Angell Criticizes Chemical Deal, Draws Rebuke

Chemical Banking Corp. and Manufacturers Hanover Corp. responded angrily on Wednesday to a Federal Reserve governor who expressed doubts about the banks' reliance on cost reductions to justify their merger.

The governor, Wayne Angell, was the lone dissenter when the Fed voted 4 to 1 last week to approve the merger, which is scheduled to be completed by yearend.

Sticking Point

Mr. Angell said his concerns about the cost reductions -- and about their ultimate impact on profitability -- would be assuaged if the banks raise additional capital before the merger. "Then the question concerning efficiency and profits would be a corporate risk and of lesser concern," he wrote in his dissent.

"With all due respect to Governor Angell, his comment about cost savings and revenues flies in the face of overwhelming support from bank stock analysts" that savings of $650 million will be achieved, Chemical and Manufacturers Hanover said in a prepared statement.

A spokesman for Manufacturers declined to discuss the matter beyond what was in the one-sentence statement. The new Chemical has planned a $1.25 billion stock offering early next year to boost capital.

In its approval vote last week, the Federal Reserve Board endorsed the plan to raise the equity capital shortly after the merger is completed.

The board called on the two banks to avoid trimming capital when they combine, noting that a one-time restructuring charge will actually reduce capital initially. The board majority said raising new capital "promptly" would be satisfactory.

But Governor Angell demurred. "Bank holding companies seeking to engage in significant expansion that is dependent on raising new capital should raise the needed capital prior to the expansion," his written dissent said.

Other experts lined up behind the existing capital-raising plan.

"I think it makes the most sense for them to raise the capital after the merger is completed and they can point to their game plan for cost savings," said Allerton Smith, an analyst at First Boston Corp.

Mr. Smith said Chemical would find investors more receptive to a stock offering once the merger is accomplished.

"In my opinion, the capital markets would be more averse to buying the equity before the merger is completed," he said.

Another Vote of Confidence

Similarly, Frank DeSantis, an analyst at Donaldson, Lufkin & Jenrette, said he is confident that the new Chemical Banking Corp.'s stock offering will go through - before or after the merger.

"In hindsight, the thing to have done would have been to issue stock right after the announcement and take advantage of the euphoria" and the high stock price, said Mr. DeSantis. But "I can't conceive of something being so terrible that it wouldn't allow them to issue the stock at some price."

PHOTO : Wayne Angell, Raise capital, then expand

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