Fleet's leap to the national stage

As Chad Gifford paced the Coatue spit, near his beachfront home on Nantucket's north shore, his emotional resistance to selling FleetBoston Financial Corp. was palpable. Fleet's chief executive knew a deal would trigger his early retirement. But what terrified him was ceding control of Boston's last banking powerhouse -- an institution whose legacy of chief executives included his father, Clarence Gifford -- to outsiders.

As the slanting September sunlight brought the island's color scheme into brilliant focus, Gifford suddenly saw things differently: "It's going to happen," he thought. "I had to accept the fact it was going to hurt."

Despite his reluctance, there was a certain inevitability to Fleet's destiny. A quarter-century of consolidation in banking, Gifford knew, was creating an industry dominated by national franchises. But Fleet did not have the financial wherewithal to acquire one of the super-regionals playing on this stage. The best outcome for shareholders, Gifford realized, was to sell.

With the nation's two biggest banks in pursuit, he had leverage. He would use it to secure an enormous premium over the stock's recent trading price, impressing even Wall Street's veterans. The New Englander also exacted an unprecedented promise from the winning bidder: Bank of America's chief executive, Kenneth D. Lewis, guaranteed Fleet's employment in New England would remain at its current level, or rise, in the years after the cost-cutting frenzy that follows megabank deals.

Fleet is like "the last remaining beach property," says Lewis. "It was really the last outstanding franchise left."

Bank of America's $47 billion acquisition of Fleet, disclosed Oct. 27, extended its franchise into the Northeast, a swath missing from its coast-to-coast empire. The deal, awaiting regulatory approval, will close in the second quarter of this year. Once Gifford made his decision, the biggest US merger of 2003 fell together fast. "He's an excellent dealmaker," said James Moynihan, Advest Inc. senior vice president. "I never thought they'd get that price."

Two years ago it would've been impossible to predict Gifford would negotiate from a position of strength. In the fourth quarter of 2001, Fleet disclosed a $507 million loss from loan problems in its Latin America operation and bankruptcy filings by Enron Corp. and Kmart Corp. In five consecutive quarters, it wrote off $4 billion in bad loans, to WorldCom, Adelphia Communications, and dot-coms. Fleet's stock, which peaked near $47 a share in the boom, reached a low of $18 in late 2002.

"All hell was breaking lose," says Gifford, who became CEO in December 2001. "The last thing I was thinking about was any kind of transaction." He and his new chief financial officer, Eugene McQuade, dug in, and Fleet's problems receded. By the third quarter of 2002, Fleet reported a "clean quarter" with no charge-offs, as well as reductions in its nonperforming loans. Early in 2003 Gifford could look for the first time to Fleet's future in a consolidating industry, and he wondered: "How do we play in that world?" The essential question for Fleet: Acquire, or be acquired? New England's biggest banking company was hampered by its recent financial troubles, and slow population growth would make it very difficult to generate revenues from its customer base in the future for a major acquisition.

A "pivotal issue," says board member and onetime Fleet chairman Joel Alvord, was "who might be candidates for us to talk to and do you think we could acquire them? If we can't, then that may mean we should look harder at what's best for Fleet and the shareholders."

In April, a deal with Bank of America became explicit when its chief executive invited Gifford to dinner. The two had chatted before, but this dinner, in the private Piccolo Room upstairs at Mama Maria's in Boston's North End, was different. In his direct style, Lewis presented a book describing a merger, calling it "a thing of beauty." The resulting 29-state franchise -- from Washington state to Florida to Maine -- would have 33 million retail customers and 16,500 ATMs. "I came away," Lewis says, "wondering, first of all, if we could ever pay what they would want, and, second, feeling that Chad would never sell."

Gifford felt confident that Fleet was now strong enough to remain independent. But the seed of a deal, now planted, grew. Over dinner in London in June, he sought counsel from Donald Moore, Morgan Stanley vice chairman, who years ago had advised Gifford, then BankBoston Corp.'s chief executive, on the BayBanks takeover. Gifford talked with other potential suitors, the chief executives of Bank One Corp., Wachovia Corp., and Citigroup, the largest US banking company.

Anguishing discussions were going on inside Fleet. Gifford, McQuade, now president, and Fleet vice chairman Jay Sarles talked for hours in the Boston College Club -- 10 floors above Gifford's 100 Federal St. office -- about barriers to becoming a national player. "It was pretty clear there'd be three, four, five national banks created over the next five years," McQuade said, and "we might be better off partnering with someone than going it alone."

The pressure on Gifford was whether to act now. If he didn't, the suitors might move on to other deals. He had leverage now.

Gifford brought the question to his 18-member board Aug. 21. He laid out a "wish list" of what Fleet needed to do a deal: improvements for shareholders, customers, and 19,000 New England employees. A majority on the board, said member Thomas May, NStar's chief executive, "were in favor" of investigating a deal. For Gifford, it was "the hardest decision he's ever made," Alvord says.

Sarles was dispatched to talk to Citigroup and Bank One; McQuade was assigned to Bank of America and Wachovia. As merger scenarios crystallized, Gifford saw common ground with Bank of America. Their franchises and business lines were remarkably compatible. More important, the two CEOs clicked. "Each time I met with Chad I felt better and better about the trust that was developing," says Lewis, 56. "We said so many things," says Gifford, and Lewis "hasn't backed off one thing." Bank of America's recent appointment of Fleet's Anne Finucane to oversee the Northeast operation is viewed as a guarantee Lewis's jobs commitment to Gifford will be honored.

Lewis held another card: His chief financial officer, James Hance Jr., and McQuade had second homes near Osterville on Cape Cod and were summer golfing buddies. Instructed by their CEOs to hammer out a potential agreement, they met one Friday night in late August at a noisy fish house. Hance avoided naming a specific price but said he was authorized to offer Fleet 25 to 30 percent ownership of the combined bank's shareholder value -- equivalent to $42 per Fleet share. Then McQuade laid out two of Fleet's central demands: seven of 19 board seats for Fleet board members and a promise to maintain Fleet's employment levels. McQuade reported back to Gifford that Bank of America was willing to negotiate.

Lewis suspected Fleet was talking with others including Citigroup, which he knew would be formidable competition. "At that point, I had no idea whether we could meet their criteria," Lewis says. He also had no idea Gifford's team was not getting the same strong vibes from Citigroup's new chief, Charles Prince, that they were getting from Lewis's group. Citigroup, with its deep pockets, was matching Bank of America's bid, said people close to the negotiations. But Citigroup's reputation is for paying high premiums to buy a company and eliminating its senior management.

"Bank of America doesn't have the ruthless reputation Citi does," said Morningstar Inc. analyst Craig Woker. Bank of America, says McQuade, was "listening to what we needed." Citigroup declined to comment for this story.

In meetings with Lewis, Gifford's lieutenants detailed improvements underway at Fleet, similar to Bank of America's progress years earlier. "That's when I really got excited there was growth potential with the existing customer base," Lewis says. This would later help him persuade his board to boost the bid.

Merger talks between the CEOS continued. After Gifford's walk on Nantucket, he broached the sensitive topic of placement of Fleet's top executives under Lewis, who would remain chief executive, and Gifford, who would be chairman for two years after the deal. Fleet's conditions required sacrifice, such as cutting Bank of America's 133,000 work force. What made it doable was that the banks' markets did not overlap, eliminating the need for branch closings. Lewis also planned to hire people in Boston's mortgage operation.

Each Gifford protege brought into top management meant less responsibility for someone on Lewis's team. But a September investigation into improper trading in Bank of America mutual funds by the Securities and Exchange Commission and New York's attorney general made one decision easier. Bank of America, having dismissed the head of its mutual funds group, Robert Gordon, agreed to relocate this major unit and others to Boston.

On Oct. 21, Gifford sought approval to structure a deal with Bank of America. His board was demanding: Citigroup's interest required that he press Lewis hard on price for Fleet shareholders, whose stock, at $32 a share that day, was one-third lower than 1999 levels.

The next morning, Lewis persuaded his board in Charlotte it was necessary to boost the offer from $42 a share to $45 to snare Fleet. He boarded the corporate jet for Manhattan. He arrived at Fleet's Upper East Side apartment and told Gifford, "We're not going to lose the deal" over $3 a share. "Cosmetically, it looks better at $42," he said, referring to Wall Street's anticipated negative reaction to a $45 bid. "But if that's what you have to have to do a deal and a handshake, so be it."

Then Lewis shook Gifford's hand and looked him in the eye. "Today," Lewis said, "Bank of America truly becomes Bank of America."

Kimberly Blanton can be reached at blanton@globe.com.