Chemical, Manufacturers banks merge New bank will be nation's 2nd-largest


NEW YORK -- After years of informal talks and months of intense negotiations, Chemical Banking Corp. and Manufacturers Hanover Corp. announced yesterday a record-breaking $2 billion merger that will produce the second-largest bank in the nation.

The deal also will throw 6,200 employees, from a combined 45,000-person payroll, into the inundated New York market of unemployed bankers and prompt an unprecedented consolidation of systems, branches and client relationships in an effort to pare $650 million in annual costs within three years.

"The driving force here really is to rationalize our organizations, take some of the excess capacity out of the system and have a more profitable organization on an ongoing basis," said Walter Shipley, chief executive of Chemical.

The new bank will assume Chemical's name and Manufacturers' headquarters and, according to a new organizational chart, keep most of the top executives from both companies. Manufacturers' chief executive, John McGillicuddy, 60, will serve as chief executive of the combined bank until 1994 and will be succeeded by Mr. Shipley, 55. A notable resignation was handed in by Manufacturers' president, Thomas Johnson, a former Chemical executive who had been expected by outsiders to soon succeed Mr. McGillicuddy.

Chemical and Manufacturers date back more than 150 years. For an extended time, they, along with a few other major New York institutions, dominated the U.S. financial markets. They are still among the nation's top 10 in terms of assets, but their relative standing has been sliding for years as many of their best clients found more efficient ways than bank loans to raise money and some clients, notably Third World countries, highly leveraged companies and real estate developers, proved to be bad borrowers.

In 1987 and 1989, each reported large losses. Last year, neither earned enough to cover its dividend, and their credit ratings -- impeccable AAA into the mid-1970s -- had fallen into the BBB category, close to non-investment grade. Standard & Poors Corp. upgraded its credit outlook for both companies yesterday, stressing that a successful merger would prompt an improved rating.

Concurrent with the combination, $1.25 billion in equity will be raised. Mr. Shipley said that he expected the bank to regain AA status, "which we think is critical," within four years.

On news of the deal, Chemical's stock price jumped $2.875, to $26.625, and Manufacturers rose $6.125, to $29.375. But even with those increases, the share price remains substantially below each company's book value, suggesting investor skepticism about asset quality.

"I consider them both marginally solvent," said Warren Heller, director of research at Veribanc, a banking rating firm. "It's not a union made in heaven."

The long-awaited deal between Chemical-Manufacturers comes weeks after the revelation of merger talks between Southern banking powers NCNB Corp. and C&S;/Sovran Corp. That triggered widespread enthusiasm for bank stocks, with Wells Fargo and Security Pacific -- like Chemical and Manufacturers long rumored as a possible merger match -- rising sharply and other gains registered by First Interstate, Bank of New York, Republic New York, BankAmerica, Bankers Trust, J. P. Morgan, First Chicago and Chase.

Lowell Bryan, a director at McKinsey & Co., a consulting firm, said that he expected at least one more major New York bank merger to come soon and that within the next five years the nation's 125 largest banks, which control two-thirds of the overall market, will consolidate into 15 or 20 vast institutions.

Others are more reserved. "Rarely," said David Beim, a professor at Columbia University's Graduate School of Business, "is there an opportunity to achieve such cost savings" as in the case of Chemical and Manufacturers.

"There certainly is a lot of consolidation that this business could use, but I don't think this merger by itself will release an avalanche, as people assume," Mr. Beim added.

The popularity of such mergers may depend on how the Chemical-Manufacturers combination works out, he said, and that is uncertain. The combined bank still will be stuck with the poor assets and poor business mix of the separate institutions. Achieving cost savings will require executives who ran the two banks to do the cutting. This situation will differ from the two successful bank mergers in the recent past: At both Wells Fargo, which acquired Crocker in the mid-1980s, and Bank of New York, which acquired Irving Trust three years ago, one bank, and one chief executive, was firmly in charge.

Elsewhere, bank mergers have a spotty record. "Historically, it has been very difficult for large institutions to integrate their systems," said Veribanc's Mr. Heller.

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