Uneasy bedfellows face the morning after

"The merger will be a success, but will it be fun?" says a member of senior management at the merged JP Morgan Chase, encapsulating an attitude shared by a number of former JP Morgan bankers. Not necessarily, though, by former Chase bankers.

The new JP Morgan Chase has an imposing $715bn in assets, making it the second largest US bank, pre-tax profits of $8.7bn and operations in more than 60 countries. The only comparable bank is Citigroup, the largest in the world, with pre-tax profits of $21bn and double the return on assets - 2.34% versus 1.22%, according to The Banker's rankings.

Citigroup is also the institution that JP Morgan Chase sees as its main competitor, rather than the bulge bracket firms, because of its ability to provide one-stop shopping. "There is no question what clients want: someone who can take care of a transaction from A to Z, regardless of the type of financing," says Walter Gubert, chairman of the global investment bank. Can JP Morgan Chase give Citigroup a run for its money? From the old JP Morgan it arguably has a better franchise than Citigroup has from the old Salomon Brothers. It is already seeing cash benefits from its enhanced capabilities, having managed the merger relatively well. But its challenge is to squeeze the synergies out of the deal in soft markets without losing key staff. As in all investment banking deals, people are the vital issue.

Culling at a minimum

The complementarity of the two organisations helped. There were not that many areas with significant overlap, so the need for culling was reduced. However, this does not mean the integration has been easy. "It is an experience every M&A banker should go through, but only once," says Nick Draper, head of M&A in Europe.

In some areas, though, such as foreign exchange and emerging markets, there was quite a fall-out, while about 60 Robert Fleming corporate financiers have left. Chase bought the UK merchant bank in August last year but, once JP Morgan was on board, this led to overlap and a culture clash.

The differences between the old Chase and JP Morgan led to a host of quotes at the time of the merger equating it with a merger between retailer Wal-Mart and jewellers Tiffany. It is true that JP Morgan attracted well-connected young bankers who took pride in their intellectual expertise, while Chase, the product of a merger with Chemical Bank and Manufacturers Hanover, had less of a blue-chip image.

The differences still persist. "Cheap suits and cheap buildings," says one former JP Morgan banker of his new employer, a jibe due in part to the integration of the offices in some cities such as New York, where the glossy Wall Street building is being abandoned for a (perfectly decent) building on Park Avenue. Another former JP Morgan employee says glumly: "I used to have a nice office; now I work with Chase, and my office is in the toilet."

Major players exit stage left

Some key bankers have left, such as Ramon de Oliveira, who was on the executive committee of the merged bank. A source at the bank insisted he had "retired". He is in his mid-40s.

The bottom line, though, is whether this will affect the firm's success. First, the fact that both are New York-based banks made the cultural integration easier than, say, the touted merger of JP Morgan with Deutsche Bank. Second, putting snobbery to one side, not one of the bankers interviewed who are employed there saw this as a reason to leave the firm - those who could not bear the loss of the JP Morgan atmosphere and strategy have already left, or like the Paris office, were reportedly given a pep talk by chairman Sandy Warner who "banged a few heads together", in the words of someone present.

And the European JP Morgan bankers were reassured quickly that they would not lose out in the merger to Americans. (Europe, Middle East and Africa produces 23% of revenues.)

One of the reasons for the success of Chase's $32bn acquisition of JP Morgan was speed where significant personnel decisions were concerned. "We announced 50 top people on day one, 500 within the first month and 1000 by the end of the year," says Mr Gubert. The merger was announced on September 13, 2000 by JP Morgan's Mr Warner and Chase's Bill Harrison, president and ceo of the new entity.

Mistakes, we've made a few

The bank acted quickly and may have made some mistakes, but it believes clarity was more important.

One of the perceived mistakes - although the firm insists otherwise - may be naming co-heads. In the words of one JP Morgan Chase banker: "The dual head things have to go, if nothing else just to keep costs down."

Take Bruce Carnegie-Brown and Tom Canning, co-heads of capital markets for Europe, an area to which Chase brought a strong loan business and JP Morgan brought a strong bond business. When asked which one would still be there a year from now (following nervous laughter from both) Mr Carnegie-Brown says: "Neither of us knows who. But I am a fan of the co-head structure. I was a co-head at the old firm."

Mr Canning adds: "It's more of a partnership which was one of the reasons I took the job."

Although the bank insists that co-heads were named because they brought different expertise, in this specific case JP Morgan had moved away from the loan area only a few years ago, when it decided the future did not lie in commercial banking but in investment banking.

Personalities come into play

More of a current issue seems to be the type of personality involved. "In all organisations you should have both leaders and managers. In Chase, they are all managers, there are no leaders [like in JP Morgan]" says a senior banker at the new bank. However, other former JP Morgan bankers in the merged firm do not regard this as a negative thing, saying there is a need for management and Chase is after all the aquirer, not the other way round, proof that leaders do not always win.

Meanwhile, despite being in the middle of a merger, the bank has held on to its market share in investment banking, and in some areas, has even gained market share, say analysts. For example, it has climbed up Thomson's league tables in worldwide M&A advisory from number six last year to number three in the first quarter of this year.

This is especially important as investment banking is responsible for 52% of pre-tax profit. Yet in this business area, critics argue the deal has failed to fill two gaps in the bank.

First, it lacks a top equity capability, they say. Recent research from Credit Suisse First Boston (CSFB) pointed out that the bank was ranked sixth in the equity underwriting business in 2000 and has dropped to 10th in the year to date. According to a former employee in that division: "When you add up two banks that were not leaders in equity, you don't get a leader. And both had been trying to get more business, so they hired too many [bankers]."

The importance of being branded

But the same person, who has worked for a couple of bulge bracket firms, talks about the power of the JP Morgan brand and implies it may only be a matter of time: "The access to corporates is as good as anyone on the street. They just didn't have the scale to pursue equity business using their balance sheet. The merger with Chase gives them those resources."

They are also hiring in some big hitters: in mid-June Mino Caposella, co-head of Goldman Sachs's US equities business, joined as head of North American cash equities. And CSFB analysts expect JP Morgan Chase "to make its mark in the equities business over time".

M&A weaknesses exposed

The second criticism is that the firm lacks top US M&A capability. Mr Gubert retorts that those critics are failing to look at the facts since Chase recently hired talented people and bought both the Beacon Group and H&Q. "There is no question the merger brought us what we needed to strengthen it," he argues. Chase, in the last 18 months, acquired the Beacon Group, a US corporate finance boutique, and H&Q, an outfit specialising in the technology sector. It is true that JP Morgan Chase is advising on General Electric's $42bn troubled takeover of Honeywell and on ALZA's $12bn merger with Johnson & Johnson, among others. But it remains stuck at six in Thomson's league table of US M&A advisers.

Competitors argue that a few deals and a few quality M&A bankers such as Geoff Boisi, co-head of investment banking and a former head of mergers at Goldman Sachs before his stint at the Beacon Group are not enough to push JP Morgan Chase into the top three US M&A advisers.

The bank argues that its lethal weapon - in this battle and in others - is the ability to offer virtually all products and capabilities to clients. Extra business will come from this, and in fact, already has.

"We would not have won the Telecom Italia mandate without the merger," says Mr Gubert, referring to the e2.5bn convertible issue for the Italian telecommunications company, as well as acting as adviser on its merger with Seat, the yellow pages company. Another example is a $500m subordinated debt issue for Bank of East Asia, a mandate that would not have happened without the merged bank's capital.

Only time will tell

The success of the merger cannot be judged until a number of years have passed, say analysts.

"They have not had the opportunity to do too much, with slow equity and M&A markets, and no Initial Public Offerings," says Diana Yates at St Louis-based brokerage AG Edwards & Sons. "You cannot turn it around overnight in a dead market. We see it as a long term proposition and rate it a buy." JP Morgan Chase bankers are a lot more impatient. "The success of our business model is how we come through this year and the next, not five years from now," says Nick Draper, chairman of M&A in Europe.

But how to ensure the most is made of the capabilities of this one-stop shop? "We have a cross-border marketing database where people make referrals and we keep track of how we did for the client and whether this led to a fee," says Declan Sheehan, head of the private bank for Europe, Middle East and Africa. Bankers are compensated for anything that leads to business for another unit. To increase this - and perhaps because cross-referrals are not up to speed yet - a team of private bankers sits in the investment banking group to help the flow of information and ensure they are at the table when, for example, a family company is being sold; and the private bankers will work on ensuring the structure of the deal will be best for the long-term wealth management of the owners.

Meanwhile, on the asset management side, some cross-referrals are already working.

"The custody arm of Chase came to us and said we have a client who needs money managed. By the end of January, we had a $500m mandate from that client," says Ron Dewhurst, head of investment management for the Americas.

Keeping numbers down

Of course the number of services on offer can have its downside. A memo from Klaus Diederichs, head of investment banking in Europe, published by the Financial Times in May, told bankers to limit the number of JP Morgan Chase people in a client meeting, as too many had been showing up and "this makes us look silly in front of clients".

Meanwhile, the current state of financial markets may on balance be neutral for the deal. It has arguably made bankers less willing to move firms, while helping JP Morgan Chase's fixed-income business. However, slow equity markets mean business is still being done by the old leaders, making it more difficult for the bank to break into the upper ranks, says Dave Berry, head of research at financial services specialists Keefe, Bruyette & Woods.

In addition, the treasury and security services division, which encapsulates custody and is responsible for 10% of pre-tax profit, acts as "a natural hedge for the more cyclical businesses", says Steve Wilder, head of treasury services in EMEA.

Nor has the bank's latest warning that revenue from venture capital and trading is likely to decline caused much of a furore since all other banks are suffering. Analysts estimate earnings per share growth of around 25% both this year and next.

JP Morgan Partners, one of the world's largest venture capital units, with assets of $24bn under management, is dragging down the bank's results, but its outstanding long-term record should see it recover when markets rally.

JP Morgan Partners under fire

What will also help the division, says Jonathan Meggs, a general partner, is increased business from the merged entity. In 2000, 17% of deals came from Chase, while this year he is looking for 30% to come from JP Morgan Chase. "Quality deal flow is a scarce resource," he says.

Helping to ensure JP Morgan Partners are shown good deals by the bankers, managing directors at the bank have the opportunity to invest in their portfolio. "Not only do we have a warm, cuddly relationship with the investment bank, but this gives the investment bankers a direct incentive," says Mr Meggs. As for the retail and middle market financial services division, responsible for 25% of pre-tax profit - and seen by some of the investment bankers as simply a balance sheet allowing them to win more business - it should see its performance improve under the stewardship of Dave Coulter, former chief executive officer of Bank of America, who joined last year. Its 30 million clients give it critical mass in the New York tri-state area and Texas.

He says there are a number of M&A deals in the pipeline that have resulted from referrals from the JP Morgan investment bank to the Chase middle market business (companies with $10m-$1bn in sales) and vice versa.

Merger most excellent?

Ultimately, Chase realised it had to buy a large investment bank and JP Morgan realised its formula of excellence in wholesale markets was not going to win the day.

Naturally, that much-vaunted culture is changing. "It is no longer JP Morgan, for better or worse," says a former M&A banker at JP Morgan.

"And better for shareholders," he adds. Currently, cash return on average common equity is 17.6% - dragged down by venture capital - and the bank's aim is to increase it to 20%-25%, a number that looks achievable if it continues to keep control of expenses and take full advantage of its capabilities to offer all services to clients.

Analysts believe the bank will give Citigroup a run for its money if it pulls the different strands of the merger together. But just accomplishing the merger is not enough. "It has to execute and prove itself," says Ms Yates. In the words of a JP Morgan vice-president who chose to stay in the merged entity: "It would be criminal if it didn't work." But the fun may disappear.