On April 13 the routine at Chase Manhattan Corp.'s global investment bank was unchanged: Vice chairman James B. Lee Jr. led his top managers into a sunrise meeting.
But the topic that day was far from usual. BankAmerica Corp. and NationsBank Corp. had just announced plans to merge, forming a megabank that would surpass Chase as the nation's largest.
Mr. Lee labeled the deal a non-threat to Chase's corporate business. The new company, he said, would mostly be a coast-to-coast consumer bank. "I am not that worried," he said in a memo.
He then ordered an immediate sales offensive to win the merged banks' corporate clients.
Mr. Lee's reaction-deep confidence in Chase's market position combined with a sharp sense of urgency-epitomizes the company's thinking about the sweeping changes under way in banking. Chase, they say, is operating from a position of great strength-but remains vigilant.
This edgy self-assurance permeates Chase's global investment bank, which includes syndicated lending, high-yield bond underwriting, and merger and acquisition advisory.
Mr. Lee says he is betting that large, merging institutions willbe confused for a while. Mean-while, he is looking to his own group's main strength-syndicated lending, where Chase has long reigned as No. 1-as the basis for a global expansion in corporate banking.
Though acknowledging at least one hole in the strategy-an equity underwriting business-Mr. Lee and others at Chase insist they are better positioned than their rivals in the race for corporate banking leadership.
"Our global wholesale bank is more profitable than all of J.P. Morgan and Goldman Sachs," said Walter V. Shipley, chairman and chief executive officer.
He added: "The traditional investment banks - Goldman, Merrill, Morgan Stanley - are way behind on syndicated finance. The significance of them being behind in that is even greater than the significance of our being behind in equities, and yet everyone focuses on equities."
Last year Chase's wholesale unit earned $4.85 billion pretax, 70% of Chase's total income. That lagged the $6.45 billion earned by comparable businesses of the proposed Citigroup-but it was clearly ahead of J.P. Morgan's total pretax earnings of $2.15 billion and Goldman's reported total of $3.01 billion.
In its own view, at least, Chase already has assembled the essential ingredients of success. Those are "scale in terms of a lot of capital, a lot of clients, and a lot of products," said William B. Harrison, chief of wholesale lending and vice chairman of the board. "That's the entry fee into the business."
New King of the Hill
Still, Chase clearly faces mounting challenges as its rivals bulk up. Indeed, the bank that financed America's biggest blue chips-General Motors Corp., International Business Machines Corp., and Time Warner Inc. among them-is about to be knocked from its position as the No. 1 bank to the largest U.S. corporations.
A presentation by Mr. Harrison after the NationsBank-BankAmerica announcement showed that Chase is lead bank to 29% of the 1,174 biggest U.S. companies, while the new BofA would be top banker to 31%.
Meanwhile, the proposed Citigroup, through its Salomon Smith Barney Inc. subsidiary, would dwarf Chase in key investment banking categories: mergers and acquisitions advisory, high-yield and investment-grade debt underwriting, and equity underwriting.
Even Chase's vaunted leadership in syndicated lending is under attack. Chase still ranks first by dollar volume, with a market share of 23.3% in the first half with 237 deals worth $118 billion. But BankAmerica, with 335 deals worth $74.3 billion, would rank a close second.
When NationsBank and BankAmerica announced their deal, Mr. Lee told his staff that syndicated lending "is the only area where we need to make sure we focus our attention."
Need for Equities Expertise
In interviews, Mr. Lee and other bank executives said they plan to use corporate contacts made through lending to win more M&A and debt- underwriting assignments.
Can that strategy work?
"Absolutely," said Lawrence Cohn, a banking analyst at Ryan Beck & Co. and a former Chase investment banker. "But the keystone to every company's balance sheet is equities."
As a financial services provider "you don't even have to be big in equities, you just have to be reasonably good."
The need for an equity underwriting capability is not lost on Chase, which has done little with the equity powers it has had since 1993. After weeks of speculation, Chase executives now acknowledge they have talked to brokerages, including Merrill Lynch, about a possible merger. And when Mr. Harrison spoke to analysts this summer, equity underwriting topped the bank's list of priorities.
In fact, analysts estimate that Chase has recently accelerated its timetable for building the business to six to 24 months from three to five years.
"The view is that they can't just keep waiting," Mr. Cohn said. "They've got to get started."
For one thing, the five firms that Chase considers its largest global banking competitors are all top 10 players in equities. And the new BankAmerica, which Chase includes among its next five largest rivals, would own NationsBank's Montgomery Securities unit, an investment banking boutique known for its initial public offering expertise.
"I would be very surprised if Chase didn't do something inside of three years, if not sooner" to bolster its equity effort, said Ronald I. Mandle, an analyst with Sanford C. Bernstein & Co.
Without buying an equities shop, Chase would have "to deliver earnings growth each quarter" to bring its stock valuations in line with that of its peers, Mr. Mandle said. Chase's stock was trading at a price-to-earnings ratio of 15.53% on June 30, while the top 15 banks traded at an average of 17.06%.
In a 58-page research report published in April, Mr. Mandle analyzed the impact four potential acquisitions-Merrill Lynch & Co., Morgan Stanley, Dean Witter & Co., Donaldson, Lufkin & Jenrette Inc., and PaineWebber Inc.- would have on Chase's bottom line. He concluded that any of these deals would boost the bank's stock, as long as Chase did not pay a substantial purchase premium.
But he and other analysts say that today the price for such firms has risen sharply and that Chase risks buying a firm at a price that would weaken the value of its shares.
Mr. Harrison acknowledges the problem."One of the overhangs of the stock is that (investors worry) we'll do a merger that doesn't make sense."
But he and other Chase executives bristle at the suggestion that they missed the equities boat. They argue that their peers not only lack key business segments, but face merger consolidation issues.
"Chase caught the first boat," Mr. Harrison said. "We've got all this stuff behind us."
With or without a deal, the bank is hoping to maintain its double-digit earnings growth through global expansion. Already, Chase has 27 trading floors overseas. And its investment bank is hoping to sell its high-yield and leveraged loan products to foreign customers.
"The speed of entrepreneurial behavior around the world requires U.S. financial technology to happen," Mr. Lee said.
But Chase isn't alone. As Travelers Group's recent purchase of Japan's Nikko Securities Co. shows, Citigroup isn't relaxing its global effort.
Likewise, Thomas W. Bunn, who would head the new BankAmerica's corporate finance division, said he promises to build NationsBanc Montgomery Securities into a "major global player." The unit already has a strong presence in Latin America and Asia and plans to bring BankAmerica's entire wholesale banking product line to foreign financial markets "immediately," he said.
History of Entering Lines
Mr. Lee and Mr. Harrison say their record of growth speaks for itself. Since 1994 Chase has built three businesses nearly from scratch. Barely on the charts in 1993, Chase is now No. 6 in high-yield debt, No. 8 in investment-grade debt, and No. 18 in merger and acquisition advisory.
Chase's other corporate finance businesses are formidable too. Its venture capital group, Chase Capital Partners, had revenues of $738 million in 1997 and is the largest private equity fund among commercial banks. Chase's asset management and private banking divisions combined for $1.5 billion in revenues.
The bank's huge trading business, under Donald H. Layton, its global markets chief, has been the bank's best-kept secret in terms of profitability. Trading contributed 49% return on equity last year and $2.03 billion of the bank's revenues, nearly double its revenue in 1993, with a broad mix of foreign exchange, arbitrage, derivatives, and bond deals.
"I think the market is beginning to believe that we really are a growth story," Mr. Harrison said, "And that's what will get us back to comparable" stock price.
Ryan Beck's Mr. Cohn acknowledges Chase's success in building strong franchises. But he adds that success in debt markets is not hard to come by.
"It's easy to penetrate and it's been a good time to do it." he said. "But there comes a time in every cycle that what the customer needs is equity."