Troubles Of A Model Merger

Joseph G. Sponholz, Chemical Bank's affable chief financial officer, isn't kidding when he calls himself "the man in the middle." As implementation manager for the planned merger of Chemical Banking Corp. and Manufacturers Hanover Corp., Sponholz, 47, is trying to turn what started with a secret handshake last spring between two rival chairmen into what they have described as a $135 billion marriage of equals that will produce a mammoth institution second in size only to Citicorp. "We're trying to take the best of both worlds," says Sponholz, fresh from his umpteenth meeting with Chemical Chairman Walter V. Shipley and Manny Hanny Chairman John F. McGillicuddy.

After shareholders from both banks gave an overwhelming go-ahead on Nov. 1, plenty of people are watching to see whether Sponholz can deliver. Several other big banks have announced megamergers since Chemical and Manny Hanny revealed their engagement last July. But bankers, analysts, and regulators coast to coast repeatedly point to the Park Avenue deal as the one that could set the tone for other combinations among hard-pressed banks. Success could open the floodgates for more such "in-market" mergers on amicable terms similar to Chemical's and Manny Hanny's. But failure could dash hopes that these combinations will produce the massive cost cuts and economies of scale needed to get the banking system through the deleveraged 1990s.

The evidence to date, based on extensive interviews with officials of the two banks, is mixed. Nothing has developed that would sabotage the merger. But neither is the deal turning out to be an easy fit. Numerous glitches and hangups have cropped up, such as incompatible accounting systems.

EAGER FOR HARMONY. Many of the problems arise because mergers of equals, in which no partner rules the roost, are inherently tricky. When Wells Fargo & Co. acquired troubled Crocker National Corp. in a distress sale five years ago, there was no question who was boss. Wells executives simply imposed their will, often harshly, when conflicts arose. But insiders say the chairmen of Chemical and Manny Hanny seem so eager to preserve harmony that they have yet to make some tough moves, such as applying a sharp knife to the banks' upper-management ranks.

To be sure, officials of the two banks were under no illusions that the deal would be a snap. Chemical Vice-Chairman William B. Harrison Jr. says it will initially produce "two very destabilized organizations." Adds McGillicuddy: "We knew it was going to be complicated when we started. But neither Walter nor I knew how complicated." Unless these complications are resolved, the new bank may have trouble realizing anything

Yet as the Dec. 31 merger deadline nears, subtle and not-so-subtle differences are emerging. None is likely to keep the new Chemical -- minus the Manny Hanny name -- from opening for business as scheduled on Jan. 2. In fact, executives at both banks are already anticipating selling at least $1.25 billion in common stock next spring to give their new bank a firmer capital base.

'RELIGIOUS ISSUE.' The problems that have developed run from the cosmic to the trivial -- such as the cost to certify checks or whether to maintain Chemical's offer of $5 to any customer forced to wait in line for more than seven minutes. Many of these small matters have already been resolved -- the "5 for 7" offer, for example, will survive. But clearing up the cosmic issues is another matter altogether.

Account-handling in the branches is one example. Manny Hanny uses a pair of aging systems for business and consumer accounts at its New York branches, while Chemical has a more modern system in use in its branches in New York, New Jersey, and Texas. Chemical's system probably would work perfectly well for everyone after the merger. But Manny Hanny has just spent four years and $80 million on a plan to automate branches and improve customer service.

Predictably, Manny Hanny execs are fighting hard to make theirs the new standard, even though that would mean installing an unproven system just when postmerger shock will be at its most intense. But Chemical's technology team isn't surrendering. "Manny Hanny's people are wedded to their system, and Chemical's are wedded to theirs," says Miller. "It's a religious issue."

Miller, who along with Harrison will become a vice-chairman at the new Chemical, expects to pick one over the other by yearend, which will cost some jobs. But that will be inevitable. Indeed, Manny Hanny and Chemical desperately need to slash costs. At the outset, the new bank will still bear many of the burdens that drove its partners to the altar in the first place.

The banks will share some $6.5 billion in shaky loans to leveraged buyouts, real estate developers, and Latin American governments. And despite the layoffs of 9,600 workers since the mid-1980s -- plus an additional 2,350 through Manny Hanny's sale of its CIT finance unit -- the two still suffer from excessive overhead. Standard & Poor's Corp. analyst Tanya Azarchs estimates that noninterest expenses currently eat up a hefty 68% of Chemical's and Manny Hanny's combined revenues -- a full 12 percentage points higher than Ohio-based consumer powerhouse Banc One Corp.

To remedy this, Shipley and McGillicuddy plan to close 70 to 80 branches and cut some 6,500 employees, or 14% of the combined banks' work force, in an effort to save as much as $700 million a year by 1993. Some of those closings and cuts have already been announced, and many other firings are expected "very quickly," perhaps by December, says Vice-Chairman Harrison.

But some observers insist that even more forceful steps are needed -- and they wonder whether either McGillicuddy or Shipley are willing to take them. They note that despite promises of drastic job reductions among the new Chemical's rank and file, upper management on both sides seems to have escaped the budget-cutters' ax. To some degree, that reflects a desire to keep current departments functioning until the merger becomes reality. Still, the bank will probably start 1992 with two top-level trading executives, a passel of senior middle-market lenders, and so on. "It's one of theirs, one of ours, one of theirs, one of ours," says a longtime Manny Hanny banker.

Some insiders predict that the biggest cuts may not go through until McGillicuddy retires as Chemical's chairman at the end of 1993. He will then hand the reins to Shipley, who won't have to share power. "They've hammered together some sort of a structure to work this out," says the Manny Hanny exec. "In two years, Chemical will rule."

SICKLY STOCK. Although the Chemical-Manny Hanny merger announcement met with near-universal praise from stockbrokers, the banks' stock prices have languished since then. As a result, some analysts, pointing to the sharp savings that Bank of New York and Wells achieved after taking over local competitors, are urging McGillicuddy and Shipley to get even tougher. "What the markets want is Attila the Hun," says Keefe, Bruyette & Woods Inc. President James J. McDermott Jr.

What the markets get may be less than they would like. But McGillicuddy, Shipley, and their team insist that they will squeeze out every unnecessary dollar of overhead they can. "We have done so much," says Sponholz. "Can we do more? The answer is yes." There will be a heck of a lot of explaining to do if the answer is anything else.

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