Wells Fargo, based in San Francisco, and Norwest Corporation, of Minneapolis, are to join forces in a $35bn (pounds 21bn) merger. The new bank, to be called Wells Fargo & Company, will be the US's seventh largest in terms of asset size and fourth largest in terms of market capitalisation.
News of the deal sent US stocks soaring in early trade. Wells Fargo was up $4.25 at $367.50, while Norwest was trading down $2.121/2 at $37.561/4.
Richard M Kovacevich, chairman and chief executive of Norwest and president and chief executive designate of the new company, said the merger would unite high-performing companies with complementary businesses, products, markets, technology and customers.
As with the recent tie-ups between NationsBank/BankAmerica and Banc One/First Chicago, the rationale for the deal was primarily cost-cutting, according to most analysts. The two banks hope to save at least $650m in costs a year by the third year after the merger.
The two banks yesterday tried to play down fears of job cuts, saying any lay-offs would be "minimal".
Analysts added that Norwest, seen as one of the industry's stars, could revitalise Wells Fargo, which has been beset by difficulties in recent years following its $11.3bn acquisition of First Interstate, the Los Angeles- based bank.
One analyst commented: "Norwest will try and rejuvenate a franchise which has been pretty beaten up."
The deal will be seen as yet another success story for Warren Buffett, the legendary billionaire investor, and a long-term shareholder in Wells Fargo.
Mr Buffett's most recent annual letter to shareholders in his Berkshire Hathaway investment vehicle revealed that the US investment guru held a 7.8 per cent stake in Wells Fargo at the end of 1997, slightly down from the 8 per cent stake he held at the end of 1996.
Ironically, Mr Buffett recently warned of the dangers of the consolidation wave currently sweeping through the US banking industry. Mr Buffett told shareholders at his company's recent annual general meeting: "I think when you get all through with this, you'll find that some of them are real hits and some of them are misses. They're very big and those aren't easy to do."
The Wells Fargo/Norwest merger - dubbed a "merger of equals" by the two banks - is the fourth in the US banking industry since April, when Travelers Group kicked off the latest round of merger fever with a $70bn tie-up with Citicorp.
The Wells Fargo deal will create a banking powerhouse with 90,000 employees, 20 million customers and $191bn assets under management. It will have the largest bank-owned insurance agency, be the US's leading commercial real estate lender and rank first in mortgage originations and servicing.
Paul Hazen, currently chairman and chief executive of Wells Fargo, will become chairman of the new bank.
Some analysts were sceptical about the prospects for the group in the short- to medium-term, citing the problems experienced by Wells Fargo when it successfully completed a $11.3bn hostile bid for First Interstate, a rival Californian bank.
The US Federal Reserve on Monday approved the merger of Union Bank of Switzerland and Swiss Bank Corp, creating the second largest bank in the world. The Fed said it had weighed criticism that the Swiss banks had not done enough to settle claims from heirs of Jewish Holocaust victims dating to World War Two but decided it did not warrant blocking the merger.
Recent US banking deals
April 7: Travelers Group and Citicorp announce $70bn merger.
April 14: BankAmerica and NationsBank say they are to join forces in $60bn deal.
Banc One and First Chicago NBD announce $30bn link-up.
April 22: Bank of New York launches $25bn bid for Mellon Bank. Bid is withdrawn one month later after Mellon rebuffs Bank of New York's approach.
June 8: Wells Fargo and Norwest announce $35bn deal.