A $2 billion outsourcing pact J.P. Morgan entered five years ago is on its deathbed now that the bank is in an agreement to be acquired by Chase Manhattan Corp.
Technology experts agreed that Chase is likely to put the kibosh on Morgan's high-profile Pinnacle Alliance - which links Computer Sciences Corp., Bell Atlantic Network Integration, AT&T Solutions, and Andersen Consulting - to help Morgan save nearly $350 million over seven years.
Outsourcing contracts have routinely been shunted in merger situations as far back as Bank of America's purchase of Continental Bank in 1994, when the Chicago bank was only two years into a 10-year, $500 million outsourcing agreement with International Business Machines Corp.
With only two years left on Pinnacle contract, Chase's decision to liquidate it is going to be even easier, observers said. Any penalties are bound to be negligible because so little time is left on the contract, they said.
"They have a fair amount of money for restructuring charges," said Bradley S. Vander Ploeg, an analyst at First Union Securities. "Anything they would incur would be peanuts. They are better off deciding and moving on."
Chase does not need to look far to find historical examples of restructured outsourcing contracts in mergers. When its predecessor company, Chemical Banking Corp., bought Chase in 1996 and took its name, the new Chase reduced a $480 million check processing contract it had with Fiserv to cover only a single operations unit in Syracuse, N.Y.
This summer Chase expanded that same Fiserv contract, indicating a greater willingness to let outsiders help it run its systems. It has become much more open to installing software products from outside vendors, rather than building its own systems.
"We don't build from scratch as we did before," said Charles DeFelice, vice president of development of Chase business services in a recent interview. "We buy and write products to our specification."
Most outsourcing contracts include clauses to protect banks in the event of a change in management by allowing them to redirect their fees to other services.
Bank of America could have lost $50 million for terminating Continental's outsourcing contract, said a source close to the deal. Instead the bank used up the money on a different set of services from IBM.
First Union did a similar maneuver in 1994 when it bought First Fidelity, which had signed a $450 million outsourcing contract with Electronic Data Systems Corp. in 1990. First Union "restructured the work to EDS where they could add more value," said Lawrence A. Willis, executive vice president of First Manhattan Consulting Group.
J.P Morgan formed Pinnacle Alliance to handle conventional banking activities such as commercial lending and trade processing. Peter Miller, now a managing director of LabMorgan, spearheaded the project.
The alliance "is absolutely going to dissolve, because the merger was not just a deal to be more competitive, it was a merger to eliminate redundancy," said M. Arthur Gillis, president of Computer Based Solutions Inc. "Chase has demonstrated to the industry that they are a no-nonsense acquirer. When they do a deal they merge the banks post-haste, and they do it well to save money."
