Advertisement
  1. Archive

Chase buys up revered Morgan

The consolidation frenzy in the financial-services industry ends the independence of a prestigious and historic name in banking.

David Rockefeller, meet J.P. Morgan.

Chase Manhattan Corp., a banking giant formed from mergers of three New York banks, has agreed to acquire venerable J.P. Morgan & Co. for about $35.2-billion in stock, a deal that would bring together two of the oldest names in United States finance.

The deal announced Wednesday marks the latest in a series of huge transactions in the rapidly consolidating financial-services industry. It is expected to end the independence of one of the most prestigious banks in business history, one that fell behind the financial-services giants formed in recent years, including Citigroup Inc. and Morgan Stanley Dean Witter & Co. The negotiations underscore a failed attempt by J.P. Morgan to build itself into a full-service investment bank and crack the big leagues on Wall Street.

The deal highlights how many of today's global financial giants are U.S. companies that have leapfrogged over their European counterparts. In effect, the globalization of finance has become the Americanization of finance.

Many British financial institutions are marginal players or have been swallowed up. Only a handful of European banks such as Deutsche Bank AG remain serious contenders to be a global survivor.

On Wall Street, the deal is expected to further pressure a wide group of players to gain heft, from smaller firms such as Lehman Brothers Holdings Inc. and Bear Stearns Cos. to giants such as Merrill Lynch & Co. The agreement follows closely on the heels of announced deals to combine Credit Suisse First Boston with Donaldson, Lufkin & Jenrette Co., and UBS AG with PaineWebber Group Inc.

The boards of both Chase and J.P. Morgan approved the deal Tuesday, the Wall Street Journal reported. Each share of J.P. Morgan was set to be exchanged for 3.7 shares of Chase.

At current prices, the agreement values shares of J.P. Morgan at roughly $196. After climbing for weeks on rumors that the firm was a takeover target, J.P. Morgan's shares fell $4.19 Wednesday to $181.25 in trading on the New York Stock Exchange. Chase Manhattan fell $1.31 to $51.19, dropping the value of the deal from about $36-billion to $35.2-billion.

The deal creates a financial titan with a combined $675-billion in assets. In size, it would rank behind only Citigroup, with $800-billion, and Bank of America, with $680-billion. The institution would link Chase's powerful syndicated-lending franchise and its venture-capital arm with Morgan's profitable $400-billion in assets under management at its private-banking arm. The deal also would give Chase a stake in a major mutual-fund company. J.P. Morgan owns just under half of American Century Investments, which has about 75 no-load mutual funds and nearly $100-billion in fund assets.

The name of the new behemoth will be J.P. Morgan Chase & Co. Morgan's chairman and CEO Douglas Warner will be chairman of the combined company, while Chase chairman William Harrison wil be chief executive. The two will be co-heads of the executive committee.

But clearly this is a takeover: The board will consist of eight directors from Chase and five from J.P. Morgan. The management committee will have 11 members from Chase, four from Morgan. Geoffrey Boisi, the head of investment banking at Chase, whose father was a senior J.P. Morgan executive, is to be co-head of investment banking at the combined institution. The other co-head: Donald Layton _ a Chase executive, not a Morgan executive. In fact, as of Monday night, the only senior Chase staffer confirmed to be leaving as a result of the deal was Neal Garonzik, Chase's head of asset management, an area in which Morgan is strong.

Speculation about a deal had mounted for weeks. On Friday, J.P. Morgan's chief financial officer resigned, and Tuesday, Warner canceled a long-planned speech, sending the stock higher.

Financially, the deal looks expensive for Chase. Because Chase trades at a modest 12 times earnings, and the price is in the range of 17 times earnings, the deal would appear to dilute Chase's earnings before any planned expense reductions.

The transaction would cap a tumultuous decade at J.P. Morgan. Ten years ago, Chemical Banking Corp., Manufacturers Hanover Trust and Chase Manhattan were on their backs, hurt by bad real estate loans and lending to high-risk borrowers. But Chemical acquired Manufacturers Hanover, then the old Chase (taking the Chase name), and emerged as a banking leader thanks to the scale and heft from its spate of deals.

J.P. Morgan and Chase have held talks with various players recently. Over the past few months, the rumors surrounding Morgan heated up, amid some speculation that its board was growing impatient. Less than a month ago, Lawrence Bossidy, a J.P. Morgan board member, said, "Either it continues to grow on its own or it combines with somebody. If you talk to management, they don't think their options are limited to going it alone."

The talks bring together institutions with rich histories, involving two of the biggest names in U.S. finance _ the Rockefellers and the Morgans. J.P. Morgan was founded in 1838 by George Peabody, one of whose eventual partners was the father of J. Pierpont Morgan.

By the end of the 19th century, J. Pierpont Morgan was the equivalent of chairman of the Federal Reserve before there was a Fed, and the House of Morgan rivaled the Rothschilds and Barings in global influence. Though vilified in some quarters, he helped stave off financial crises such as the Panic of 1907. Nearly 80 years later, his namesake bank was once again called in to play a similar role by helping put together a bailout of Chicago's Continental Illinois.

The firm flourished but was severely hobbled by the Glass-Steagall Act of 1933, which left it unable to conduct the type of investment-banking business that helped it thrive. It responded by spinning off its investment banking into a new company that became Morgan Stanley.

In some respects, management had great foresight. J.P. Morgan excelled in private banking and asset management and began to realize in the 1980s that commercial banking _ lending money _ was not such an attractive business. But at the same time, the bank stuck too long with its old-line customer base. As a result, it was shut out of smaller deals, such as small companies headed for initial public offerings.

At the dawn of the industrial era, J.P. Morgan had helped form many of the nation's leading companies, such as U.S. Steel and AT&T. But a century later it struggled to build a technology investment banking practice and watched as other banks and venture-capital firms built the AT&Ts of the 21st century.

The result: The firm largely missed out on the huge technology IPO boom that fattened the likes of Goldman Sachs and Morgan Stanley. And it didn't have the foresight to buy into the business the way Chase did with its purchase of Hambrecht & Quist.

Chase was founded in 1877 as the Chase National Bank of the City of New York (although some roots of today's Chase go back much farther). Named for former Treasury Secretary Salmon P. Chase, it began by financing imports and exports and acting as sort of a bank for other banks. It became the world's biggest bank after a 1930 merger with Equitable Trust, whose biggest shareholder was John D. Rockefeller Jr. From then on, Chase was considered the Rockefellers' bank. Rockefeller's son David became president in 1959. He retired as chairman in 1981.

Recently, J.P. Morgan began shopping itself more aggressively to a number of big Wall Street firms, including Merrill Lynch, Goldman and a handful of European institutions, the Wall Street Journal reported. "Shouldn't we be talking" was the introduction made to senior executives at Merrill, the Journal reported. They did talk, but only briefly. People at Merrill quickly came to the conclusion that acquiring J.P. Morgan would do little to enhance Merrill's own valuation. And there was a lot of overlap, including investment banking and capital markets.

But Chase's stock and its market capitalization far outpaced J.P. Morgan's, giving Chase the heft to be the effective acquirer of J.P. Morgan. Chase has a stock-market value of about $71-billion.

A Chase-J.P. Morgan combination will be better able to compete with the larger giants. Chase's Chase H&Q brokerage unit will feed off Morgan's modest but growing stock-underwriting business. The deal will create a powerhouse in traditional commercial-banking businesses: lending, bond underwriting, trading and derivatives management.

Morgan's strength overseas _ it ranks fifth in global stock underwriting because of its strength in Europe and Japan _ would feed Chase's international ambitions. The combination would be No. 3 in fixed income underwriting, though that is hardly the most profitable business on Wall Street. It would make the new bank sixth in the merger advisory rankings on a global basis, when measured by announced deals, a measure by which Chase is currently ninth and J.P. Morgan is 11th.

Put simply, "Chase has the customers and Morgan has the U.S. equity business and the European platform," says Ronald Mandle, a Sanford C. Bernstein & Co. analyst, who speculated about a Chase-J.P. Morgan deal in a recent report.

And in banking, the combined institution would claim supremacy in some traditional businesses. "It will be the undisputed world leader in areas like foreign exchange, syndicated lending and derivatives," says Andy Collins, senior bank analyst at ING Barings.

But Chase was already a leader in those businesses. So it's unclear what the added value is of putting these businesses together given the rich price tag. And the deal will fall short of the goal of Chase's Harrison to achieve so-called bulge-bracket status in the highly lucrative markets of investment banking.

"This moves Chase along, but it doesn't really get them there," says James Schmidt, a fund manager at John Hancock Funds.

Indeed, this may not be the deal to end all deals. Chase had wanted to count itself among the top Wall Street firms through a merger with one of the bulge-bracket investment banks. Former chief executive Walter Shipley, before giving the reins to Harrison last year, had actually offered to give his post to the head of any potential suitor who would combine with Chase, the reported. But that wasn't enough to lure either Merrill, Goldman or Morgan Stanley into a deal.

Layoffs are almost a certainty, Collins says. "It's going to be a bloodbath," he says. "There are going to be a lot of corporate bankers out of work in the New York region."

Chase is one of the Tampa Bay area's largest employers, with more than 4,800 employees in Hillsborough County. Last fall, the company announced that it would add 2,140 new jobs at its area facilities, which do everything from handling payroll transfers to working with customers who have Chase retirement accounts.

_ Times staff writer Kyle Parks contributed to this report.

Text for chart not available electronically. Please see microfilm.

YOU MIGHT ALSO LIKE

Advertisement
Advertisement