The Chase To Become A Financial Supermarket
Financial stocks are soaring on Wall Street, and it seems as though there's a merger a day. The latest, on Sept. 13, links Chase Manhattan Corp. with white-shoe firm J.P. Morgan & Co. to form a giant with $670 billion in assets. The $36 billion deal is by far Chase's most ambitious push into the rarefied world of investment banking, and comes hard on the heels of the $10 billion bid by Switzerland's UBS for broker PaineWebber and Credit Suisse First Boston's $11.5 billion deal to buy broker Donaldson, Lufkin & Jenrette.
The megadeals are pairing investment banks with commercial banks, brokerages, and market makers--breaking old walls that used to keep them firmly apart. But the bigger these behemoths get, the worse off their corporate clients may be.
Like the merger wave of the mid-1990s that created mammoth consumer banks, gaining critical mass is the name of the game. The new giants want to be all things to all customers, providing everything from corporate debt to equity underwriting to 401(k) retirement plans and cash management. "As other companies consolidate and grow, they're going to want to use companies like us that can provide a full range of services--if we're good at them," says Chase Chief Executive William B. Harrison Jr. "No one has a broader, richer deeper client base."
Harrison may be right. Chase gives J.P. Morgan an entree with 5,000 potential new corporate clients. In turn, the investment bank strengthens Chase's global clout, especially in Europe and Asia, and adds to its asset-management operations by bringing in top-drawer private clients and a mutual fund group, American Century Investments.
But do corporate customers really want the one-stop financial shopping they're being offered? Few are ever asked. Talk to corporate brass, and you'll get skeptical views on the merits of an all-in-one financial relationship. "History tells us that one-stop shopping does not work," says Gerard D. Cronin, financial services analyst with McDonald Investments Inc. in Boston. "It's not because the companies don't work together. It's because the customers don't like it."
"TRUST FACTOR." Midsize companies in particular are complaining that this consolidation wave is ushering in higher fees, less competition, and poor service. "What CFOs want is a long-lasting, meaningful relationship with people in these banks--a trust factor," says Kelly Hicks, chief financial officer of Pumatech, a San Jose (Calif.) software company. "With all the [mergers and acquisitions] activity that's happening, the continuity is not there."
He should know. Pumatech got startup funding from Chase Capital Partners. Then BT Alex. Brown and Deutsche Morgan Grenfell underwrote its December, 1996, public offering. But, following mergers, the investment banks dropped Pumatech's coverage after analysts left. Now it gets commercial loans from Silicon Valley Bancshares and Imperial Bancorp and farms out its cash-management business to the seven banks that make markets in its stock, including U.S. Bancorp Piper Jaffray and FleetBoston's Robertson Stephens.
Even if the bankers that a company deals with don't leave, problems can still arise. David Blohm, CEO of SmarterKids.com Inc., an online toy store with an educational emphasis, originally used Hambrecht & Quist to advise it on mergers and alliances. When Chase took over H&Q, he could tap into a wider client base for deals, but the relationship got muddier. Blohm says he found his bankers were fighting turf wars over who got to handle which client. "It gets harder to harness the question of who's in charge," Blohm says.
Ironically, the very combinations designed to bind corporate clients tightly by serving their every need may be driving the customers into multiple banking relationships--just for peace of mind. With the pace of change in banking now as fast as in the dot-com world, "You really need the luxury and protection of more than one bank relationship," says John Bawf, CFO of EStamp Corp. The Mountain View (Calif.) Internet stamp dealer was taken public by Donaldson, Lufkin & Jenrette, but now relies on nearby Imperial Bancorp for the bulk of its banking.
AVOIDING CONFUSION. For some companies, the dwindling numbers of big banks means they can lose deals. Medtronic Inc., an acquisitive Fridley (Minn.) medical products company, had mostly used Goldman, Sachs Group Inc. as its investment banker. But in one potential deal Goldman was representing Medtronic's target, so it was forced to use another bank--and the deal fell through. "You get conflicts of interest," says Gary L. Ellis, Medtronics' treasurer and controller. Bankers who've been through a merger mill themselves are sympathetic. "It gets a little complicated when there's an overlap in coverage or credit," says Alex Mason, a onetime Bankers Trust executive who watched the bank acquire Alex. Brown and then be bought by Deutsche Bank.
To their credit, Chase and J.P. Morgan tried to address some of the problems before announcing their deal. For example, to avoid any confusion about who was in charge, J.P Morgan CEO Douglas A. "Sandy" Warner and Harrison filled the top 40 executive spots before their announcement.
The consequences of these mega-mergers are far from being all bad for Corporate America. In fact, access to banks' huge technology resources may be a big plus for companies. As with online brokers and the revolution the Internet has caused in financial services, technology will continue to equalize prices, the availability of proprietary research, and other services.
Corporations would be best served if these expanding financial conglomerates keep each division autonomous, says McDonald's Cronin, forming "mini-bureaucracies instead of one centrally managed company."
However these financial giants structure themselves eventually, they have a major job. Companies have to be convinced that however big their banks become, they still put their customers first.