Chemical Banking Corp. and Manufacturers Hanover Corp. unveiled a stock-for-stock merger yesterday that will forge the two New York money center institutions into the nation's number two bank.

The merger, the largest in U.S. banking history, will transform two middling banks into a well-capitalized organization and boost its credit standing, analysts said.

But the deal, driven by a $1.25 billion common stock offering and $650 million per year in expected savings, will cost at least 6,200 jobs as the surviving institution, to be called Chemical Banking Corp., weeds out overlapping positions.

About 95% of those cuts will come in New York City, home of the banks' securities operations, including their public finance units and primary dealerships.

"The driving force here is to rationalize the organization and take some of the excess capacity out of the system and have a more profitable organization on an ongoing basis," said John F. McGillicuddy, Manufacturers' chief executive officer.

Mr. McGillicuddy, who will become chairman of the new Chemical, said at a New York City press conference that it was too early to say where cuts might come, but added the bank does not intend to exit any of its existing business lines.

Most of the layoffs -- which will hit about 15% of the banks' work force -- will come at 70 bank branch offices that are likely to be closed, he said.

Officials in Chemical's municipal department said they had not yet heard what kinds of personnel and structural changes to expect.

But if history is any guide, the consolidation, targeted for completion by yearend, could result in significant staff reductions.

When E.F. Hutton & Co. agreed to be acquired by Shearson Lehman Brothers Holding Inc. in 1987, the company slashed the size of its municipal securities department, laying off bankers and bond professionals mostly from Hutton's ranks.

And Kemper Securities Holding Co. last year eliminated redundant national trading desks and national public finance operations at several regional dealers after acquiring them during the late 1980s.

Based on volume of annual municipal business, Chemical Securities Inc. is the stronger of the two companies, managing $6.3 billion of new issue business so far this year, according to Securities Data Co./Bond Buyer. That placed them 18th among managing underwriters nationwide.

Manufacturers Hanover Securities Corp. ranked 24th, with $5.2 billion in 1991.

If the two firms' total volume were combined beginning in January 1991, the new firm would have ranked 11th so far this year, just behind Morgan Stanley & Co.

Mr. McGillicuddy said the banks had talked with Gerald Corrigan, president of the New York Federal Reserve Bank, and believe the deal will pass muster with banking regulators.

A spokesman at the New York Fed would not comment on the merger, but said an organization can have only one primary dealership.

David Green, head of Chemical's dealership, said he could not comment on how the merger might affect the government trading operations. And a Manufacturers employee said they were told no decisions about lower-level staff had been made. "The only jobs decided on right now are the top 13 positions," he said.

A merger between two money center commercial banks has been long-rumored in the financial markets, where consolidation has become an industry buzzword.

Such "in-market" consolidation is likely to be the first phase of the commercial banks' retrenchment, followed later by inter-market mergers, analysts said.

"It's the first of the mega-mergers, a trend we view as positive for the industry," said Anne McDermott, bank analyst at PaineWebber Inc. "It seems to be a true merger of equals."

Said one capital markets specialist: "This will act as a catalyst and will be an important moment in the U.S. banking scene. Some of those companies may combine once again, and you might see the new Chemical Banking Corp. two years from now saying, "I want to get into Chicago, I want to get into San Francisco.'"

Mr. McGillicuddy said bank officials hope the the merger will restore "the organization's credibility in terms of the rating agencies and analysts."

The bank expects its ratings to rise to double-A over the next four years, he said.

Bond raters uniformly praised the move. Fitch investors Service and Moody's Investors Service said the are reviewing Chemical and Manufacturers for upgrades, while Standard & Poor's Corp. affirmed the banks' ratings but changed its outlook to positive from stable.

Manufacturers' senior debt is rated Baa3 by Moody's, BBB-plus by Standard & Poor's and A-minus by Fitch. Chemical's senior debt is rated Baa3 by Moody's and BBB-plus by Standard & Poor's and Fitch.

"You're going to have a much stronger institution, equity will be increased substantially, so I think the surviving name will be a much more formidable competitor," said Fred Debussey, vice president at Fitch.

Even with a $550 million charge to cover restructuring costs, the planned common stock offering will boost the new Chemical's capital ratios by nearly one percentage point, with its Tier 1 ratio rising to more than 6%.

Chemical has not named underwriters for the offering. Goldman, Sachs & Co. and Morgan Stanley & Co. are advising Chemical and Manufacturers on the merger.

"The credit people are excited that you're getting these big banks creating earnings through costs savings so they can take a much lower risk asset profile," said William J. Downes, vice president at Keefe Bruyette & Woods Inc., which specializes in bank securities.

"There are a number of banks out there that would like to do something along these lines," he said. "What's going to be tough to find is another situation where you have this ideal set of circumstances."

In the secondary market, bond buyers bid up Manufacturers and Chemical issues by as much as 50 basis points in active trading, even as the broad market idled.

The impact of the merger on the tax-exempt letter of credit market would be relatively slight.

About 20 municipal issues totaling $250 million are outstanding, according to Moody's, and both rating agencies gave positive outlooks to the credit ratings.

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