Chase Is Under Siege AgainKelley Holland
When Thomas G. Labrecque took the reins at Chase Manhattan Corp. in October, 1990, the bank was in turmoil. Losses on commercial real estate were bludgeoning its loan portfolio and a looming recession was putting pressure on its credit-card business. Worse, there were chronic rumors that the once proud bank built by the Rockefellers wouldn't survive on its own.
Fast forward to the present, and it's deja vu. Once again, Chase is under siege. Sure, the bank is healthier, and earnings are up, but profitability remains lackluster. Chase's return on assets for the first half of 1995 was a slim 0.77%. And nagging takeover rumors have resurfaced. Almost every day, there is yet another report of an impending merger with Chemical Banking Corp. Fanning the speculation is the unsettled climate created by activist investor Michael F. Price, who disclosed on Apr. 5 that he had acquired a 6.1% stake, making him Chase's largest shareholder.
CLIMBING. Price is fresh from successfully agitating for the sale of Michigan National Corp. to National Australia Bank Ltd., announced in February. Since Price's arrival, Chase's stock has climbed 41%, to $53.63, on the expectation that he would force major changes at Chase, including a possible sale.
For now, Labrecque would appear to be betting that cost-cutting will placate Price. He has retained a consultant with a take-no-prisoners approach to expenses and pledged to reduce annual costs by at least $400 million. Through a spokesman, Labrecque declined comment for this story. But analysts and other shareholders reckon that bolder moves, such as the sale of one or more key assets, may be inevitable. Chase's credit-card business alone could fetch as much as $3 billion. Cost-cutting is "just the beginning," says Raymond Garea, a vice-president at Price's Mutual Series Fund.
An even bigger question is whether Labrecque can persuade shareholders that Chase should survive as an independent institution if a takeover offer comes along. The CEO has gotten generally positive reviews for returning the bank to profitability and moving to break down Chase's Balkanized culture. He has also developed bold plans for cross-border finance, credit cards, and everything in between. But until Price surfaced, Chase's stock was only a mediocre performer. If a possible merger partner emerged, investors might not want to stick with management.
Chase, in short, is in a race against time. An important deadline is next April, the time for Chase's annual meeting, when Price could propose a slate of dissident directors. But activist shareholders could force a move even earlier.
Price's interest in the bank was based on a belief that, as he said in a Securities & Exchange Commission filing, the "value of all the businesses operated by [Chase] far exceeds the current market price of [its] stock." Price added that Chase "should seriously consider taking steps to realize the inherent values in its businesses...to maximize shareholder value."
Price has been meeting regularly with Labrecque and other Chase executives--a practice the bank follows with all its major shareholders, a Chase spokesman says. He is agitating for Chase to do more than just cut costs. Garea describes cost-cutting as merely "a first step." Other institutional investors say Price has presented Chase with a list of the types of steps he would like to see, including the sale of such profitable businesses as credit cards and mortgage finance. Garea says they have not presented an explicit list.
One reason Price is so formidable is that he has something of a following after his success with Michigan National. "Mike Price is a bulldog, and he has got a ton of money," says one institutional shareholder. Garea says Price has talked to other big investors in Chase about their views of the bank, and "by and large, I think people are supportive" of Price.
RETREAT. The disclosure of Price's stake ignited a flurry of takeover speculation. In mid-April, NationsBank Corp. expressed interest in Chase, although it backed off after Chase said it wasn't interested. A market source says Chase also talked to a number of foreign banks about a combination.
In July, Ronald Mandle, an analyst at Sanford C. Bernstein & Co., published a report saying that a merger of Chase and Chemical Bank could pare some $1.1 billion from annual expenses. He also predicted it would have unprecedented leadership in syndicated lending, mortgage banking, and credit cards.
Mandle said he had no knowledge of any takeover discussions, but rumors of Chase-Chemical talks are rife. One rumor had the two banks' CEOs meeting for dinner at a restaurant in New Jersey; another had them lunching at the Waldorf-Astoria hotel; and another predicted a press conference on July 28 to announce a deal and Labrecque's resignation. Both banks declined to comment on rumors as a matter of policy.
So far, Chase has responded to the pressure from Price and the market mainly by vowing to cut costs. After promising to eliminate some $400 million in expenses, Chase retained Chandrika Tandon of Tandon Capital Associates, to help slash spending. Tandon has followed her usual custom of enlisting bank employees full-time to help identify cost reductions. The 100 full-time and 400 part-time Tandonistas, as bank insiders call them, began their work on July 5, and implementation of their ideas is slated for January, 1996.
Arjun K. Mathrani, Chase's chief financial officer, says the bank has not changed its strategy in the wake of Price's investment but is simply moving ahead in disciplined fashion on its own longstanding agenda. Hiring Tandon, he says, was just part of the long-term plan to improve productivity. "We've been getting more focused and efficient," he says, "but the theme has been consistent."
Consistency may not be enough, though. The so-so performance of Chase's stock has been frustrating investors for years. It is only now, they say, with Price in the picture, that management is taking the kinds of steps that have been necessary for some time. Chase, says one institutional investor, is "much more proactive in trying to dislodge shareholder value than they were pre-Price."
Chase has other serious problems, notably the loss of some of its most talented executives. Since April, Chase has lost its risk-management chief, several top traders, the president of its mortgage bank, and more. Several of the departing executives were responsible for huge portions of Chase's revenues over the past several years.
Some institutional investors have been predicting that a dramatic move of some sort is inevitable. "It's going to be real difficult for them, if they can't keep the stock up, to say no to a takeover offer," warns one. A consultant who has worked with the bank thinks a sale of Chase's retail-banking businesses could work well, leaving them with a good-size corporate-banking and securities-processing franchise.
NEW BREED? Nowadays, it's sounding as if the dramatic move might be a sale of the entire bank. Trading in Chase's shares and options was unusually heavy over the last two weeks in July, suggesting significant turnover in the shareholder base. David S. Berry, director of research at Keefe, Bruyette & Woods Inc., says that while he does not believe a Chase merger or takeover is in the offing, merger talk "attracts a different kind of shareholder," one less inclined to stick with management if a premium bid surfaces.
Despite all the speculation, Chase insiders say the bank is determined to remain independent. The bank may get at least a short reprieve. Chemical Bank, the potential buyer everyone is currently focused on, announced a $1.2 billion stock buyback program in July--not a move a bank usually undertakes in advance of a big merger or acquisition. In the meantime, Chase's Mathrani insists that the bank can make the necessary improvements on its own. "We will deliver," he says. "It's the only way to beat the skeptics." In its battle with the skeptics, however, Chase Manhattan seems seriously outnumbered.