Wow! That's Some BankKelley Holland
For eight years, Walter V. Shipley has taken a week each summer to golf in Scotland or Ireland with Robert E. Allen, CEO of AT&T, and their wives. This year, though, Scotland's verdant links weren't so relaxing. "I'd end up sometimes playing 36 holes of golf, go have a drink, have dinner, play gin rummy, and then get back on the phone" to New York, he says.
Shipley certainly appeared relaxed enough: He shot an 82 at St. Andrew's, his best round there ever. To throw off rumormongers, Shipley stuck to his entire regular vacation schedule, even going on a late August fishing expedition in Canada. All the while, Allen had no idea that his good friend was embroiled in negotiations with Chase Manhattan Corp.'s Thomas G. Labrecque to create the nation's largest bank.
On Aug. 28, Allen got the news. So did the banking world: Shipley would join his Chemical Banking Corp. to venerable Chase, the bank of the Rockefellers. At $297 billion in assets, the new Chase--the bank will keep the older name, even though Chemical clearly will dominate--will dwarf even Citicorp, long the largest U.S. bank. It will have $20 billion in equity to invest where it pleases, a sum exceeded by only three other banks in the world. "Chase will be able to compete in a manner to which few institutions can aspire," Shipley exults.
TOP PLAYER. The numbers are breathtaking. True, the combination would rank just 21st in assets worldwide, behind a host of giant Japanese and European competitors. Yet with more than $163 billion in overall deposits and some 4 million consumer accounts, Chase will be the dominant retail banker in New York. Its $20 billion portfolio of credit-card balances will be fourth in the nation. It will be the global leader in emerging-markets underwriting and trading revenues. And with $191 billion in loan syndications under its belt so far this year, according to Loan Pricing Corp.'s Gold Sheets, the new Chase will be far and away the leader in that booming business, giving it entree into lucrative and multifaceted customer relationships around the world (table).
By combining two operations that compete directly in many markets, moreover, the new Chase expects to cut 12,000 employees and $1.5 billion in annual expenses by the first quarter of 1999. But that's the easy part. The bigger question: Can Shipley engineer lasting revenue gains from a combination unprecedented in its size and diversity, producing an organization that yields profit growth long after the excess costs have been wrung out? "They can get costs down in two years," says John B. McCoy, chairman and CEO of Columbus (Ohio)-based Banc One Corp. and a veteran of more than 100 acquisitions. But "can they get the revenue side pumped up with the right focus?"
The early evidence doesn't point to an easy home run. Shipley and Labrecque both have produced only mediocre long-term results at their institutions and enter into their marriage with some likely cultural barriers and no articulated vision beyond the need to cut costs. The banks' retail operations face a market in revolution, where success increasingly depends less on size than on nimbleness and creativity. Their electronic home-banking effort lags. And their mutual-fund products, though they have performed well, have relatively skimpy sales compared with those of rivals.
More to the point, the banking industry is consolidating around them at a breakneck pace. Well focused rivals, including J.P. Morgan & Co., Banc One, and nonbanks such as Charles Schwab, have formidable expertise in many of the new Chase's businesses. As he leads Chase into the 21st century, Shipley must walk a fine line between maintaining the heft that generates market clout and avoiding bulk that translates into inefficiency, undue risks, and a diffusion of corporate energy.
As CEO of Chemical, Shipley vowed that the bank would be a leader in its chosen markets. But in practice, his bank has a portfolio of a dozen or so businesses--not all of which produced top-tier results. Now, as CEO-designate of the new Chase, Shipley lauds the synergies in the deal and sets lofty financial goals: He says the bank aims to get costs down close to 50% of revenues, low for a bank, and generate a return on equity of 18% or higher. But all Shipley says about long-term goals is that Chase will "plow forward as one of the world's great global banks." He and Labrecque say the bank has some two dozen key businesses, and they plan to make substantial investments in half a dozen of them to give Chase leadership positions.
HUGE THREAT. Shipley exudes confidence about the new Chase. But many banks have suffered when they have tried too hard to diversify broadly--one reason big money-center bank stocks long underperformed those of their regional brethren. Citicorp, most notably, learned its lesson all too well in the 1980s: After a disastrous immersion in commercial real estate that even, temporarily, put Citi on a short leash with its regulators, the bank vowed to change its ways and manage for profitability rather than scale. "In the past, we tended to run the company to occupy space," Chairman and CEO John S. Reed told analysts in February. He vowed that henceforth, "we're going to run the company for performance" and not try to be in every market.
Without question, Chase's doubling will present a formidable competitive threat to many of its wholesale banking competitors. A top London foreign exchange specialist says that a merged Chase "will certainly be a stronger force." It will be tough to beat in the custody business, too. Bank of New York, for example, has been actively snapping up custody operations in a bid to build scale. But, says one bank analyst, "combine [Chase and Chemical's trust and custody operations], and can you picture what that does to Bank of New York? It blows them away." A Bank of New York spokesman says the company "has increasingly become a player in global custody [a segment of the custody business]. This merger does not change that."
In retail banking, though, size is only a starting point. Experts such as Frank Woosley, director of the financial institutions consulting practice at Deloitte & Touche, predicts that 450,000 jobs will disappear from the business in the next decade as banks go electronic. "The only thing that matters about having a big customer base is if you segment it and do a good job with each segment," he says. Adds Tom D. Seip, head of retail brokerage for Charles Schwab & Co.: "Size will make them a tougher competitor. But just better distribution won't make or break them. They have to administer the level and type of services that customers want."
The new Chase would lag behind Citi and others in electronic banking offerings, an area both Shipley and Labrecque admit they need to steer more investment toward. As nontraditional competitors enter the retail fray, Chase could become even more vulnerable. "One of the great dangers of this merger is that they are going to be tremendously inwardly focused for the next three years," says David M. Partridge, director of the financial institutions practice at Towers Perrin. "For Fidelity, Schwab, and Citicorp, this is a wonderful opportunity to take business away from the combined bank." Mutual funds and credit cards might be especially vulnerable.
All told, "I'd have to concede the most attractive part [of the deal] is the economies they're talking about," says John Neff, senior vice-president and managing partner of Boston-based Wellington Management Co. and a holder of 2.6 million shares of Chemical stock. Certainly, those savings will be substantial. Chemical's widely praised 1991 merger with Manufacturers Hanover Corp. ultimately excised 6,200 jobs and $750 million in annual costs.
But integrating the branch systems of Chemical and Manny Hanny took close to two years. A major hurdle was in accommodating the gradual melding of the two corporate cultures. With the new Chase, too, there is the potential for culture clash. While the two CEOs say that the banks' cultures are extraordinarily compatible, others are skeptical. Richard L. Thomas, chairman and CEO of First Chicago Corp., which is using 11 task forces to implement a merger with Detroit's NDB Bancorp Inc., speaks from experience when he says that merging two corporate cultures "is very hard work."
One trouble spot on the horizon could well be the new bank's crowded executive office. Of five top executives, Chemical is supplying three, including, of course, the CEO. Shipley will spend most of his time on retail banking and national consumer products such as credit cards, while Labrecque will focus on global wholesale banking, information services, and risk management. Under the two top officials will be a senior vice-chairman, Chemical's Edward D. Miller, and two vice-chairmen. As if that's not enough complexity, the bank says Labrecque is not the heir apparent. He says he suggested leaving the succession question open, but the resulting uncertainty could set off a disruptive horse race a few years hence.
Then there are possible antitrust problems. With a commanding share in clearly defined local markets such as middle-market lending and branch banking, the new Chase may be forced to divest some of its holdings, according to antitrust attorney and former Justice Dept. Antitrust Div. official Donald J. Baker. He predicts that they are "probably going to sell off some branches--some of which they would have closed anyway," and adds that they may have to sell some foreign offices, too.
Shipley must move fast to get this deal together. Too much time dithering, and he risks losing momentum. "This is not the time for them to sit and twiddle their thumbs," says Thomas H. Hanley, head of bank research at CS First Boston Inc. "The hard decisions have to be made immediately and executed immediately."
Yet combining two organizations of such size may create problems no one has foreseen. Gerard L. Smith, head of the banking group at UBS Securities Inc., is impressed with the merger's potential for savings but also has qualms. "There are risks that are very hard to quantify relative to the control of this bank," he says. Banc One's McCoy, indeed, argues that size can kill if managed improperly: "If you don't know how to drive a race car and it goes 200 miles per hour, you can kill yourself in the first 100 yards," he says.
If Shipley can manage the massive consolidation, the new Chase will have enormous cost savings to propel it forward--$600 million in the first year of the combined companies, an additional $450 million in the second, and a final $450 million in the third. Executives at the two banks are clearly excited, as are investors such as Michael F. Price, who shook up Chase when he disclosed a 6.1% stake in the bank in April. Engineering long-term revenue growth for the biggest bank in America will prove a serious challenge. But if the deal works as planned, Shipley's next vacation ought to be a lot more relaxing.
Banking's New Powerhouse
How the combination of Chase Manhattan and Chemical will rank in its key markets
WORLDWIDE WHOLESALE BANKING
GLOBAL LOAN SYNDICATION
#1 Chemical led this booming market before the merger, doing $160 billion in 1995 deals; Chase is strong in complementary industries
Chemical's focus is on market making; Chase has emphasized customer transactions in growth areas such as emerging markets
#1 GLOBAL CUSTODY
Chase leads in recordkeeping and processing of corporate customers'
WEAK SPOT: UNDERWRITING
Although both banks are picking up steam, neither broke into the top 10 debt underwriters for 1994
U.S. CONSUMER PRODUCTS #1 MORTGAGE LOAN SERVICING
The combined banks have a massive $125 billion servicing portfolio, thanks in part to acquisitions since 1993
#3 MORTGAGE ORIGINATION
Both banks are major players; combined, they will have $20 billion
#4 CREDIT CARDS
Chase had lost ground but is regaining share; Chemical has many
lucrative co-branding deals
WEAK SPOT: MUTUAL FUNDS
Despite strong performance of its Vista funds, Chase has lagged behind most brokers and mutual-fund companies in assets
NEW YORK RETAIL BANKING #1 CONSUMER DEPOSITS
With $32 billion in deposits, the new Chase will have more of the New York retail market than any rival
#1 BRANCH BANKING
Ditto--a combined 480 branches in the New York area far outpaces
#1 MIDDLE-MARKET LENDING
Chemical has long dominated in New York and Long Island; Chase is stronger elsewhere in the region
WEAK SPOT: ELECTRONIC BANKING
Citibank and others are ahead