New York-based banking giants Chase Manhattan Corp. and Chemical Banking Corp. on Monday announced an $11-billion merger that will create the nation's largest banking company, one that touches millions of consumers through credit cards and mortgage loans.
Chemical, the nation's fourth largest bank, and Chase, sixth largest, together will leapfrog Citicorp to the No. 1 spot. The combined company, with assets of nearly $300 billion, will have broad global reach but will still be far smaller than several Japanese banks.
The much-rumored deal, like many in the ongoing wave of bank mergers, is being driven by banks' need to dramatically cut costs in the face of rising competition from mutual funds, stock brokerages, consumer finance companies and others.
The companies, which when combined will take the Chase Manhattan name, told analysts that they can save $1.5 billion in costs over the next three years by consolidating operations, closing offices and eliminating some 12,000 jobs.
It is the same story across America, as mergers among banks are resulting in profound disruption. Consumers are seeing their local branch closed or their accounts bounced from one bank to another. Communities are witnessing a loss of jobs or a subtle loss of economic status as the hometown bank is swallowed by a distant rival.
But economists simply see the inefficiency and overcapacity being squeezed out of a bloated U.S. banking system--a process that they say not only will continue but will accelerate. A report earlier this month by the Deloitte & Touche accounting firm predicted that half of all U.S. bank branches and 450,000 banking jobs would disappear within the next decade.
Seven of the 20 largest U.S. banks are involved in multibillion-dollar mergers announced since February. In another major bank deal disclosed Monday, Cleveland-based National City Corp. agreed to acquire Integra Financial Corp. of Pittsburgh in a merger valued at $2.1 billion.
"Today we've got a $300-billion bank. You'll probably see a $400-billion one within a matter of months," said David M. Partridge, a banking specialist at the management consulting firm of Towers Perrin. He speculated, as others have, that the next mega-deal could involve No. 2 BankAmerica Corp. of San Francisco and No. 3 NationsBank Corp. of Charlotte, N.C.
In the Chase-Chemical merger, as many as one-third of the job losses will come in New York, where both banks have the bulk of their consumer banking operations and where their businesses overlap to perhaps a greater extent than those of any two banks in America. Around 100 of the banks' 480 branches in the region will close. Currently, the banks have 75,000 employees in 39 states and 51 countries.
Wall Street applauded Monday's announcement: Chase's stock soared $6.625 a share to close at $59.625, while Chemical's gained $5.75 to close at $60.125, both on the New York Stock Exchange. Bank stocks across the board were higher as investors anticipated more merger activity. The big California banking companies--BankAmerica, First Interstate Bancorp and Wells Fargo & Co.--are all seen as potential candidates for deals.
Some experts cautioned that the Chase-Chemical merger is complex and the savings not automatic. Others raised concerns that the difficulties of putting the banks together will distract managers from other strategic imperatives, particularly stemming the flow of business to such nonbank competitors as mutual funds and consumer finance companies.
"Banks are playing an old game. It's like railroad mergers," said analyst Thomas K. Brown of Donaldson, Lufkin & Jenrette. "If they spent less time worrying about each other and more worrying why they're losing market share to the nonbanks, they'd be better off."
That said, Brown acknowledged that the huge opportunity for savings in the Chase-Chemical combination make the deal worth pursuing.
Analyst Diane B. Glossman of Salomon Bros. said Chemical enhanced the credibility of its cost-saving claims through its relatively smooth handling of its 1991 merger with Manufacturers Hanover Trust Co.
Chemical Chairman Walter V. Shipley, 59, who played a major role in that transaction, will become chairman and chief executive of the combined Chase-Chemical. Chase's chairman, Thomas Labrecque, 56, will be president and chief operating officer.
"The combination is a unique strategic fit, with complementary product capabilities and market coverage that will give us leadership positions across all our business lines," Shipley said in a news conference Monday.
Consumer groups criticized the deal, however, warning that it could lead to inconvenience and higher fees.
"Bigger is not necessarily better," said Stephen Brobeck, executive director of the Consumer Federation of America. "To the extent competition is reduced, fees and loan rates will tend to increase and banking services could become less convenient."
Outside of greater New York, the disruptions for consumers will be slight. Both banks have large mortgage-banking and credit-card operations--including extensive consumer loans to Californians--so customers nationwide may see changes in the handling of those accounts, but any such alterations are expected to be minor.
Under the deal struck Sunday by the boards of directors of Chase and Chemical, 1.04 shares of Chemical stock will be exchanged for each Chase share.
The merger is subject to approval of shareholders and federal regulators.
"A bank merger of this size is going to be looked at very closely," Steven Sunshine, a former Justice Department antitrust lawyer now in private practice in Washington, told the Associated Press.
Coincidentally, Congress has scheduled hearings in October on the wave of big bank mergers and can be expected to question whether the Chase-Chemical deal hurts consumers.
Since both Chase and Chemical have extensive operations overseas, the merger will vault the combined company into the ranks of the handful of banks with truly global status.
"Now they're definitely a player internationally," said William Siart, chief executive of First Interstate Bancorp, the Los Angeles-based regional banking giant.
Rodney L. Jacobs, an economist who is chief financial officer at San Francisco-based Wells Fargo & Co., said the Chase-Chemical merger makes sense because it "strips capacity" from the banking system.
The excess capacity results not just from the fact that there are 10,000 commercial banks in the country--far more than needed--but because consumers are finding ways to do their banking business with nonbank rivals, Jacobs said.
Chase was under special pressure to take some kind of dramatic action. Last April, New Jersey investor Michael Price announced that he had purchased 6% of the company's stock and began leaning on management to boost its stock price.
That was when Chase was considered a merger candidate. Last month, speculation began to focus more closely on Chemical as a partner because of the obvious overlap between their businesses and the savings that could result.
Chase, named for Abraham Lincoln's Treasury secretary, Salmon P. Chase, has been associated with the Rockefeller name since 1930, when John D. Rockefeller Jr. merged his Equitable Trust with Chase National Bank. From then until 1981, when David Rockefeller retired as chairman, the bank was run by members of the Rockefeller family.
Chemical, founded in 1823, took its name from its origins as a chemical manufacturer that branched into banking.
Before Monday's announcement, the biggest U.S. banking merger would have been one announced earlier this year, a proposed $5.6-billion combination between Charlotte-based First Union Corp. and New Jersey-based First Fidelity Bancorp.
* MERGER FEVER: Several California institutions seen as merger candidates. D1
* MORE COVERAGE: D1, D3