ALCHEMY MIGHT make a comeback in light of the investor Michael Price's ability to turn Chase Manhattan Bank, once America's most prominent bank but now in serious disrepair, into the darling of Wall Street. But who are the ultimate beneficiaries of this magic?
Wall Street rewards efficiency, and the merger of Chase and Chemical Bank promises to deliver the same services to its customers while eliminating duplication in branch locations and back-office operations.
What Chase's lethargic management avoided was accomplished through pressure by shareholders. Price bought up 6 percent of Chase's stock, and then, with his shareholder allies, deftly put the bank "in play" by publicly criticizing its management and suggesting that it be sold or broken up. He did well for his Mutual Series Funds, for other institutional investors and for all Chase shareholders. Surely this is a victory for activist corporate governance.
But the experts are saying there is a lot more to this merger than cost-cutting. We now have a Very Big Bank capable of taking on the world's other giants. This, the experts claim, will be good for America as well as Chase shareholders. We'll see. After the cost-cutting, the new bank will have to be different to be better. Other than cutting costs, there are very few benefits to be gained.
To be different, it will need strategies for increasing revenues, consolidating and protecting valuable market shares, introducing new market initiatives to expand beyond New York City, and addressing the bank's comparatively minor role in the world's booming capital markets.
Neither bank will gain something that wasn't there just by becoming larger. There are virtually no economies of scale at this level.
Finally, size also brings with it major problems of managerial and organizational efficiency, especially in the tricky area of monitoring risk exposure -- from Third World loans to investments in derivatives.
Many of the world's biggest banks, principally the Japanese, are also among the most impotent and inefficient. And some of the most profitable and valuable banking businesses, such as Merrill Lynch, J.P. Morgan and Morgan Stanley, do not concern themselves very much with size of assets.
The real gains from this point on depend on what the managers of the new Chase will do. They have to redeploy resources well, retain top talent and rethink their strategies to deal efficiently with both domestic and international competition.
They cannot allow the bank to sink back into the businesses that both Chase and Chemical had come to consider usual, in which all emphasis is on cutting costs, then finding another bank to acquire to cut more costs.
There has to be more, or the new Chase may end up looking much like the old one a few years from now, and sharing the same fate.
The authors are professors of finance and economics at New York University's Stern School of Business.