7 Lessons From WaMu's Playbook

Dyan Beito's career has soared since she joined Washington Mutual Inc. in a merger four years ago. She has been given big promotions, rising to become executive vice president for deposit services at the Seattle company. But some of her most vital work comes when she steps away from her regular duties and flies to a new city to brief managers at another financial institution that is about to be acquired by Washington Mutual.

"I know exactly what you're feeling," she tells hundreds of nervous managers. "Four years ago, I sat in your seat. But let me tell you a little bit about how we do mergers here." An hour later, after she lays out Washington Mutual's approach, the tension is gone. Managers at acquired banks suddenly see a brighter future. As one of them told her, "This sounds like the company that I've always wanted to work for, but never knew existed."

So what is Washington Mutual doing right? Talk to executives at the company, and what emerges is a wealth of homegrown wisdom about how to carry out corporate takeovers. Washington Mutual has operated away from the spotlight -- there's no Donald Trump figure in Seattle hawking his version of The Art of the Deal. But Kerry Killinger, Washington Mutual's president, chairman, and CEO, along with Craig Tall, his top takeover specialist, have quietly purchased nearly 30 thrift institutions, mortgage companies, and other financial firms in the past 15 years. Like many banks, Washington Mutual has had to increase loan-loss reserves somewhat to adjust to the current weak economy. But since 1986, it hasn't had a single deal go sour.

All told, Killinger, Tall, and company have built Washington Mutual into one of the nation's top consumer banks, with more than $200 billion in assets. What was once a puny Seattle thrift is now the biggest mortgage lender in the United States, surpassing Bank of America and Citigroup. Washington Mutual also has more than 4 million checking-account holders, chiefly in the West, but with expansion drives afoot in Texas and New York. And Washington Mutual's stock price has climbed nearly tenfold in the past decade.

That success is even more striking because many banks and brokers have a terrible time making acquisitions work. Projected efficiencies fall through. Key executives quit after the deal is done. Computer systems never learn to talk to one another. And before long, what was heralded as a brilliant combination turns into a costly write-down.

So in this post-IPO era of roll ups, buy ups, consolidations, and acquisitions, how do you do one right? Here are seven key rules from Washington Mutual's mergers-and-acquisitions playbook.

1. Pick targets that will make you a market leader. In 1996, Washington Mutual made its first foray into California, buying Keystone Holdings Inc. Since then, Washington Mutual has made five more California purchases, snapping up nearly 1,700 branches by acquiring the likes of Great Western Financial and Home Savings of America, a subsidiary of H.F. Ahmanson.

In the home-mortgage market, Washington Mutual has been relentless. It built up a strong position from its California acquisitions and then, in the past two years, redoubled its bet by acquiring the mortgage units of PNC Financial Services Group Inc. and FleetBoston Financial Corp. Each deal has given the company greater market clout and greater efficiencies. "There is a network effect in banking," explains Jerry Gross, Washington Mutual's chief information officer. "The more nodes you put in, the less effort it takes."

In general, "acquisitions need to be a by-product of your basic strategy," says Killinger. "We would never want to do scattershot acquisitions and then have to think up strategies to justify them. We believe that the best way to build value is to focus on a few markets where we can achieve national leadership."

2. Work with sellers whose values match yours. "A week doesn't go by where we don't talk to someone about a possible deal," says Tall, Washington Mutual's vice chair of corporate development and specialty finance. "In a typical year, we may complete two or three transactions." Deals make the cut if they improve per-share earnings, fit into growth strategies, and bring minimal risks.

As Tall and his team gauge risks, they pay attention to sellers' priorities. "Most sellers want this transaction to be a way to extend their business further than they can take it on their own," Tall says.

3. Make blunt decisions about who will run the show. Many jumbo deals these days are billed as "mergers of equals," with top-management duties split across a delicately assembled coalition of executives from both companies. That sounds soothing -- but it's not the Washington Mutual approach. "I've never heard of a merger of equals that really worked," Tall says. "It just means that tough decisions don't get made."