Operational Problems to Delay Chemical's Merger of Lead Banks
The merger of the lead banks of Chemical Banking Corp. and Manufacturers Hanover Corp. will not be completed until the second half of next year because of operational problems, according to bank insiders and investment banking sources.
There was also speculation among investment bankers that the merger of the holding companies themselves might be delayed past the Dec. 31 target because of concern by regulators about loan quality and capital levels. But the two companies firmly denied that the marriage was off schedule.
Examiners Viewed as Uneasy
The companies would not confirm or deny the reports about snags in combining their flagship banks - Manufacturers Hanover Trust Co. and Chemical Bank. But well-placed sources said Monday that information about the delay would be disclosed in a filing to the Securities and Exchange Commission.
Several people inside and outside the banks said that mid-level examiners from the New York State banking department and the Federal Deposit Insurance Corp. are increasingly nervous about approving a merger in light of new problem credits put on Manufacturer's Hanover's watch list.
If the New York commercial real estate market continues to decline, these sources said, the regulators fear that the banks will be inadequately capitalized.
The banks, which plan to use the Chemical name after the planned merger, have announced plans to raise $1.25 billion in equity through a common stock offering. But one capital markets source on Wall Street said the companies may have to raise an additional $250 million, further diluting the value of the banks' shares.
An FDIC official in New York declined to comment on the status of the merger. A New York State banking department spokeswoman denied any new-found problems with either bank's loan portfolios.
John Meyers, a Manufacturers Hanover spokesman, denied any capital-raising plans beyond the original announcement. A Chemical spokesman refused comment.
Few observers believe that the in-market merger, which is being touted for its cost-cutting potential, will be canceled or even delayed. "The regulators in some respect asked for this merger," said David Berry, an analyst at Keefe, Bruyette & Woods Inc. "Both these companies are reasonably healthy."
Bank sources said that the companies securities underwriting subsidiaries, where much of their capital markets and investment banking operations are housed, will be combined according to schedule.
However, a delay in merging the lead banks is likely, at least temporarily, to rob the deal of its basic virtue - saving costs by cutting redundant branches, systems, and personnel.
One key problem, according to a source close to Chemical, is operational. The two banks have multiple data centers and software systems.
The banks had estimated that cuts in operational costs would eliminate $200 million in expenses per year within three years - almost one-third of the total estimated cost savings of $650 million.
If the lead banks continue to operate under their current structures, layoffs may be slower and cooperative efforts more difficult. One source said that Manufacturers Hanover Trust, bracing for a longer existence than expected, has refused to release to Chemical some retail customer data.
Any delay in the merger - which was announced in July - could make investors squirm, analysts said.
"There has been a modest level of disappointment already because the companies have been slow" in cutting senior-level jobs, said Thaddeus Paluszek, an analyst for Kidder Peabody in New York.
The shares of both companies have soared about 20% since the merger announcement, though they have drifted down in September. The stock of Chemical closed unchanged Monday at $25.375 a share. Manufacturers also was unchanged, finishing the day at $28.375.