N.Y. Merger Would Create 2nd-Biggest Bank in U.S.
In what could presage a wave of big bank mergers nationwide, Chemical Banking Corp. and Manufacturers Hanover Corp. announced Monday a merger that would create the nation’s second-largest bank.
The merger, valued at more than $2 billion, the largest in U.S. banking history, would combine two banking giants struggling with problem real estate and international loans. Executives of both companies said the union would create a single strong bank, which will keep Chemical’s name, with ample capital and a much higher credit rating.
“This will make us a much tougher competitor than either of us ever were individually,” said John F. McGillicuddy, Manufacturers’ chairman and chief executive, who will head the merged bank.
Chemical is now the nation’s sixth-largest bank, with $73 billion in assets; Manufacturers is the ninth largest, with $61.5 billion in assets. With combined assets of about $135 billion, the new Chemical will be second in size only to New York’s Citicorp. The merger would eliminate about 6,200 jobs from a total work force of 45,000.
Analysts said the merged bank will be on a strong footing to compete globally with other banking companies and to expand in the United States as more interstate banking is allowed, something neither bank was well positioned to do individually.
Banking industry analysts for months have predicted mergers among the so-called money-center banks in New York because of overcapacity in branches and basic banking services, made worse by the recession. And it comes on the heels of the proposed merger of NCNB Corp. and C&S;/Sovran in the Southeast, to create the nation’s third-largest bank.
Many analysts Monday forecast that the Chemical merger will touch off a new wave of acquisitions nationwide, particularly among banks that have been hurt by the sharp decline in the real estate market as well as losses from loans in the 1980s to finance mergers and loans to developing countries.
“There will be more to follow,” said James M. Rosenberg, a banking analyst with Shearson Lehman Bros.
He said that, in New York, Chase Manhattan was a likely candidate to merge with another big bank, and he said California banks, hurt by sharply rising losses from real estate loans, are likely to seek merger partners as well.
“There is no major player in California who isn’t a potential candidate,” Rosenberg said.
Although the new bank will be called Chemical, senior corporate executives described the transaction as “a merger of equals” that will leave the shareholders of each company owning about 50% of the new bank holding company. The merger will take place through a tax-free exchange of stock, whereby each Manufacturers Hanover share will be exchanged for 1.14 shares of Chemical common stock. Executives of the two banks said the transaction’s market value exceeds $2 billion.
Wall Street strongly approved of the impending nuptials: The stocks of both companies rose sharply. In trading on the New York Stock Exchange, Chemical closed up $2.75 at $26.50; Manufacturers closed up $6 at $29.25.
McGillicuddy, 60, initially will take the reins of the new super-bank, serving as chairman and chief executive. Chemical’s chairman and chief executive, Walter V. Shipley, 55, will become president and chief operating officer. But the companies said Shipley will step up to succeed McGillicuddy as chief executive in January, 1994.
The new efficiency and savings from the merger will come at the expense of the two banks’ work forces: The companies said they plan to reduce the number of employees by at least 6,200, or 14%, through layoffs and attrition over three years. At least 80 of the banks’ combined total of 660 consumer branches in New York will be closed. The banks’ back office computer operations will be merged.
In addition, Chemical will give up its 50-story headquarters building on Park Avenue in Manhattan when its lease expires in 1994. The merged banks’ headquarters will be directly across the street, in what is now Manufacturers’ head office.
The expected consolidation is designed to save the merged bank a minimum of $650 million annually after three years, with about half the savings from reduced labor costs. Most of the rest will come from savings on real estate, including branch office space. The merged bank is to take a restructuring charge of about $550 million to cover severance pay and other costs related to consolidation.
Banking analysts hailed the merger as a logical step that will create a strong bank out of two relatively weak ones. Both banks reported rather small profits in 1990--$291.2 million for Chemical and $139 million for Manufacturers--after both banks had big losses in 1989. Both banks recently were forced to substantially lower common stock dividends.
On Monday, Chemical reported net income for the second quarter ended June 30 of $94 million, down 17% from $113.1 million in the same quarter a year ago. Manufacturers reported net income of $75 million in the second quarter, up 136% from $33 million in the year-ago quarter.
Still hobbled by heavy losses from real estate loans, non-performing loans to developing countries and capital that only slightly exceeded regulators’ minimum requirements, the two banks individually seemed headed for an uncertain future.
“They would have continued to flounder,” said Kyle Frey, a banking analyst with Warburg, Pincus Counsellors Inc., an investment management concern. “Especially in metropolitan New York, there are just too many banks.”
The combined bank is to have a healthy $7.7 billion in capital, money that can be used to pay for expansion or as a cushion against losses.
McGillicuddy said the merger would reduce the percentage of problem loans in any particular category, rather than increase them. Chemical has more problem loans from real estate. Manufacturers’ real estate portfolio is in significantly better shape, although still troubled, but that bank has a much heavier problem from loans to developing countries.
The merger is subject to approval by regulators, including the Federal Reserve and New York state banking authorities. McGillicuddy and Shipley said they think approval by the Fed is likely.
McGillicuddy said that one of the main goals of the merger is to improve the banks’ credit ratings, which have slipped dramatically in recent years. To further bolster its credit rating, the merged bank will attempt to raise $1.25 billion in additional capital through the sale of new common stock.
The merger seemed to be having its intended effect. Standard & Poor’s and Moody’s said Monday that they had placed the two banks’ debt securities under review for a probable upgrade in ratings if the merger takes place.
McGillicuddy and Shipley said secret negotiations on the merger had been going on for two months. The two men, longtime friends, said they share similar ideas about banking and had privately discussed the possibility of a merger several times during the last two years. “There is a real cultural fit of the two organizations,” McGillicuddy said.
Shipley told a meeting of securities analysts that the banks decided to move now because each bank recently got past major problems that might have made a merger difficult. Chemical’s Texas subsidiary, Texas Commerce Bancshares, returned to profitability and seems to be on a sound footing after substantial losses in the late 1980s. Manufacturers completed charge-offs and other measures to lessen the problem of its developing-country loans.
The possibility of a rival bid emerging for either bank was considered remote. As part of their merger agreement, each bank gave the other an option to buy 19.9% of its outstanding shares if another offer emerges.
The merger prompted the resignation of Thomas S. Johnson, 50, a highly regarded banking executive who had left Chemical to become president of Manufacturers Hanover. Johnson was regarded as the likely successor to McGillicuddy as chief executive at Manufacturers.
