Chemical Pins Hopes on Fee Services
The new Chemical Banking Corp. has a chance to dominate the market for fee-based corporate services if it plays its consolidation cards right, consultants and Wall Street analysts said.
In many ways, the combination of the two wholesale service businesses - Manufacturers Hanover Corp.'s GeoServe subsidiary and Chemical's financial services group - is a microcosm of the overall merger.
Both companies believe that, when they have merged, their operating services business will have a critical mass of customers, giving the combined company a strong business stake in a competitive environment, according to consultants who worked on the merger plans.
$100 Million Expense Cut
Officials at Hanover told analysts at a briefing this week they anticipate cutting at least $100 million in expenses from the combined wholesale businesses in the next three years.
The cost reduction would not only drive up profits from these fee-based businesses but also, in the estimate of some observers, could add $1 billion to the new institution's market capitalization by boosting its stock price.
For that to happen, the new bank must integrate operations, personnel, and resources in a bid to become a top-tier player in a variety of businesses, including cash management, funds transfer, and trust services.
Focus on Operating Services
In these markets, however, the merger of two middle-tier players is quite complex, given the relative equality of the two operations and the need to invest heavily in systems upgrading to catch up with the market leaders.
"Given the clout of the combined entity, in terms of customer relationships and critical scale, they are likely to place a great deal of strategic importance on their operating services," said Melville Blake, a consultant at the Mac Group, a unit of Gemini Consulting based in Boston.
But bankers at both institutions expect considerable benefits from the merged operating services units. Officials at the banks said the combined operating services units would place first or second in 20 of 30 wholesale business lines.
While Citicorp may remain out of reach in many fee-based services, other top players such as Chase Manhattan Corp. and Bankers Trust New York Corp. could find themselves threatened.
Analysts said they believe the strong performance of these transaction services will escalate. "Both those units are still in the early phases of strong growth potential," said James McDermott, an analyst at Keefe, Bruyette & Woods Inc. A revenue growth rate of 20% to 25% is likely, he said.
"These are businesses where scale counts, because it can enable lower costs, which allows more technology investments, and moreover, customers are looking for committed major players," said James McCormick, president of First Manhattan Consulting Group.
Both Chemical and Hanover have highlighted their fee-based processing businesses to Wall Street analysts. Both are among perhaps a dozen banks that run cash management and other processing businesses for a profit. Neither company, however, had an unassailable position in the marketplace or superior technology, according to rival bankers and analysts.
The two companies have had a different focus in cash management, the lead operating service. Hanover has concentrated on Fortune 500 companies; Chemical tried to serve middle-market customers. Still, the two companies realize they have considerable overlap in technology, support services, and products.
Hanover formed GeoServe three years ago as an umbrella organization for its back-office processing businesses. GeoServe generated more than $440 million in revenues in 1990. Ronald I. Mandle of Sanford C. Bernstein & Co. said he expected GeoServe to earn about $30 million in 1991, 10% of the parent's income.
As an indication of the perceived strengths of GeoServe, Edward O. Miller, Hanover vice chairman, will be vice chairman of the new Chemical Banking Corp., where he will oversee operating services. Chemical does not separately report earnings for the financial services group, although analysts believe the figure would be less than GeoServe's.
If the new company can generate growth in these businesses of 7% to 9% while cutting costs, the benefits would be sizable. The resulting income could boost return on equity and the new Chemical's stock price.