(FORTUNE Magazine) – Last month Wells Fargo CEO Dick Kovacevich pulled off a humdinger of a deal. He snagged Utah-based First Security for half the price that another bank had agreed to pay in an aborted deal last year. Not only was the price hard to beat, but the acquisition also transformed Wells into a leading bank in the booming Rocky Mountain region. What's the first thing you would do if you were Kovacevich? Dial up the top analysts on Wall Street and declare that you'd just made the best buy since the Louisiana Purchase? Promise zillions in cost cuts? Go on CNBC and rhapsodize about accretion, synergy, and economies of scale? Many bankers would.

But not Kovacevich. Instead, he hopped a plane to Utah. There he and COO Les Biller met with First Security employees and fielded questions about everything from health benefits to business strategy. He left Wall Street to his CFO, Ross Kari. Even then, Kari waited a full day before holding a conference call with analysts. "The way I see it is, when you take care of your employees, they take care of your customers," explains Kovacevich. "And your shareholders wind up winning anyway."

Hmmm. Someone ought to tell Kovacevich that's not the way the banking industry does things. Or perhaps he already knows. After all, when his Norwest Bank took over Wells Fargo (and assumed the name) in 1998, the Street panned the $31 billion deal. James Schmidt, a money manager with John Hancock and a big Norwest investor, told FORTUNE at the time, "If I could snap my fingers and make the deal go away, I would."

Good thing he couldn't. The new Wells Fargo has been a resounding winner--the most successful merger of its kind. Not only does the bank rank No. 1 in everything from small-business lending to online banking, but it also enjoys a flourishing and decidedly "functional" corporate culture. Revenues and profits continue to grow beautifully, and its stock is well ahead of its industry index (see chart). None of the CEOs behind the other mammoth bank mergers of the past few years--Banc One/First Chicago, First Union/CoreStates, NationsBank/Barnett, to name a few--can make that boast. Indeed, precious few of them are still around to make any boast. John McCoy abruptly left Bank One in December, Ed Crutchfield of First Union retired in March, and John Reed lost a bruising boardroom battle and left Citigroup in February. Many believe that Bank of America's Hugh McColl will retire in a couple of years as well. If he does, Kovacevich will be the only banking titan from the early 1990s still standing.

That will be a tribute to a management style that is as different from prevailing banking practices as--well, as Minneapolis (Norwest's home) is from San Francisco (Wells Fargo's past and future headquarters). Kovacevich eschews relentless penny-pinching. He doesn't terrorize employees with countless rounds of layoffs. He prefers old-fashioned techniques: building topnotch customer service, emphasizing careful execution, making employees feel well loved. He admits that many of Wells Fargo's initiatives border on the hokey, but the stuff really works. The upshot is, at this phase in the ongoing consolidation of the banking industry--a vicious free-for-all among mega-institutions and mega-egos--a nice guy has finished first.

How did he do it? The first rule in the Kovacevich merger handbook: Never pay too much. Norwest bought Wells Fargo for close to its market price and 2.7 times book value. Compare that with the four times book that Nationsbank shelled out for Barnett and the 13% premium to market that First Union paid for CoreStates (see table). Of course, there was a good reason that Wells was priced like day-old bread. In 1996 it had launched a horrifically ill-advised hostile takeover of First Interstate that destroyed customer service and killed morale.

Once Kovacevich had struck his deal for Wells, of course, his work had only begun. The cultures of Norwest and Wells Fargo couldn't have been more different. Norwest was known as a friendly, low-tech but high-touch Midwestern bank, whereas Wells boasted cutting-edge technology, a riskier balance sheet, and customer service as inviting as a Soviet grocery store's. The First Interstate merger had triggered a mass exodus of managers, and those remaining were bitter and overworked. They were not thrilled to hear of yet another merger. "Let's just say I took this job with some trepidation," jokes Patricia Callahan, who came from the old Wells to be human resources chief of the combined bank.

Kovacevich tackled the financial and personnel issues in characteristically unconventional fashion. For starters, he planned to reduce costs by only 17%. Again, compare that with First Union, which promised to slash costs by a draconian 45% after it bought CoreStates. "Everyone thinks that if a deal has a ton of synergies, then it must be a good deal," says Kovacevich. "So they cut costs. And they assume that it won't hurt revenue. That's not going to work."

Kovacevich also insisted on taking his time. Common wisdom contends that speed is essential in blending corporate cultures. However, Kovacevich spread Wells' integration over a three-year period. He needed all that time to make sure the deal was truly a merger of equals--a concept most bankers toss around (it confers certain tax and accounting advantages) but rarely put into practice. "Wherever Wells was good, Norwest wasn't," bluntly states the Bronx-born COO Biller, the other half of what is considered the best management duo in banking. "So that's why we needed to take the best from each company." Biller has been working to integrate both banks' computer systems evenly. So far he is ahead of schedule, and Wells is poised to run on just one system by the fourth quarter of this year.

On the people side, Kovacevich has striven to maintain an even blend of both Norwest and old Wells veterans in top management. He installed old Wells people at the helm of key areas like wholesale banking, Internet services, and private-client services. "I've got to hand it to Dick," says HR chief Callahan. "He didn't have preconceived notions about anyone." The evenhandedness extended down the ranks as well. Of the 3,200 Wells Fargo employees whose positions were made redundant in the merger, fully 56% were retrained and stayed on with the company in different jobs.

Wells Fargo's numbers so far suggest just how well Kovacevich's approach is working. The bank's earnings bloomed by 91% in 1999, hitting $2.23 per share--exactly what the bank had promised Wall Street at the time of the merger. What's more, its revenue picked up nearly 9%, to $16.7 billion, compared with 6% at crosstown rival Bank of America. "Wells has hit all of its financial projections, and in a quality fashion," says Sandra Flannigan, an analyst at Merrill Lynch. They didn't boost the bottom line with tricks like one-time gains, she explains. "That's almost unheard of in banking these days."

In more ways than one, it's odd that Kovacevich should be one of the most lionized bankers in the country. For starters, the tall, lanky native of Washington State is far too good-looking to be a banker. (He looks like Paul Newman playing a banker.) He never had any interest in the industry as an undergraduate at Stanford, where he studied industrial engineering and pitched for the school's baseball team. (The Stanford Daily at the time, apparently struggling a bit with baseball jargon, declared him the team's star "twirler.") Kovacevich was even scouted by the majors, where, but for a shoulder injury, he might have twirled professionally.

Instead he wound up running the toy division of General Mills, where he picked up a load of marketing and retail experience. He wet his feet in banking at Citibank's consumer banking group, where he helped roll out the bank's then revolutionary ATMs. That background helps explain the emphasis he now places on sales and services. Kovacevich doesn't refer to Wells Fargo's retail banks as branches but rather as "stores." And he's obsessed with cross-selling. The bank boasts that its households each own about 3.4 of its products on average--double the industry average--and Kovacevich wants to drive that number up to eight. "The thing about Dick is, he's a really consistent guy," says Michael Wright, a member of the Wells Fargo board of directors and CEO of grocery store chain Supervalu. "When he starts talking about stores and sales, many other bankers look askance. Then you see results, and you have a lot of believers."

Some of the strongest believers are Wells Fargo's own employees. While most companies barely even remember to pay lip service to their "corporate vision," Wells approaches its own with cultlike enthusiasm. Kovacevich refers to it constantly, there are Vision and Values brochures everywhere around headquarters, and any given employee could tell you exactly what the mission is. Overall it's pretty simple: "We want to be the best customer- service bank in the world."

Morale seems to thrive on this diet of earnestness and clarity of purpose. Last month this FORTUNE reporter chanced upon a group of Wells Fargo branch--sorry, store--managers boarding a plane in L.A. after an off-site conference. Decked out in WELLS FARGO UNIVERSITY paraphernalia, they teased one another, laughed about dancing at an earlier party, and shouted, "Oh, no! The press!" in mock horror when I identified myself. Then they went back to high spirits and shop talk, trading ideas on how to deal with bank audits and maternity leave. If Wells employees are feeling any angst because of the merger, you sure couldn't have proved it with this group.

That's not to say that Wells Fargo is without its share of challenges. One of the keys to Kovacevich's success in the acquisition has been his willingness to allow Wells managers to continue doing what they do well. But Tom Brown of bankstocks.com, a research Website, wonders whether Kovacevich will be able to maintain that attitude toward Wells Fargo's commercial real estate lending business. The business is quite successful--it kept the bank profitable even in the early 1990s--but it tends to place large bets on higher risk borrowers. That's not Norwest's style. "Dick will never feel comfortable placing large bets, but that's what his commercial real estate division is doing," says Brown. "I think it's an unsustainable situation."

Wells Fargo also needs to improve its asset management business--a steady, fee-driven line of business that can open doors to all sorts of sales. At the moment, though, only 11% of Wells Fargo's profits comes from its investing operations. Kovacevich would like to see that number closer to 25%. "We want most of our customers' net worth with us," he says, "and right now we're not our customers' first choice."

To reach that goal, Wells is rolling out a service known as a Portfolio Management Account. PMA combines a client's entire financial portfolio in one statement. So far the program has had impressive results. Among other things, PMA client households own an average of nine Wells Fargo products. "If all my customers had numbers like that, I'd be relaxing on a beach somewhere," says Biller. In addition, First Security brings its own investment firm, Van Kasper, to the merger. Biller estimates Van Kasper will pump up Wells' brokerage sales force by about 15%.

Then there's the Internet. At the moment Wells Fargo has the country's most successful online banking business, with 1.8 million Internet users and 100,000 new clients coming online each month. Kovacevich inherited the Internet strength from the old Wells, which had offered online banking since as far back as 1994. It's a great business to have, since online customers are famously sticky--they're 36% less likely to leave the bank than unplugged clients--and they tend to hold bigger balances.

But for the same reason, competition for online customers is ferocious. Places like Bank One believe the best way to attract online enthusiasts is through an entirely separate brand, like its Wingspan venture. Kovacevich, on the other hand, prefers a multichannel approach, in which online banking becomes one service option among many that include tellers and ATMs as well. "What's the likelihood of converting the whole world to just Internet banking?" he asks. "Wingspan is not a bet I would be willing to take." So far, he has been right: Wingspan has drained Bank One's coffers and sliced into profitability. Yet Internet specialist banks have lower costs and can pass on those efficiencies as higher savings rates and lower-interest loans. As banking customers become more Net-savvy, Wells might be forced to quickly alter its strategy.

Wells is also hoping to be among the first banks to offer full electronic bill presentment and payment. That saves customers from having to sort through mailed bills a few times a month and remember to pay them on time. With electronic bill payment, the bill goes electronically to the bank, allowing a user to view and pay bills, all on the screen. It's a valuable convenience. The bank estimates that customers who use its current, incomplete electronic bill payment system are 54% less likely than other online customers to leave the bank. "Those are pretty compelling statistics," notes Steve Ellis, head of wholesale banking's Internet services.

At present, however, the online bill payment and presentment network has been maddeningly fragmented. Customers can't get all of their bills in one place (defeating much of the purpose), and billers can't reach all of their customers. "Electronic bill paying has got to be very simple," explains Charles Wendel, president of Financial Institutions Consulting. "And right now it's far too complicated."

To simplify things, Wells Fargo got together with Chase Manhattan and First Union to found a bill-payment and presentment clearinghouse called Spectrum. In the same way that Visa and MasterCard unified the credit card business, Spectrum is designed to bring member banks and billers together in a single channel. So far the system has signed 18 different banks--a start, but nothing more than that. And many worry that Spectrum won't pull it off. "There's no Spectrum CEO who has a unifying vision. No one is on the phone helping other banks sign up for the consortium. And no one is putting up resources to build it," complains Michael Killen, head of Internet financial services consultant Killen & Co. "I don't like it when there's no leadership for something like Spectrum. It will drift." Biller and Kovacevich agree that this is a valid criticism, and they promise a CEO will be in place soon.

Perhaps the greatest threat to the success of Wells Fargo would be the departure of Kovacevich himself. Kovacevich is, not surprisingly, perennially rumored to be on the short list of CEO candidates for even bigger institutions. The most obvious place for Kovacevich to go would be to Citibank, where he earned his banking sea legs. However, Kovacevich quickly dismisses the idea. "I wouldn't trade my position with anyone in the financial services world. It's taken me 12 years to get this organization where I want it," he says. "God knows I'm too old to start this over again." And God knows there aren't many other people around who could pull off the same feat.

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