$58
Billion Deal to Unite 2 Giants of U.S. Banking
By ANDREW ROSS SORKIN
J. P. Morgan
Chase agreed
yesterday to acquire Bank One for $58 billion in stock in a deal that
would realign the competitive landscape for banks and create a
true rival to Citigroup.
The transaction would unite the investment and commercial banking
strength of J. P. Morgan Chase, the product of a merger of Chase
Manhattan and J. P Morgan in 2001, with Bank One's much larger
consumer banking operations. The combined company would have
2,300 branches in 17 states. With the addition of Bank One, based
in Chicago, J. P. Morgan, the nation's second-largest bank, would
also become an even bigger issuer of credit cards. The combined
company would have $1.1 trillion in assets, compared with nearly
$1.2 trillion for Citigroup.
The deal is a Wall Street homecoming of sorts - and possibly a
form of redemption - for Bank One's chief executive, James L.
Dimon, who was at one time the heir apparent to Citigroup's
chairman, Sanford I. Weill. Mr. Dimon, 47, who is known as Jamie,
was ousted as president of Citigroup in 1998 after an internal
battle but will now become J. P. Morgan's president and chief
operating officer. He is to take over as chief executive in two
years from J. P. Morgan's leader, William B. Harrison, settling
the persistent question of succession.
The merger is expected to result in the elimination of about
10,000 jobs as part of J. P. Morgan's effort to save $2.2 billion
over three years. The cuts will be concentrated in retail
banking, and the greatest number may be in the New York area
because the retail banking operation is to be run from Bank One's
base in Chicago. The retail operation includes consumer banking,
small-business banking and consumer lending. J. P. Morgan's
headquarters will remain in New York, where the bank has laid off
hundreds of investment bankers over the last several years.
For retail customers, there will be few immediate changes. The
banks' branches do not overlap, and they said they would maintain
both brand names pending a review. Bank One has 1,800 branches,
mostly in the Midwest and the South. J. P. Morgan has 530
branches, which operate under the Chase name, mostly in the New
York area and Texas.
The transaction is contingent on approval from both the Justice
Department and the Federal Reserve, though legal experts said
they did not expect the merger to be blocked.
The deal is the latest in a recent wave of mergers in an industry
that has been gradually consolidating for years, and some
analysts suggest it will presage more. In October, Bank of
America, the nation's third-largest bank, agreed to acquire
FleetBoston Financial, the seventh largest, for about $48 billion.
Both deals appear to be a bet on the continuing strength of the
consumer banking business.
The merger comes as J. P. Morgan is facing increasing competition
for its retail branches in the New York City area, and may be
overly reliant on corporate customers, said Richard Bove, an
independent bank analyst with Hoefer & Arnett.
Mr. Harrison, the J. P. Morgan chief, said in an interview
yesterday: "We didn't have the right mix. There was way too
much volatility in earnings. We were so heavily weighted on the
wholesale side," referring to the bank's corporate
customers. "This makes us a more balanced firm."
The merger comes not long after J. P. Morgan's earnings and stock
price recovered from a downturn in its investment banking
business, a downturn that until recently made it worth less than
Bank One. Mr. Harrison, who referred to the last several years as
"choppy," said he wanted to take advantage of the
bank's stability. The expansion, he said, will make it better
able to compete.
Steven Wharton, an analyst at Loomis Sayles & Company and an
owner of J. P. Morgan shares, said, "J. P. Morgan wanted to
be more like Citi, and this helps get them there." Still,
Mr. Wharton said that he was frustrated that Mr. Harrison did not
give J. P. Morgan longer to benefit from the recovery in its
corporate banking operations.
Mr. Harrison defended making another deal just as his own
business was recovering. "Both of us have been through a lot
of mergers before," he said. "Mergers are hard. But we
know how to do them."
Brock Vandervliet, an analyst at Lehman Brothers who predicted
the deal last week after rumors began to surface, applauded the
deal. "I think Bill Harrison did the right thing," he
said.
The deal is also a bit of redemption for Mr. Harrison, who many
Wall Street figures had predicted would be forced out of a job
after merging Chase with J. P. Morgan just as the stock market
was cresting. The company became the subject of speculation about
being taken over itself at the time. To compound problems, it
became embroiled in the Enron scandal and was also forced to
write off hundreds of millions of dollars in bad loans.
With this deal, Mr. Harrison appears to be controlling his own
destiny. "I'm a happy camper," he said.
Mr. Dimon, the Bank One chief, rejected the notion that he took
the deal as a way to return to his Wall Street roots and take on
Citigroup.
"I wasn't
looking to come back to New York," he said. But he did say
that he and Mr. Harrison had discussed a merger off and on over
several years. The negotiations began in earnest in November,
both men said. Mr. Harrsion said J. P. Morgan was not ready for a
deal any earlier.
"We couldn't even begin to entertain a merger," he
said, explaining that the company was still reeling from
integrating J. P. Morgan and Chase. Likewise, Mr. Dimon said Bank
One was not ready for a deal any earlier, either. "I'm not
sure we were going to attract a merger partner a few years
ago," he said, referring to some problems the bank was
trying to rectify since he was hired in 2000, like troubles
related to the purchase of the First USA credit card company.
Under the terms of the deal, shareholders of Bank One will
receive 1.32 shares of J. P. Morgan - or about $51.77 - for each
of their shares. That is a 14 percent premium over Bank One's
closing price yesterday of $45.22. The deal was announced after
the stock market closed.
Some analysts suggested that Bank One might be selling for too
little, considering that FleetBoston was able to command a 40
percent premium, though Bank of America, was initially criticized
for overpaying.
Mr. Dimon said he was not concerned with the premium because he
thought that "the fit is so compelling" and that the
combined company "will do better than even if we sold out
for a bigger premium."
Shares in Bank One jumped 10 percent in heavy after-hours
activity after closing up 61 cents. Shares of J. P. Morgan were
down 4 percent in after-hours trading after closing at $39.22, up
32 cents.
Although the deal is structured as a takeover of Bank One by J.
P. Morgan, the combined company's board will have eight members
from each bank.. The banks said the transaction was expected to
contribute to earnings in 2005. Merger-related costs are expected
to be $3 billion before taxes.
J. P. Morgan Chase's financial adviser on the transaction was J.
P. Morgan Securities Inc.; its legal adviser was Simpson Thacher
& Bartlett. Bank One's financial adviser on the transaction
was Lazard Freres & Company, and its legal adviser was
Wachtell, Lipton, Rosen & Katz.