Commentary: A Made-To-Order Banking Megamerger

Bank One will supply J.P. Morgan Chase with the top talent it needed

In May, J.P. Morgan Chase & Co. Chairman and CEO William Harrison threw investors a curve ball. The man who plunked down $34 billion in 2000 to buy J.P. Morgan and its investment-banking smarts suddenly told them he wanted to buy a big retail bank as soon as his company's stock price improved. Eight months later, with J.P. Morgan's shares up 40%, he got his wish.

On Jan. 14, his bank agreed to buy Chicago-based Bank One Corp. (ONE ) for $58 billion in stock -- a 14% premium -- to create a financial institution second in size only to behemoth Citigroup (C ). The combined company will have $1.1 trillion in assets, more than 2,000 branches in 17 states, and capabilities in everything from plain-vanilla lending to asset management.

It's a deal that both banks needed badly. Insiders say Harrison, 60, has been under pressure for months to find a successor with star power. Going outside was necessary because no one in the bank was considered up to snuff. And Jamie Dimon, 47, CEO of Bank One, fills the bill admirably. The highflier has been raring to get back into the big leagues ever since he was fired as president and heir apparent at Citigroup four years ago after a bust-up with Chairman Sandy Weill. Now, Dimon is slated to take over as J.P. Morgan (JPM ) CEO from Harrison in 2006.

The financial-services industry is littered with failed mergers, but this marriage has a good chance of working. Harrison and Dimon have complementary strengths. Harrison is savvy at cutting deals but not so good at making them work. The Chase Manhattan-J.P. Morgan merger floundered after investment banking hit the wall in 2000 and top J.P. Morgan managers left the combined bank in droves.

By contrast, Dimon has proven himself a master manager of mergers in disarray. The charismatic exec, who speaks in a hurried, sometimes-broken syntax, arrived at Bank One when it was sinking under the collective weight of dozens of mergers, with 87 different bank charters and 7 different deposit systems. In barely three years, he turned a $544 million loss into an expected $3.4 billion in earnings for 2003.

In the process, Dimon assembled a crackerjack team of former top managers from Citigroup to run Bank One. All five of them have key jobs on the new company's 27-member executive committee. Heidi G. Miller, CFO at Bank One, becomes head of treasury at J.P. Morgan. "The most important part of this deal is that J.P. Morgan gains somebody with a strong reputation to vault the company into the true super league," says Reilly Tierney, financial-services analyst at investment bank Fox-Pitt, Kelton.

Harrison and Dimon have also solved a mutual problem. In banking these days, it's eat or be eaten. And even though Harrison and Dimon had managed to stop the rot at each of their companies, analysts were concerned about both of their futures. "You're decreasing J.P. Morgan's earnings volatility and increasing Bank One's chances to grow," says Brock Vandervliet, financial-services analyst at Lehman Brothers Holdings Inc. (LEH ). J.P. Morgan gets a chance to go head to head with Citigroup in everything from credit cards to retail banking. And Bank One picks up investment-banking capabilities just as mergers and stock offerings are picking up and retail banking for wealthy individuals is expanding.

Ironically, even though Harrison and Dimon have created a retail giant, some analysts think Dimon's addition may be just what the bank needs to turn Harrison's vision of an investment-banking powerhouse into a reality. A former investment banker himself, Dimon should be able to attract rainmakers. "People are pretty excited," says a senior banker inside J.P. Morgan.

Perhaps that's why, even though technically J.P. Morgan has bought Bank One, it is already being viewed as if it will be run by Dimon, who'll be president and COO, though he insists "Bill is the boss." Still, that should be a warning to the new bank's rivals. After Weill fired him in 2000, Dimon took up boxing to work out his anger. "We do hope to give Citi a little bit of a run for its money," says Dimon. And now he has the heavyweight punch of a $131 billion company behind him.

By Emily Thornton and Joseph Weber

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