Morgan falls to the Chase. But why?

This merger is a good fit, say the principals. But the cognoscenti aren't convinced.
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It's been a high-spending week for William Harrison jnr, the hyperactive chief executive of Chase Manhattan. Last weekend he was at Flushing Meadow, handing a cheque for $800,000 (£570,000) to Venus Williams, the winner of the (Chase-sponsored) US Open tennis championship. By Tuesday, he was ready to write a somewhat larger cheque - one for $30.9bn, which was to be handed to shareholders in JP Morgan.

It's been a high-spending week for William Harrison jnr, the hyperactive chief executive of Chase Manhattan. Last weekend he was at Flushing Meadow, handing a cheque for $800,000 (£570,000) to Venus Williams, the winner of the (Chase-sponsored) US Open tennis championship. By Tuesday, he was ready to write a somewhat larger cheque - one for $30.9bn, which was to be handed to shareholders in JP Morgan.

Like Gianlucca Vialli's departure as manager of Chelsea, the Morgan deal was a surprise to outsiders, but not to the cognoscenti.

Wall Street Kremlinologists have been analysing the recent comments of Sandy Warner, the patrician boss of Morgan, and spotting signs that America's most venerable bank was up for sale. "Previously Warner would say: 'JP Morgan has an exciting and viable future as an independent bank', but recently he has only been saying 'JP Morgan has an exciting and viable future', no independence," commented one insider.

And so it came to pass. Morgan announced that it was to sacrifice 140 years of independence for a certain future. Chase, fresh from its overpriced purchase of London-based merchant bank Robert Fleming, was again spreading around the cash and being free with its brand name. The group was originally called Chemical Bank but took Chase's name when it bought one well-known New York bank; it is now being renamed JP Morgan Chase.

But while Morgan's decision to sacrifice its heritage could be predicted, what has taken a few people aback is the purchaser and the price.

Until a decade ago Morgan was Wall Street's top dog. Founded by the ubiquitous legend among financiers, J Pierpont Morgan, it once saved the New York markets from collapse; it also helped found the Federal Reserve system, and has taken over from NM Rothschild the role of the adviser that central banks turn to in their hour of need. In 1990, it was worth more than Citicorp - which was then the world's largest bank - Merrill Lynch or, for that matter, Chase and Chemical combined.

Now Morgan is being sold for virtually the same amount that Citigroup - as Citibank is now known - is paying for Associates First Capital, a Texan consumer finance company which was, until recently, owned by Ford.

And to be bought by Chase must be a terrible ignominy for the blue-blooded bankers of Morgan. Though there has been much made of the historic relationship between J Pierpont Morgan and Chase's founder John D Rockefeller in the early part of the century, those in the know argue that this is a deal based upon the strengths of Chemical Bank, a commercial lender whose history was much less patrician.

Though Mr Warner and Mr Harrison were selling the deal last week as a marriage between a bank with lots of product but not too many clients (Morgan) and a bank with lots of clients but not enough product (Chase), experts were saying that the fit between the banks is far from perfect.

For a start there is a great overlap in both fixed-interest trading and derivatives, which will lead to thousands of job cuts on both Wall Street and in the City. This is an almost inevitable consequence of any of the deals that are being put together in this year's rush to consolidate in investment banking - UBS's purchase of PaineWebber; CSFB buying Donaldson, Lufkin & Jenrette; Goldman Sachs opening its wallet to acquire market maker Spear, Leeds & Kellogg, or indeed Dresdner's proposed purchase of Wasserstein Perella.

But while most of those deals are being struck to fill particular gaps in the product range offered at the purchaser or target, insiders at Morgan are scratching their heads to work out how the Chase deal solves its problems.

"What we need is a broker, pure and simple," one well-placed source commented. "We are great in equity derivatives, but are no good in equities trading. We have massive gaps in M&A [mergers and acquisitions] and Chase has nothing to fill them."

It is believed that Peter Hancock - the well-regarded chief financial officer of Morgan who resigned ahead of the deal - was actually proposing that the bank should be a buyer, not a seller, with Lehman Brothers or Bear Stearns considered to be ripe targets.

The buzz in Wall Street is that Merrill Lynch, miffed by Chase's pre-emptive strike, might just be tempted into making a hostile rival offer for Morgan. Such aggression would even surprise the toughest of New York traders, a breed for whom "vicious" is seen as a compliment.

The other potential suitor - though one which probably would balk at going hostile - would be Morgan Stanley, the broker that was forced to split from JP Morgan in 1933, when the Glass-Steagall Act came into force preventing lenders from trading shares.

Glass-Steagall was repealed a decade ago and ever since then there has been hopeful speculation that the two Morgans will once again become one. But it seems that Morgan Stanley, an investment bank which prides itself on persuading clients to be bold, has missed its chance.

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