The top executives of Chemical Banking Corp. and Chase Manhattan Corp. said they expect market clout, cost reductions, and technology capabilities will add up to a handsome payback on the $10 billion merger deal they announced on Monday.
"We are seizing upon a truly unparalleled opportunity to create a premier global financial services company," Walter V. Shipley, chairman and chief executive officer of Chemical, said as the money-center banks set a new valuation record in this record-setting year for bank mergers.
Mr. Shipley, who would have the same titles after the merger, set forth ambitious goals for the $300 billion-asset company that would retain the Chase Manhattan name: $1.5 billion in annual cost savings, double-digit growth in earnings per share, "an efficiency ratio in the low 50s, and a return on equity of 18% or better."
Analysts agreed with the logic, and the stock market responded favorably, pushing the stock of both Chemical and Chase up 10% on a banner day for institutions involved in acquisitions. (See markets report on the back page.)
Lawrence Cohn, a banking analyst with PaineWebber Inc., said the implications are greatest from a cost and management standpoint.
"This is being driven by cost savings," he said. "Over half are international, a big chunk from corporate overhead, and another chunk from a reduction in overlapping expenses, mostly in the New York metropolitan market."
Mr. Shipley and his counterpart at Chase, Thomas G. Labrecque, billed their merger as "strategic," intended to gain dominant market shares and save on expenses. Neither would say who approached the other first.
The deal caps several months of speculation about Chase's future after institutional investors, led by Michael Price of Heine Securities Corp., criticized the company's ability to generate shareholder value.
Mr. Labrecque, who was designated president and chief operating officer of "the new Chase," declined to link the merger agreement directly to those criticisms. He said Mr. Price "ranks with a number of shareholders" in wanting to improve the company's value.
"We had planned a whole series of things for 1995, and this is an acceleration of the second phase," Mr. Labrecque added.
Still, Mr. Labrecque had been giving every indication that he wanted to keep Chase independent. Analysts like James McDermott, president of Keefe, Bruyette & Woods Inc., said the shareholder criticisms had "undoubtedly" spurred a change in thinking at Chase.
Mr. Cohn also noted that the bank was still heavily engaged in trying to reengineer its operations and reduce costs. "What surprises me about this transaction more than anything else is the timing," Mr. Cohn said.
"Chase has entered into this transaction before it has seen one penny of the benefits from its Focus program," he said, referring to a productivity improvement effort assisted by the consultant Chandrika Tandon.
Nor did the benefits begin to accrue from a separate program to better integrate the company and improve cross-selling," Mr. Cohn added. "It makes you wonder how much faith they had in the ultimate outcome of those programs."
The combined bank would have more than 75,000 employees but intends to shed 12,000 jobs, around one-third in New York and the rest elsewhere. The merger is expected to result in pretax merger charges of about $1.5 billion from such areas as severance pay, leases, and technology integration. The $1.5 billion in operating cost savings are expected to be realized within three years.
Mr. Shipley and Mr. Labrecque, who would preside over the largest bank in the country, said size will be an advantage, enabling them to offer more products at lower cost and making investments in the future more affordable.
Analysts praised the deal in part because of Chemical's experience with the 1991 merger of Manufacturers Hanover Corp.
"I have confidence they will deliver the $1.5 billion (cost savings) they say they will," said Robert Albertson, a banking analyst with Goldman, Sachs & Co.
The two banks said that together they will rank first in global loan syndications and global custody; in Chips, Fed Wire, and automated clearing house funds transfer volume; and in total trading revenues. The new entity would also rank first in mortgage servicing and fourth in credit cards. In New York the bank would be the biggest in consumer deposits, branch banking, middle-market banking, and trust and estate management.
Outside the United States, Mr. Labreque predicted gains in everything from foreign exchange and derivatives to cash management, securities custody, and information processing.
"Customers like to do business with strong institutions," Mr. Labreque said. "Our capital and size will make us even more competitive overseas."
Both executives said they are not eyeing additional acquisitions, but did not rule out that possibility.
"As the market changes, we're keeping our ears and eyes open for other opportunities," Mr. Shipley said.