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The Wall Street banks are playing poker and a merger is on the cards

News Analysis: Talk of a Chase-Merrill deal has been dismissed. But insiders await the next move
IF THERE is one thing Wall Street investment bankers love to talk about it is deals. These days they seem to be spending almost as much time talking about mergers between themselves as they are about those between clients. "Everyone is talking to everyone," said one investment banker yesterday.

Talk of a deal in the offing between Chase Manhattan and Merrill Lynch was given fresh impetus last week by advance publicity for an article from Forbes, the American business magazine, only to be killed off by none other than David Komansky, the chief executive officer of Merrill Lynch, who told a regular pre-results briefing of Wall Street stock analysts on Friday that the firm regularly examines merger proposals and has not seen anything recently that "creates value."

Most read that as a straightforward denial. But the more sophisticated Wall Street insiders reckon that may not be the end of the story. One said: "These guys are consummate poker players."

It is no secret on Wall Street that Chase, which at one time has been linked with practically every investment bank on the Street, not to mention a couple of the Europeans too, is still thirsting for a deal. Insiders say that Chase went to Merrill last summer before the bail-out of the now infamous hedge fund Long-Term Capital Management. The debacle not only cost the firm dear - last autumn it declared its first loss-making quarter this decade - but Merrill's senior executives, it emerged, had ploughed some of their own pensions money into LTCM.

Sources say that Merrill at the time said OK - provided itcould run Chase's entire wholesale corporate banking business. Not surprisingly Chase's response was a polite no. "They were incredibly arrogant," complains one investment banker who knew that situation well.

Investment bankers reckon that Chase may have got the sense that it is now time for Merrill to eat some humble pie. The rumour mill has it that Merrill needs to do something to recover momentum after last autumn's mauling. Talk in the bond markets is that while Goldman's and Deutsche's fixed income desks have been coining it in during the first quarter, Merrill has been left behind.

Such talk is dismissed by Michael Marks, the former head of Smith New Court and now head of Merrill's European operations, who says that the firm "is delighted by its performance" in the first quarter.

Rivals say, nevertheless, that while Morgan Stanley and Goldman have also raked it in on the merger and acquisition front over the past few months, Merrill has been lagging behind. Merrill also sustained another hit the other week when Tom Gahan, head of its lucrative leverage finance business, quit to join rival Deutsche Bank.

Mr Komansky's denials have been ambiguous, to say the least. "I feel strongly that we are not paid as a management team, we're paid to create value," he said to analysts last Friday. According to analysts who attended the briefing, he said the top management takes a look every quarter atevery merger proposition and had recently gone through the process again.

Over the past few days, the Internet chat rooms, where staff of both banks swap gossip, have been abuzz with stories, the most intriguing of which talks of proposals for merging Merrill's and Chase's investment banking operations, which would be spun out of the core retail and commercial bank.

The guys at Chase, for their part, feel that Merrill is not the only game in town. Senior partners at Goldman Sachs, which is limbering up to go public over the next six weeks, have talked openly about a merger as part of the rationale for ditching their 130-year-old partnership status. Some have discussed in partners' meetings a what-if scenario where a deal between Chase and Morgan Stanley could be gate-crashed by Goldman with a sweeter stock offering.

Walter Shipley, Chase's chairman and chief executive, has reportedly been around the top three bulge-bracket firms offering the chief executive officer's job as a sweetener to get one of them to bite.

Up to now, the assumption has been that the consolidation between the investment banks is very much a second tier affair. Deals like the $10bn takeover of Bankers Trust by Deutsche or the SG Paribas deal take out some capacity at the margin, but the top three have been able to glide along way above the fray.

One thing Chase is clear about, say those who know the bank well from inside, is that its top brass have already decided there is no point making a play for a second-tier investment bank. "We could have looked at an Alex.Brown or a PaineWebber, but that kind of deal does not really get you anywhere," said one well-placed source.

There is a sense out there that investment bankers are making hay while the sun shines and the Dow soars, but if the Dow slides and business dries up, some of those who have been busily hiring in anticipation of good times continuing to roll are going to be left exposed.

Both Lehman and Donaldson Lufkin Jenrette have been frantically hiring teams in an effort to build a strong European foothold. Some see the recent outbreak of hostile deals like the BNP bid for Societe General and Paribas or Olivetti's move on Telecom Italia as a sign that Anglo-Saxon capitalism is breaking out in Europe and that demand for Anglo-Saxon-style investment banking expertise is about to take off.

The bulge-bracket big three agree that Europe is the next battleground but are determined to get there first. Goldmans, too, has made little secret of its desire to use some of its cash pile to go on a hiring spree and acquire some more bulk. They will fight tooth and nail to ensure that the oligopoly that dominates Wall Street will emerge triumphant in Europe too. If the price is a merger between the big five, no doubt they will pay that too.