Whether J.P. Morgan Chase & Co. will keep or sell its Texas operations has been a perennial topic for the rumor mill since a predecessor firm bought the ailing Texas Commerce Bank in the late 1980s.
Rumors that Morgan Chase will sell have started to pop up again, and despite unequivocal denials by the company, some observers are giving them credence.
Analysts use the following logic in their "what-if" scenario: The weak economy has wreaked havoc on the company's lending, underwriting, trading, and private equity businesses, and with earnings sharply lower than in previous years and the stock price depressed, now may be the time to look at selling some valuable assets.
J.P. Morgan Chase Texas has $31.7 billion of deposits, 138 branches, and the biggest deposit share in a state that is attracting the attention of outsiders. Assuming it could get a deposit premium comparable to some other recent branch network sales - in the range of 10% to 20% - Morgan Chase could be looking at a windfall of $3 billion to $6 billion, analysts said.
Not so fast. Donald H. Layton, a vice chairman and the head of retail at Morgan Chase, told an audience of investors in Boston last month that, even though there were challenges in Texas, Morgan Chase was inclined to keep and perhaps build its operations there. The company has been "interested in doing small acquisitions" for retail and consumer businesses in its existing markets, including New York, New Jersey, Connecticut, and Texas, he said.
Company insiders, including Hal Pote, the head of branch banking, said there is no such talk of a sale. "We are absolutely not interested in selling," he said in a telephone interview Thursday. "In fact, we are opening more new branches in Texas next year than we have in the last two years. We have a good position there, and there is plenty of room to grow."
The rumors appear to be supported by a notion that Morgan Chase needs capital, which the company denies.
Adding weight to the latest rumor is a wave of defections in the senior ranks of Morgan Chase's Texas bank since last year, particularly in the last six months. Many of these executives have gone to a Houston-based rival, Southwest Bancorporation of Texas Inc.
Bankers in Texas even have a joke about all the defections - they claim there are no senior Morgan Chase executives left in Houston who belong to the ritzy River Oaks Country Club, where all the local business gets done over power lunches. (Actually, Alan Buckwalter 3d, the non-executive chairman of Morgan Chase in Texas, is a member.)
"It wouldn't surprise me" if Morgan Chase were to sell, said Bill Strunk, a commercial banking consultant at the Houston-based Strunk & Associates LP. "They want to build in the New York area, and they could direct these resources there. I've thought Texas was an odd duck-fit from day one."
But several factors would complicate a sale. To increase efficiency, Morgan Chase has been integrating its Texas businesses with their New York counterparts. That would make lopping off the Texas bank more difficult and costly.
"I think you could say they made the opposite decision when they consolidated the businesses more directly," said Diane Glossman, an analyst at UBS Warburg. "That's not to say it's impossible, but they have finally started to say in public that they recognize the value of retail" and want to build it.
As for making acquisitions, Morgan Chase's currency has weakened this year. Its shares have dropped 32% since January, though they have risen 61% from their low of $15.26 in October. Analysts said the company could raise funds for an acquisition in the red-hot New York market by selling a business elsewhere.
"If they need to raise capital, a good way of doing it is selling assets that are very valuable," said Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets.
Should Morgan Chase decide to take the plunge, there would be a long list of bidders, Citigroup Inc. among them, analysts said.
In a research note last month, Richard Strauss of Goldman Sachs Group Inc. wrote that Todd Thomson, Citi's chief financial officer, had expressed some interest in a Lone Star acquisition.
"The company feels it misses a presence in only one key area, which is Texas - a hole that needs to be plugged." Mr. Strauss wrote in the note, in which he recounted a conversation with Mr. Thomson. "The state meets two of management's principal criteria: First, there is plenty of wealth, and second, Texas would constitute a nice complement to Citi's newly gained Hispanic presence."
Mr. Strauss would not elaborate, nor would a spokeswoman for Citi.
Morgan Chase has 12.38% of the state's deposits, according to the latest data from the Federal Deposit Insurance Corp. Bank of America Corp. comes in second, with 459 branches in Texas and $31.5 billion of deposits, a 12.29% share. Wells Fargo & Co., Bank One Corp., Compass Bancshares Inc., and Comerica Inc. are the other out-of-state companies among the top 10 in Texas market share.
In addition to Southwest, the biggest Texas-based banks in deposit share are Cullen/Frost Bankers Inc. of San Antonio, International Bancshares Corp. of Laredo, and Texas Regional Bancshares Inc. of McAllen.
Outsiders have been itching to build in Texas. Regions Financial Corp. of Birmingham, Ala., has completed four deals there in the last two years. SouthTrust Corp., of Birmingham, has done five.
The biggest acquisition of a Texas bank or thrift in the last two years was Washington Mutual Inc.'s $1.5 billion acquisition of the Houston-based Bank United Corp., announced in August 2000. Citi paid $31 billion for the Dallas-based consumer lender Associates First Capital Corp. That deal was announced in September 2000.
Texas is seen as attractive because of its pockets of urban affluence and its rich mine of middle-market businesses, facets that were not lost on Chemical Banking Corp., a Morgan Chase predecessor, when it scooped up Texas Commerce in 1987.
Morgan Chase no longer reports separate financial results for the operation, so it is more difficult to assess how business has been going there. Staff cuts made last year, particularly among middle-market bankers, sparked the defections, analysts said. Just last month the company reorganized its middle-market banking group, which had been split between Texas and New York, into a single national unit and appointed the Texas-based Todd Maclin to run it.
Frank Lourenso, who has run middle-market banking since 1990, is stepping down from day-to-day management to focus on client development. Mr. Maclin will concentrate on a national expansion of the business.
Eight years ago the company opened offices in Boston, Cleveland, and Pennsylvania. Two years ago it opened offices in San Francisco and Los Angeles, and this year it expanded the staff there. The company has also opened an office in Chicago, and it plans to open its next one in Florida - in Miami or Palm Beach - Mr. Lourenso said in a recent interview.
Mr. Maclin, who will continue to live in Texas but travel frequently to New York, is relinquishing his job as the investment banking head in the region, though he will continue to be the company's senior officer there.
