WINSTON-SALEM, N.C. — A card table, two legal pads and a handshake 20 years ago produced the most pivotal transaction in BB&T Corp.’s history and yielded a seminal economic moment for Winston-Salem, according to the Winston-Salem.
John Allison, top executive of BB&T, and Glenn Orr Jr., top executive of Southern National Corp., met in a Richmond, Va., hotel ballroom with a common goal — a merger of equals — and common concerns on how to pull it off.
They knew that even with assets of $10.6 billion (BB&T) and $8.2 billion (Southern), their chances of remaining independent were slim based on their paths.
Each had several regional banks — such as NationsBank (now Bank of America Corp.), First Union Corp. and SunTrust Banks Inc. — knocking on their doors. Changes to state and federal banking laws made North Carolina much more attractive to out-of-state competitors.
What they accomplished in initially eight hours of negotiations, and then another two weeks of talks back in North Carolina, was a $2.2 billion deal announced Aug. 1, 1994.
The deal, barely a blip on the out-of-state industry radar, was the launching pad for BB&T’s remarkable 20-year climb to becoming the 12th-largest U.S. bank with $188 billion in total assets. SNL Financial lists it as one of the top-20 most influential U.S. banking deals.
“It was a transformation transaction for both companies,” Allison said last week. He led the merged bank for more than 13 years before retiring in late December 2008.
“We’ve done larger good deals since then, but if we hadn’t been able to execute that merger of equals, the odds of competing in a rapidly consolidating industry were not good.”
“I don’t think any of us thought at that time we would become as successful as we have.”
Most pieces of data associated with the deal yields at least a fourfold increase, including:
Markets: three to 12 states.
Branches: 440 to 1,844.
Employees: 8,000 to 33,700 overall; 500 to 2,027 in Forsyth; and 700 to more than 3,800 in the Triad.
Both Orr and Kelly King, Allison’s successor as chairman and chief executive of BB&T, share the sentiment.
“I don’t know if anybody could have looked down the road and predict what has been accomplished by this bank the past 20 years,” Orr said last week. He retired from the combined bank the day it officially merged.
“In a merger of equals, you are betting on the future, not the present, and the conviction that two banks will be better together than separate.
“I can say equivocally, without hesitation, that this merger of equals — while painful and hard — set a standard for how these deals can be done when you let cost efficiencies and shareholder value take priority over the egos of management and boards,” Orr said.
BB&T has since conducted 34 bank deals, 79 in insurance companies, 21 in specialty financial companies and 10 securities and investment deals. Not surprisingly, it became known as a preferred acquirer in the Southeast.
Mike Mayo, an analyst with CLSA Americas LLC, agrees.
In a July 7 report titled “Growing up,” Mayo said the combined bank “has had the best stock-price performance of any large bank merger of equals.”
When the merger announcement was made, BB&T’s share price was $31 and Southern’s was $21.13.
For the BB&T investor who owned 1,000 shares at that time, keeping that stake has meant a $45.64 increase in share price value as of Thursday’s closing price. The stock has split once since the merger.
The bank also has paid $40,060 in dividends on those 1,000 shares, meaning that investor would have had a net gain of $85,700. For the Southern investor who owned 1,000 shares, the net gain would have $94,570.
“Since the combined pre-announcement market capitalization of the banks was $2.05 billion, and BB&T’s market capitalization is about $27.2 billion, that’s a more than 13 times increase in just 20 years,” said Tony Plath, a finance professor at UNC Charlotte.
“That means shareholders of both companies who have held on have made one hell of a pile of cash from this combination.”
Hurdles cleared quickly
When Allison and Orr sat down with their legal pads, they exchanged two deal breakers.
Allison insisted on running the combined bank, and Orr insisted it be based in Winston-Salem. Southern still was moving headquarters operations to the city from Lumberton.
To their surprise, those hurdles were cleared quickly.
Orr, 54, at the time, agreed to retire once the banks officially merged.
“It would be good for meshing the two banks together to only have one top executive,” Orr said. “I trusted John’s expertise and sense of timing for an acquisition, and he didn’t disappoint me, shareholders and employees.”
Allison said “we tried to use logic in the negotiations. Glenn had plans to retire, so the management succession was taken care of.”
Orr’s reward for stepping aside was an agreement that he would be paid $1.65 million a year for life — basically an extension of a $17.7 million severance package he was due since he still had a 10-year contract with Southern. The payments would continue to his wife, Ruthlee, upon his death.
Although there were some grumbling among Southern shareholders about Orr’s retirement package during the regulatory process, Plath said the return on investment for BB&T proved the Orr arrangement “well worth it given the potential alternative endings.”
Allison agreed to move the combined bank’s headquarters to Winston-Salem, even though Raleigh and Greensboro had been under consideration.
“Glenn had bought a bank in Winston-Salem (First Federal Savings Bank) and had started moving its headquarters and people here,” Allison said. “That would have been a big disruption to them to move again.”
King already was familiar with Winston-Salem from overseeing BB&T’s push into the state’s metro markets.
“When Winston-Salem came up, we determined there was no material difference between it, Greensboro and Raleigh for the structural things we needed — access to an airport, banking talent in the community, quality of life and cultural amenities,” King said.
“It was not too big and not too small, similar to where BB&T was at the time. We got all the pluses we needed and no negatives or limitations from being headquarters in Winston-Salem. That has remained true since.”
Sticking with a checklist
Sandra Rotter, an analyst in August 1994 with A.G. Edwards, said previous “merger of equals have faltered because of culture clashes and divided staff loyalties.”
Allison and Orr said what helped smooth their path was an integration and cost savings checklist that they stuck with throughout the process.
They determined they needed to reduce expenses by $50 million, some of which was accomplished by eliminating 10 percent of their combined workforce of 8,700 jobs, mostly in overlapping positions, and closing 95 of their combined 535 branches. BB&T’s more modern technology system was kept, leading to immediate cost savings.
Allison, King and Orr all said a major factor in the smooth integration was that the banks had similar cultures and a common recognition of the growth potential as a combined bank.
“We were able to make it work by focusing on the people side of it, and being fair to employees on both sides,” King said.
Allison said BB&T didn’t want to leave that commitment to mere platitudes. It kept track of its pre-merger workforce and determined that in 2004, the bank had kept about the same percentage of pre-merger BB&T and Southern employees.
Orr, who came up through the Wachovia training program, said he had no hesitation in taking on Wachovia in its backyard, whether with Southern or through the combined bank.
“We just felt we could offer better products and be quicker and more nimble about the decision making process,” Orr said.
When asked what about Winston-Salem lent the BB&T management team comfort about being based here, Allison said, “We knew it would be a challenge coming in the shadow of Wachovia, but that didn’t bother us because we already knew how to compete with Wachovia.
“Our focus was to run our business really well, and if we did that, we would create jobs locally and we would be involved in the community. Ultimately, I thought we would be respected here because we had earned that respect.
“People want to work with good people. That’s the kind of word of mouth advertising that makes you successful in the long run.”
Community roots deeper
The deep roots placed by BB&T helped the local community better weather 20 years’ of economic storms associated with larger employers being bought (Wachovia) or significantly downsizing their workforces (R.J. Reynolds Tobacco Co., Sara Lee Corp./Hanesbrands Inc. and US Airways Group Inc.).
Since BB&T moved to Winston-Salem, there have been more than 10,500 job positions lost just from mass layoffs from major employers, primarily Reynolds, but also 1,300 eliminated when First Union Corp. bought Wachovia in 2001.
“Having BB&T in Winston-Salem has been pretty important given all the other forces that have hit the marketplace,” Allison said. “The disruption that happened with Wachovia, we got a lot of good people from Wachovia.”
Forsyth County provided nearly $1 million in incentives to get Southern to move to Winston-Salem, bringing with it 202 jobs.
Bob Denham, a former Southern and BB&T senior spokesman, said the pledge of $100 million in deposits from city businessmen and businesswomen recruited by Southern board member Ed Pleasants and other city leaders “gave the clear nod to the Twin Cities.”
Recalling the incentive package, Mayor Allen Joines called it worthwhile given “a tremendous shot in the arm to our economy. We had been reeling from many job losses, so this was a symbolic move to restore confidence in our community.”
“The impact of this recruitment has been tremendous with the thousands of jobs, the leadership provided by the employees of BB&T to many civic and cultural organizations, and the leasing of a significant amount of real estate. All of it has contributed to the turnaround of Winston-Salem’s economy.
“It is hard for me to imagine what our city would be like without BB&T.”
A shining example
Although Orr was clear that his influence on BB&T ended the day the merger was completed, Denham emphasized Orr’s role in making the deal possible, starting with launching Forsyth Bank & Trust in 1972 with 10 employees and about $2.5 million in capital.
After 10 years of steady growth, Forsyth Bank reached $104 million in assets — large enough and the Winston-Salem market attractive enough — to convince Southern to spend $14.5 million to buy it. Former Forsyth Bank shareholders gained a 30 percent ownership stake in the deal.
Denham said the value of an original share of Forsyth Bank stock has grown nearly 100 percent under Southern and then BB&T ownership.
“Nearly every major decision made by Glenn during his career has been in the best interest of Winston-Salem, including agreeing to go away and hand the keys over to John Allison,” Denham said.
Plath credits the deal with giving “BB&T’s small-town management team the integration, experience, professional confidence and industry visibility/respect, to go on and do more complex and difficult acquisitions that eventually came to define the BB&T franchise.”
Chris Marinac, an analyst with FIG Partners of Atlanta, said he is a “long term fan of this transaction.”
“Winston-Salem benefited immensely from keeping a banking hub with BB&T,” Marinac said. “In the wake of stress testing and a shift to internal credit approvals, I think even more jobs have reached Winston-Salem.
“This has helped alleviate the pain of losing Wachovia and seeing other jobs move to Charlotte, Raleigh, etc.”
Orr summed up his recollection by delicately saying he’s not sure if Winston-Salem “has appreciated the overall value of what the deal has represented.”
“While many of the suitors at that time have gone away and or struggled with their finances the past six years, BB&T has been a shining example of how to run a bank, Kelly King doing as good a job as any banking executive.
“It is a driving force behind much of what is happening in Winston-Salem today.”