Global Policy Forum

By Brad Skillman

Chase Manhattan Corp. has agreed to acquire J.P. Morgan & Co. for about $36 billion in stock, creating a union between two of the oldest and most prestigious financial firms in the United States.

The boards of both companies have approved the deal announced Wednesday to create J.P. Morgan Chase & Co., the companies said in a statement. J.P. Morgan Chase will have about $660 billion in assets, rivaling Bank of America Corp., with $679 billion in assets, as the second-largest bank holding company in the United States. It will still trail Citigroup, which had $791 billion as of June 30.

Analysts saw a merger of Chase and J.P. Morgan as a good match because the banking powerhouses' array of services complement each other. Each share of J.P. Morgan will be exchanged for 3.7 shares of Chase, or about $207 a share - a 16 percent premium above Tuesday's closing stock price for J.P. Morgan. The companies will also exchange preferred shares.

J.P. Morgan chairman and chief executive Douglas Warner will become chairman of the new company. Chase chairman William Harrison will become its president and chief executive. "It's a good potential fit because there are quite a lot of areas where the two are complementary," said Ron Mandle, a banking analyst at Sanford C. Bernstein & Co.

For example, J.P. Morgan has a strong foothold in the investment banking arena, especially in the lucrative area of underwriting initial public stock offerings. Chase, meanwhile, set out a year ago to build up its investment banking business by purchasing San Francisco-based Hambrecht & Quist, a boutique firm that specialized in the IPOs of technology companies.

If the merger is completed, J.P. Morgan's broader expertise would be blended with the newly named Chase H&Q's expertise with technology companies, Mandle noted. In addition, J.P. Morgan's inroads in Europe would be beneficial to Chase, which does not have a strong presence there.

"This merger is a breakthrough for J.P. Morgan and Chase that will position the new firm as a global powerhouse," Warner said in a statement. "With a formidable client franchise and a potent array of capabilities to address the full spectrum of clients' needs, we see exceptional prospects for sustained growth and profitability."

Under the new structure, investment banking, wealth management, institutional asset management and private equity services will operate under the J.P. Morgan name. The retail business will be known as Chase and include credit card, mortgage banking and regional consumer banking in the New York area and Texas.

The deal, which must still be approved by shareholders and regulators, will combine the nation's third- and fifth-largest bank holding companies. Chase Manhattan had $396 billion in assets as of June 30; J.P. Morgan is fifth with $266.3 billion.

Rumors had been swirling through the markets in recent days that J.P. Morgan, one of the most prestigious banks in business history and the namesake of the legendary banker J. Pierpont Morgan, was looking for a buyer. The speculation has helped push shares of J.P. Morgan up more than 68 percent since the end of June.

J.P. Morgan shares rose $16.13 to $185.44 in trading Tuesday on the New York Stock Exchange as reports a deal was imminent began to circulate. Shares of Chase Manhattan fell $4.88 to $52.50, also on the NYSE.

The deal is the latest instance of consolidation in the financial services industry. Last month Credit Sues Group agreed to pay $11.5 billion in cash and stock for Donaldson, Lufkin & Jenrette Inc. Earlier this summer, Swiss banking giant UBS AG agreed to pay $11 billion for the Paine Webber Group Inc.

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