Chemical and Hanover Agree to Merge; $650 Million in Annual Savings Forecast

The long-awaited megamerger of two New York banks was announced Monday morning as Chemical Banking Corp. and Manufacturers Hanover Corp. said they had agreed to a stock swap valued at $2.3 billion.

The deal will create the second-largest banking company in the United States, a $135 billion-asset powerhouse in both corporate and consumer banking.

The merger, the largest ever in U.S. banking, will give the combined company 660 branches in New York, New Jersey, and Texas, although 70 are expected to be closed.

The merged company, which will be called Chemical Banking Corp., is projected to cut $650 million in annual expenses by 1994. As part of that, the combined work force of 45,000 will be cut by 14%, or 6,200 employees.

A 14% Cut in Costs

Total operating costs will also be cut by 14%, which is similar to the savings reaped by the Bank of New York Co.'s acquisition of Irving Bank Corp.

The huge projected cost savings were a driving force behind the merger, said John McGillicuddy, chairman of Manufacturers, who is slated to be chairman of the new institution.

The stock market reacted positively to the news. Chemical's shares rose $2.75, to $26.50, while Manufacturers' stock soared $6, to $29.25. Both companies' bonds also rallied on the news. Based on the value of Chemical's stock after the close Monday, the transaction has a market value of $2.265 billion.

Bank stocks in general rose as the prospect of other bank mergers got a boost.

The combined company will take a $550 million charge at the time of the merger to pay for restructuring costs, much of which is real estate in New York city. The combined entity will likely close about 70 branches in the New York region.

"Welcome to the Walt and John show," Mr. McGillicuddy said, smiling in presenting himself and Walter V. Shipley, chairman of Chemical. Mr. Shipley will be president and chief operating officer until he becomes chairman Jan. 1, 1994.

Thomas S. Johnson, currently Hanover's president and the heir apparent to Mr. McGillicuddy, is resigning effective at the end of the month, after losing the top spot to Mr. Shipley.

The companies made a joint announcement early Monday morning after signing a merger agreement. Serious discussions began 60 days ago, although both executives said they had spoken two years ago about the possibility of merging.

Cultures Found Compatible

"The cultural fits of the two institutions, and the cultural fits of John McGillicuddy and Walter Shipley, our long friendship with one another, gave us the confidence that we had capacity to pull the largest merger in banking history in the country," said Mr. Shipley.

Under the terms of the agreement, 1.14 shares of Chemical stock will be exchanged for one share of Manufacturers Hanover Corp. In addition, 0.03% of Chemical's stock will be exchanged for each share of class B stock. The class B shares will be convertible after March 1992.

A Shift in Dividends

The dividend payout will be set at $1.20 a share annually, above Chemical Bank's current payout of $1 a share annually and below Hanover's $1.88-a-share payout schedule. Peter Tobin, chief financial officer at Manufacturers Hanover, who will retain the same position at the new Chemical, said the company believes it could have a return on equity of 15% to 16% by 1994.

Equity capital would stand at $6.02 billion after the merger, but the combined entity will sell $1.25 billion in new shares after the merger takes place. Executives said the combined entity is expected to achieve stronger capital levels through equity generation and the new stock offering. By 1994, Tier 1 capital as a share of risk-based assets is expected to stand at 6.5%, compared to a pro forma figure of 5.6%.

Currently, Chemical has a Tier 1 ratio of 5.04%, while Hanover has a ratio of 6.20%. If for some unforeseen reason Chemical cannot raise the full $1.25 billion, Mr. McGillicuddy said he has received assurances from investment banks that it could raise at least $550 to cover the restructuring costs.

Based on cost savings and new stock, Mr. McGillicuddy said he hoped the new Chemical would be double-A after merger. Standard & Poor's Corp. confirmed the credit ratings of both companies. Chemical's and Hanover's subordinated debt are both currently rated triple-B. Moody's Investors Service Inc. placed the debt on credit watch with positive implications.

Mr. Shipley said in an interview with the American Banker that the new Chemical would achieve $200 million in cost savings by the end of 1992, $450 million by the end of 1993, and $650 million by the end of the third year.

"Beginning tomorrow, we will set in place a process and procedure so that by merger date, we will have substantially made all the critical decisions that will have to be made," said Mr. Shipley.

Revenue Gains Expected

"We expect many gains in revenue from the new company's strengthened financial position," said Mr. Tobin.

An integral part of the merger will be the $650 million in operating expenses expected to be reduced by yearend 1994.

Roughly $200 million will come from the corporate and institutional businesses. About $275 million will come from regional banks; operating and financial services will account for $100 million; and $75 million from corporate overhead. Excluding New Jersey and Texas, the expense base will be cut by 17%, Mr. Tobin said. Total cost are expected to be cut by 14%.

The bulk of the $550 million charge will come from severance packages and real estate in New York city. Roughly $250 million of the restructuring charge will come from real estate in New York.

The company's headquarters will be in Manufacturer's present facilities. The lease on Chemical Banking Corp. headquarters expires in 1994.

The new entity will keep the Chemical Banking Corp. name, partly because "you have to make practical decisions" in the words of Mr. McGillicuddy. Also a spokesman for Chemical said it was partly related to the class B shares of Chemical's stock.

Lawyers and investors said the concept of in-market mergers had convinced many banking executives to consider this type of transactions. Said Allen Isaacson, partner at Fried Frank Harris, Shriver & Jacobson, "It obviously reflects the benefit of in-market mergers."

But investors also note that cost efficiencies are not easy to achieve.

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