Thursday, January 15, 2004

J.P. Morgan acquires Bank One In the second largest US bank merger ever, New York-based J.P. Morgan Chase announced an agreement to acquire Bank One of Chicago. J.P. Morgan I the third-largest US banking company; Bank One is #5. The new company will be the #2 bank in the US, second only to Citigroup, and only by a few billion dollars in assets. This merger follows in the wake of the last autumn's Bank of America-Fleet merger, which had the Bank of America leapfrog over J.P. Morgan, which has now turned the tables. Many think that the two mergers will trigger a rush of megamergers comparable to, or even greater than, those of 1998-2002. In that period Bank One acquired First Chicago Bank (1998), and J.P. Morgan acquired Chase Manhattan. As it is now, Citigroup, J.P. Morgan, and Bank of America far outdistance any of their rivals, any of which may be ripe for takeover. In the banking world, as elsewhere, large size has led to increased profitability. As an article in the Wall Street Journal ("J.P. Morgan Chase to Buy Bank One", 1/15/2004) points out: Being huge offers significant advantages. For starters, large clients like being able to have all their financial work -- loans, underwriting, and mergers and acquisitions -- handled in one place, because this gives them leverage to reduce their costs. There is also the matter of being better able to serve ever-larger multinational clients. Also, experts are of the opinion that the hot area in banking is now in consumer credit, rather than corporate banking. Bank One's large retail position was therefore very attractive: Scale matters most of all in the burgeoning business of consumer finance. Citigroup and a handful of competitors have proved that lending to consumers -- via credit cards, mortgages or automobile financing -- can turn a lumbering institution into a growth business. The new company will doubtless look for new mergers once united, and Citigroup may try to counter to maintain its leading position. A strong part of this urge to merge is the egos of the principals; for example, in this deal Bank One's CEO James Dimon (who will be heir apparent at the new group) long worked with Citigroup where he was like heir until he had a falling out with Citigroup CEO Sanford Weill. Among the targets discussed in another WSJ article ("Which Bank Will be Next?", 1/15/2004) as the next to fall are other localized banks for whose so-so results is causing investor pressure for a selling out to a bigger bank. They include: Detroit-based Comerica Inc., KeyCorp in Cleveland, U.S. Bancorp of Minneapolis, SunTrust Banks Inc., in Atlanta, National City Corp. of Cleveland, Sovereign Bancorp Inc. of Wyomissing, Pa., Union Planters Corp. of Memphis, Tenn., and SouthTrust Corp. of Birmingham, Ala. Also vulnerable may be freestanding credit card companies such Capital One Financial Corp., Providian Financial Corp., which are vulnerable simply because they are isolated. Another acquisition in the banking industry is no surprise, but the magnitude of the deal took many off guard. The concentration in the banking industry and the de-localization of banking give growing power to a very few companies. Unfortunately, that concentration makes the economy depend more and more on the performance (and the probity) of a handful of individuals. In view of the recent meltdowns of Parmalat, Enron, and WorldCom, along with the ongoing mutual fund scandals, that amalgamation of power in a few companies can have major -- bad -- national consequences. And the political clout of these few banks is guaranteed to lead to less, rather than more, government oversight.          Top US banks by assets Bank Assets (billions) Citigroup $1,209 J.P. Morgan/Bank One $1,083 Bank of America/Fleet $924 Wells Fargo $304 Wachovia $388 U.S. Bancorp $189 ABN AMRO $147 SunTrust Banks $125 HBSC North America $122 National City $121 Source:WSJ Top US bank mergers Year Acqurer Acquiree Value (in billions) 1998 Travelers Group Citicorp $72 1998 Nationsbank BankAmerica $62 2004 JP Morgan Chase Bank One $58 2003 Bank of America FleetBoston Financial $43 1998 Norwest Wells Fargo Capital $34 2000 Chase Manhattan J.P. Morgan $33 1998 Banc One First Chicago NBD $30 2000 Firstar US Bancorp $21 1997 First Union Core States Financial $17 1999 Fleet Financial Bank Boston $16 1997 NationsBank Barnet Banks $15 Source:WSJ 11:26:58 AM

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