Lord Abbett. "This is now a leap-of-faith story."

The best reason to take that leap of faith is Kovacevich himself, whom many in the banking industry regard with something approaching awe. "The man is unique in American banking," says Thomas Hanley, an analyst at UBS Securities. He is famous for prophetic declarations like "Banking is necessary, banks are not" and "As a stand-alone business, banking is dead." Long ago he persuaded Norwesters to stop thinking, talking, and acting like bankers. Instead, they consider themselves salespeople and refer, with pride, to Norwest's 3,847 locations as "stores." It would all sound merely trite and corny if it didn't work so well.

For Kovacevich, the key question facing today's banks is, How do you sell money? His answer is, The way Wal-Mart sells socks or Home Depot sells screwdrivers. Much like those businesses, financial services is huge ($1.9 trillion in assets) and fragmented (no competitor has more than a 3% market share). Kovacevich wants Norwest to be the Wal-Mart of financial services, supplying 100% of customers' needs. He also wants Wal-Mart's P/E multiple. Four years ago, when Norwest's multiple was about 60% of the S&P 500's, Kovacevich made the rounds of the money management community, insisting that Norwest should sell at the same multiple the S&P 500 did. Pre-merger, he was demanding a 50% premium for Norwest.

Kovacevich can think differently than a banker because he never set out to become one. Back in the 1960s, when he was in college at Stanford, his ambition was to play Major League baseball. When a shoulder injury put an end to that plan, he instead got his MBA, headed into sales and marketing at General Mills, and later ran Kenner, the nation's third-largest toy company. In the mid-1970s, Citicorp's Walter Wriston recruited him to help build Citi's burgeoning consumer businesses. Kovacevich transformed Citi's unprofitable New York branch system into a big moneymaker and helped change the face of banking by rolling out Citi's then-revolutionary ATMs. But in 1986 he was passed over for the top consumer job at Citi and was lured by Lloyd Johnson, Norwest's CEO, to the Midwest.

Norwest needed help. It had experienced a Job-like run of bad luck. In 1979, Norwest's president was electrocuted when he stepped on a wire during a thunderstorm. On Thanksgiving Day 1982, Norwest's headquarters in Minneapolis burned to the ground. By the mid-1980s--when the nation in general and the Midwest in particular strained under high interest rates and new foreign competition--the bank was drowning in billions in bad loans.

Kovacevich and Johnson rebuilt Norwest by doing the opposite of what everyone else was doing. They shunned big business and chased mom-and-pop retail customers in rural areas. Kovacevich frequently invokes Spearfish, S.D. (pop. 6,966) as the prototypical Norwest town. Norwest added bricks and mortar--1,329 company "stores" in the past five years--and pushed into businesses like subprime lending, consumer finance, insurance and investment products, and mortgages (Norwest now supplies about one of every 15 mortgages nationwide). Today just over a third of earnings comes from banking, and the diversification has paid off. This year, for example, Norwest Financial--the consumer-lending business that many regarded as the company's crown jewel--is likely to post earnings 10% below 1997's, due in part to high bankruptcy levels in Puerto Rico. But the mortgage and banking businesses are picking up the slack; overall, Norwest is on target for its standard 13% earnings growth this year. The diversified revenue stream has certainly been a reason that Norwest's stock has performed so well. Traditionally, banks have traded at discounts to the market because investors are worried about their cyclicality.

Another of Kovacevich's key accomplishments is "cross-selling"--getting customers to buy more than one product. It's the rationale for many of the recent megamergers, like the Citicorp-Travelers deal, but for most banks, it's been more hope than reality. "Cross-sell is like the Loch Ness monster--always talked about but never seen," says Kovacevich. Except at Norwest. Today the average Norwest customer buys nearly four products, vs. the industry average of two, which generates $113 per customer in profits for Norwest, about triple the amount a two-product purchase yields. Doubling the average product purchase to eight--Kovacevich's current obsession--would again triple productivity, but Norwest still has a ways to go. "On a scale from zero to 100, we're about 30," Kovacevich admits. For example, under 3% of Norwest's 3.5 million banking households have a relationship with the company's brokerage.

The problem is, it's incredibly difficult to make cross-selling actually happen. Having better products isn't enough, since money is a commodity and innovations are easily copied--invent a new type of checking account and the other guys will have something just like it within 24 hours. Which brings us to Kovacevich's other big accomplishment: creating a management team and work environment that motivate Norwest's 58,200 employees--"team members," as he calls them. Says analyst James Schutz at ABN AMRO: "Norwest is one of the best-managed financial institutions in the country."

Consider the Florida conference. "Lots of people think this is hokey," says Kovacevich's deputy, Norwest President Leslie Biller, surveying the scene in the Fantasia ballroom. Hokey, corny, cheesy--all pop into mind when you read Norwest slogans like "Mind share plus heart share equals market share." But there's substance behind the slogans and celebrations. Walk into any "store" anywhere, and it's a safe bet that the teller will be able to spit out the price of Norwest stock--the result of stock-option grants. (In the summer of 1996, each employee got 100 options; in 11 months, each had pretax gains of $2,500.) Norwesters own 9% of the company's stock.

Norwest constantly tells its people that they're important. That makes it a bit difficult for the company to engage in Wall Street's favorite activity: massive layoffs. So in the past two years, when Norwest cut its operations costs, the company did it Norwest style--by retraining employees instead of getting rid of them. ("Retrain and retain" in Norwest-speak.) Out of 5,400 operations employees, fewer than 150 lost their jobs, yet costs were cut 20%. "Norwest is not a slash-and-burn entity," says analyst Frank Barcocy at Josephthal.

Will Kovacevich be able to absorb the 32,414 employees of Wells Fargo while eschewing layoffs and keeping everyone motivated? The deal envisions $650 million in cost savings over three years, which some analysts say is conservative. Norwest has bought 141 small financial institutions during the past ten years, and it does have a system for implanting its culture. A new bank is assigned a "buddy bank" somewhere in "Norwestland." But Norwest lacks experience with big mergers, and it's hard to imagine Wells Fargo folks queuing up to meet their buddies. Wall Street's reaction to the news suggests some doubts--and that Kovacevich will have a lot to prove in the months ahead. Norwest's P/E multiple has sunk to 18 times next year's earnings, a 23% discount to the S&P 500's. "From a stock perspective, if I could snap my fingers and make the deal go away, I'd probably do it," says James Schmidt, a manager at John Hancock.

But if the merger succeeds, there is a big upside: The price Kovacevich is paying is a mere 7% premium to Wells' stock price, and the transaction should break even in year one. "Norwest is getting a great deal," says Jonathan Lee at Hollister Asset Management. The merger will in theory combine Norwest's formidable selling skills with Wells' ability to manage costs. The new Wells Fargo will have about 20 million customers and 5,777 "stores" reaching across all 50 states, as well as internationally. It will be the nation's biggest mortgage provider, the biggest bank commercial real estate lender, the biggest bank-owned insurance agency, the No. 1 Internet bank, and the premier consumer finance company, and will rank No. 4 as a bank mutual fund manager.

Strategically, the merger also fences out Norwest's No. 1 rival, US Bancorp. At the press conference, Wells Fargo CEO Paul Hazen said Kovacevich made the first move. But informed Wall Street sources say it was Hazen who initiated serious talks--just ten days before the deal was announced--to save Wells Fargo from a US Bancorp bid. The animosity between Hazen and US Bancorp CEO John Grundhofer is legendary. "Hazen would rather slit his throat than sell out to US Bancorp," says one seasoned analyst familiar with the situation.

For Kovacevich, of course, the upside is obvious: With one move, he goes from being the CEO of the country's 11th-largest bank to being the CEO of its seventh largest. It all comes down to whether or not he's up to the job, and those who know Kovacevich are betting that he is. Says Bear Stearns' Sean Ryan: "If anyone deserves the benefit of the doubt, it's Kovacevich and Norwest."