Morgan-Chase Merger Is Proof That Size Matters

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Wednesday's announcement of a mega-merger between J. P. Morgan and Chase Manhattan signals much more than the union of two of the greatest names in American banking.

The pair's $660 billion in combined assets is designed to catapult the new company, to be known as J. P. Morgan Chase & Co., into an elite group of American mega-banks in competition with rivals in Europe as well as Japan. "The U.S. has the world's largest capital markets, and dollars are used everywhere," explains Ron Mandle, an analyst with Sanford C. Bernstein & Co. "This deal helps consolidate America's role at the epicenter of global finance."

In banking, size matters. Big international clients increasingly demand that their lenders handle any deal, in any industry, anywhere in the world. But only a few have the capital or expertise to buy and sell companies, float stocks and bonds, and trade in dozens of world markets at the same time. But those that do stand to reap huge profits. Which is why the last nine months have seen a juggernaut of billion-dollar acquisitions as Chase, Morgan Stanley Dean Witter, Goldman Sachs and other U.S. firms increase their global presence.

Congress helped set off the deal-making avalanche last year by doing away with the Glass-Steagall Act, a Depression-era law that made it illegal for commercial banks to underwrite stocks, bonds and insurance. That removed obstacles to the merger of Travelers Group, an insurance and brokerage behemoth, with Citicorp, one of the nation's largest banking companies.

U.S. competitors, as well as some huge European financial service companies, scrambled to catch up. Credit Suisse First Boston, which already had a major U.S. presence, earlier this month announced it would buy Donaldson, Lufkin & Jenrette. And the Union Bank of Switzerland is trying to acquire Paine Webber. Deutsche Bank, Germany's largest private financial institution, not long ago purchased Bankers Trust in New York and the Baltimore-based Alex. Brown investment bank, but failed to pull off a merger with its longtime domestic rival, Dresdner Bank. Still intent on growth, Dresdner is set to buy Wasserstein Perella, another U.S. deal-maker, for some $1.3 billion.

Japan is also awash in mergers, but with a difference. Instead of trying to compete with U.S. and European banks, the country's financial institutions are combining to avoid bankruptcy following a decade of recession and bad loans. Simple survival was the driving force behind the recent merger of Fuji Bank, Dai-Ichi Kangyo and the Industrial Bank of Japan, three laggard giants whose combined assets of $1.2 trillion make it the largest financial-services company in the world.

For J. P. Morgan, prestige and its position as one of the biggest asset managers in the U.S. wasn't good enough. The firm was already losing out on business to bigger rivals, and CEO Sandy Warner had warned employees — who own 30 percent of the stock — that the bank could face a takeover if revenues did not pick up. The merger is designed to solve that problem by combining Chase's huge client base with Morgan's investment expertise. "This is a story about growth," says Warner. "It's really that simple."

More mergers are surely on the way. Lehman Bros. and Bear Stearns, both independent New York investment banks, currently lack the capital to compete with rivals that are suddenly much larger. Even the giant Merrill Lynch could soon be forced into a deal — Merrill already has a $1 billion joint venture focused on newly affluent individual investors with Britain's HSBC, a huge financial holding company; if the two expand their partnership, the global reach of American banking could extend even further.