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BANKING INDUSTRY: MERGERS & ACQUISITIONS.
Term Paper ID:25694
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Essay Subject:
Focuses on Chemical Bank & Chase Manhattan. Background, industry overview, money center banks, competition, public policy, intervention & regulation, legislation & reform. Graph.... More...
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24 Pages / 5400 Words
15 sources, 32 Citations,
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Paper Abstract:
Focuses on Chemical Bank & Chase Manhattan. Background, industry overview, money center banks, competition, public policy, intervention & regulation, legislation & reform. Graph.
Paper Introduction:
Introduction
Mergers and acquisitions during the 1980s tended to take the form of hostile takeovers, often financed by well-publicized "junk" bonds, which resulted in the merged organization being sold off in order to increase cash flow. The 1980s were also a tumultuous time in the banking industry as numerous institutions failed or were investigated, some in part because of their financing of mergers and acquisitions in other industries. This represented a strong opportunity for other institutions who were able to take over deposits of the failed organizations and thus gain additional financial strength through acquisition. At the same time, the banking industry was increasingly affected by globalization, with Japanese banks in particular posing competitive threats to American business banking, and European banking interests also tak
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The banking industry has, in fact, been in a consolidation mode forthe past several years, driven by the need to reduce costs and eliminateovercapacity.[xiii] Stock Prices During late 1994 and early 1995, bank stock prices were static due, inpart, to concern over the impact of the Mexican economic situation andhigher interest rates. "The Chase Manhattan Corporation." Standard & Poor's NYSE Stock Reports, February 14, 1995, 5 2.Brophy, Teresa. Earnings had fallen atthe annual rate of six percent over the past ten years, although thecompany had seen an increase of five percent over the past five years. [xxiii]Ibid. The proposed layoffs are the most obvious disadvantage of themerger for employees. [xx]Ibid. In this regard, the two companies operated in remarkablysimilar environments. In that year, however, theBanking Act was enacted to protect depositors and to stabilize the bankingsystem. During 1994, the Fed increasedinterest rates more than at any time in the past, with the intention ofslowing down the economy. [xxxi]Brophy, "Chase Manhattan," 21 9. Ward, "The Urge to Merge," Barron's, April 18, 1994, 18. For Chemical and Chase, the mergermade sense because it increased Chemical's presence in the corporatemarket, and Chase's presence in the consumer market. In the198 s, as increasing numbers of banks failed, a number of states relaxedtheir laws to encourage BHCs to purchase local institutions havingproblems. New York: McGraw Hill, 1993.Tavelman, F. Overview of Chemical Bank In the mid-199 s, Chemical Bank was the nation's third largest bankholding company, and with both domestic and international operations.[xvii] Chemical expanded during the 199 s through acquisitions, including theacquisition of Manufacturer's Bank and related companies during the early199 s. [xxix]Brophy, "Chase Manhattan," Value Line Investment Survey, March7, 1997, 21 9. The rapid electronic movement of financialdata increased pressure on banks to control their costs and respond rapidlyto changing market conditions. It was in thisatmosphere that the Banking Act was passed, and the fear that the events of1929 brought about remained prevalent in the regulatory environment fordecades to come. [xix]Stephen Biggar, "The Chase Manhattan Corporation," Standard &Poor's NYSE Stock Reports, February 14, 1995, 5 2. However, thelarge number of failures within the banking industry and the difficultieswhich the securities industry suffered during the last half of the 198 shave combined to bring about skepticism about the wisdom of removingadditional regulations. "Bank Industry." Value Line Investment Survey, March 17, 1995, 2123.----------. Chemical Bank and Chase Manhattan were not savings and loans, anddid not participate in the mortgage market directly until the early 199 swhen deregulation made it possible for them to do so. [xxii]1996 Moody's Bank and Finance Manual, 2154. The credit card represents a strongarea for future growth, although it also represents an area for increasedcharge-offs with the company's increased exposure in the field. [xxvi]Brophy, "Chemical Banking," 2111. This indicates that the company should realize strongperformance from its consolidation, and certainly the company's overallsavings to this point, which have exceeded original projections, suggestthat this will be the case.[xxix] The following graph, plotted on a logarithmic scale to show rates ofchange, illustrates that the stock price for the combined company hasperformed well in the year since the merger was completed.[xxx] Thisindicates that the market approves of the strategy that the new company hasfollowed, and is willing to invest in the long-term success of theorganization. J. Funds can also be invested in other instruments.Customers who deposit funds with banks receive interest on those monies,while customers who borrow funds must pay interest. Banks couldalso underwrite government bonds even after Glass-Steagall.[viii] In 1989 and 199 , the Fed authorized bank holding companies (BHCs),which did not take deposits, to underwrite stocks, provided that theysegregated that part of their business from their banking business. Thiscompared negatively to the industry as a whole, although the bank'sperformance in 1994 (P/E ratio of 6. A number of acquisitions were made in1996, but these were designed to augment the products which the bankoffered. Bank mergers continued strong in1994, jumping to a value of $7.94 billion in the third quarter.[xii] Bankmergers have been common since the late 18 s, but the recent bank mergermania can be attributed to several current factors, including competition,stagnant stock prices and government policies. Anticipated Benefits of the Merger The benefits and disadvantages of the merger depend on thestakeholders performing the evaluation. Theunderwriting contribution to total revenue also had to remain under 1 percent. "The Regulatory Separation of Banking from Securities and Commerce in the Modern Financial Marketplace." Arizona Law Review, 1991, 583-654.Garsson, Robert M. Chase Manhattan, on the other hand, focused on expanding itsfinancial product offerings by acquiring companies that participated in thefinancial market, but that were not primarily banking organizations. [xxv]Ibid., 211 . It also prevented commercial banks(including state-chartered banks that are members of the Fed) fromunderwriting, distributing, selling or dealing in investment securities.In addition, banks were prevented from affiliating with firms whose primarybusiness was the securities underwriting business. In 1929, themarket fell fast and deep with the result that margin calls could not becovered by buyers.) Under Glass-Steagall, banks cannot underwrite corporate debt or equitysecurities, or purchase such securities for their own accounts. International services also includedcorrespondent banking, merchant banking, underwriting and trading ofEurosecurities, and interest rate and foreign exchange activities. de Senerpont, "OCC Will Allow Banks to Levy More Fees AcrossState Lines," American Banker, February 9, 1996, 2. Increasedconsolidation in recent years has meant that there is a decreased number ofcompetitors; however, the competitors who remain are strong financially.Barriers to entry in this market are now quite high since the capitalrequirements to effectively compete in the market have been raised as aresult of the consolidation. A nationalbank owned by an out-of-state company may choose to comply with the code ofeither state, or the American Bar Association's Model Business CorporationAct, but consumer protection remains a critical part of the bank's businessregardless of which strategy it chooses to follow.[vi] The Federal Reserve System (Fed) was established in 1913 to overseethe reserve requirements and regulatory controls over bank interest ratesand other facets of national monetary policy. One issuewhich has arisen is which consumer protection laws should be applied when acompany operates in more than one state and the laws differ. International operations in more than 5 countriesaccounted for 34 percent of average earning assets in 1993.[xx] As with Chemical, Chase Manhattan's financial performance during the199 s had been disappointing. However, the new deregulation and the increasing number of companiessuch as Chemical Bank which have holdings across state lines has alsoresulted in a flurry of activity related to consumer protection. Glass-Steagall The Glass-Steagall sections of the Banking Act of 1933 may be the mostwell-known parts of the act. The type of competition that exists in a given industry is also animportant part of the business environment. The supervisory role thatthe Board provided is now handled by the Federal Housing Finance Board.The Federal Savings and Loan Insurance Corporation (FSLIC) was replaced bythe Savings Association Insurance Fund, and administrative control is nowhandled by the Federal Deposit Insurance Corporation (FDIC). Forexample, the merger of Chase Manhattan and Chemical Bank has raisednumerous criticisms because the level of service to the community willdecrease. Since that time, the stock has been volatile, reaching a highof 49.5 in 1986, and a low of 9.75 in 199 . There was also a danger that there will be some loss of customers, butChemical has a long tradition of growth through acquisition, and its 1991merger with Manufacturers Hanover resulted in Chemical retaining a largenumber of its consumer account base. The merger of Chemical and Chase demonstrates that the company is ableto operate effectively and efficently in the highly regulated environmentof the banking industry, and many of the stakeholders, includingshareholders, have been amply rewarded for retaining their Chase stock.However, the merger also demonstrates that increased consolidation in thebanking industry may well continue as other institutions seek to gain thesame benefits that Chase and Chemical saw as a result of theirconsolidation. [ix]D. Looking to expand its international operations, ChaseManhattan announced in 1994 that it would participate in a banking jointventure in Kazakhstan.[xxii] Prior to the merger between the two organizations, Chemical had takena more active merger role from the standpoint that it acquired otherbanking institutions but not organizations outside its primary financialmarket. Chase hasalso realized more than $555 million in merger-related cost reductions;this compares with an anticipated savings of $51 million during the firstyear. Whilepublic policy can sometimes be separated from discussions regarding thebusiness environment, more often than not the business environment includesdiscussions of public policy. Similarly,securities firms, cannot take deposits, and employees, directors andofficers of commercial banks are prohibited from being actively involvedwith investment banks (and vice versa).[iv] Feasibility of Nonintervention During the 198 s, there was increased pressure on the federalgovernment to remove some of the regulations which prohibited some bankactivities. With its large combined assets and the company's broadproduct offering, the organization is robust enough to be a significantparticipant in the international banking community. [v]Ibid., 39. These lawsalso allowed savings and loans, and savings banks, to offer credit cards.At the same time, commercial banks were given the power to offer moneymarket demand accounts. Chemical's subsidiaries also provided products to ensure that acustomer would have a specific currency-exchange or interest rate at somefuture date. The company hasboasted strong earnings per share of $7.43 for 1996; anticipated earningsper share are projected to be in the 13 percent range for the five yearperiod to 2 1. This includes interest rates, thelevel and type of competition that is in the industry, the level and typeof regulation to which the industry is subject, and other factors. Among the companies acquired during this period were a factoringand commercial financing company, a local charge acount company, and amortgage banking firm. The business environment in the banking industry is also subject tomarked changes, both as a result of changes in the regulatory environmentand also as changes occur in the competitive environment. Introduction Mergers and acquisitions during the 198 s tended to take the form ofhostile takeovers, often financed by well-publicized "junk" bonds, whichresulted in the merged organization being sold off in order to increasecash flow. [xviii]Brophy, "Chemical Banking," Value Line Investment Survey,September 8, 1995, 2111. [x]Ibid., 11. [pic] Chase Manhattan Since the Merger Since the merger in early 1996, the newly formed joint company haslaunced a co-branded credit card with Wal-Mart and repurchased more than9.9 million shares of common stock. Indeed, savings and loans and banks were largely deregulatedduring the 197 s when interest rate controls were removed. However, deregulation in recent years has led to a higherlevel of competition within the industry and an increase in the number ofmergers and acquisitions as institutions seek the best situation in orderto take advantage of the new environment. Chase Manhattan acquired a bank in the Virgin Islands in 1959,and a bank in Honduras in 1967. In March 1992, Chemical assumed the depositts of CentralFederal Savings Bank from the Resolution Trust Corporation; Central Federalwas one of the institutions that was closed during the early 199 s bankingcrisis. The cost cutting moves that the new company will undertake were alreadyforeshadowed by Chase Manhattan, which had earlier announced plans to cutcosts by $4 million.[xxvii] Those opposed to the merger held that thisis an unacceptable price to pay, both in the number of workers who will berendered unemployed, and in the lack of service to the community throughthe closing of the branches. This is because the stock of the target company begins torise in the 3 -day period prior to the public announcement, a reflection ofthe tightly-knit nature of the banking business.[xv] Stock prices of theacquiring company, on the other hand, generally react negatively toacquisition announcements, dropping on the average between 5 and 15percent.[xvi] In some cases, the acquisition is so small as to beimmaterial, in which case there is no effect on the price. [xxvii]Mulle, 211 . Chemical focused on acquiring otherbanking institutions (including a failed institution) while Chase Manhattanacquired companies with other financial products. Later in 1992, the merger took place with Manufacturers Hanover;under that agreement, Manufacturers Hanover branches continued to operateand conduct transactions separately and under the old name until the mergerwas fully integrated; that occurred in late 1996. Critics of ahigh level of consumer protection argue that this illustrates the need forstreamlining the regulations which protect consumers, while consumerprotection advocates argue that this situation points out the need fornewer, comprehensive regulations which address the changing environment ofbanking. This makes the stock of target companies attractiveby comparison to the overheated market for bank stocks that characterizedthe market during 1993 and much of 1994.[xiv] How Bank Mergers are Structured Recent bank mergers have been largely friendly (negotiated) deals.Typically, such acquisitions begin with the public announcement of theagreed-upon terms of the transaction, which is followed by governmentapprovals (which take approximately six months). Earnings per share wereequally volatile, with the company posting losses in 1989 and 199 following a strong 1988. [xv]"Price Jumps," 2 . Shareholders in the acquired company benefit the most from thisarrangement as opposed to the shareholders of the company making theacquisition. The company also purchased a computer timesharingsupplier in 1974. The value of the bank's loans showed anannual rate of change of a negative seven percent over the past ten years,and negative 13 percent over the past five years. Bank stocks have typically sold at seven to eight times earnings inrecent years. The discount rate is the base rate from whichmost banks calculate the base rate (prime rate) which they charge theirbest (lowest risk) corporate customers. Customers will also feel negative effects of the merger in the form offewer branches to serve them and in a dilution of the current banks' corestrengths. Retail businesses included the second largestcommercial bank issuer of credit cards in the United States (behindCitibank), with receivables of approximately $12 billion. [ii]R. The subcommittee concluded that substantial bank credithad been diverted to the securities market, contributing to the speculationthat was at the heart of the stock market crash of 1929. [xxiv]Ibid. Whiting, "Glass Steagall: Is Repeal Necessary?" BankersMagazine, January-February 1991, 38. However,they may underwrite some government securities (such as some municipalbonds), purchase investment securities and serve as an agent for customersonce they have received specific instructions from the customer. [xi]Ferrara, 596. [xxxi] The merger has created a much more efficient organization than existedwhen the two companies operated separately; this new organization also havea much larger geographic presence and wider range of product offerings,both of which are important considerations in the increasingly globalmarketplace of banking. FIRREA The Financial Institutions Reform, Recovery and Enforcement Act of1989 (FIRREA) was a response to the many savings and loan failures duringthe 198 s. Until 1933, the industry wasrelatively free of other government regulation. The 198 s were also a tumultuous time in the banking industryas numerous institutions failed or were investigated, some in part becauseof their financing of mergers and acquisitions in other industries. [xiii]S. The effect on the heavily regulated-American banking industry was pronounced: in 1956, nine out of the top 15banks in the world were American-owned; by 1991, none of the top 25, andonly two of the top 5 , fell into that category.[xi] Regulatory Outlook The late 198 s were dominated by the failure of many financialinstitutions in the savings and loan crisis. As with the financial community as a whole, Chemical struggled duringthe early 199 s. Within the financial industry, increasing interest rates has theeffect of increasing prices. The business environment also includesinterest rates, which are set by the Fed but which affect all companies(although banking institutions are particularly subject to the influence ofinterest rates). "Chemical Banking." Value Line Investment Survey (September 8, 1995): 2111.de Senerpont, Olaf. Recent earnings per share (1993) were $1.89,falling from $3.46 in 1992. The earnings per share for 1994 increased to astrong $5.87.[xxiii] As might be expected, the company's price earnings ratio was alsodynamic during recent years, ranging from a high annual ratio of 17.3 in1993 to a low of 2.3 in 1988 (and negative in 1989 and 199 ). M. Thisillustrates different strategies for the two companies, both of which weresuccessful for these separate organizations. In addition, the newcompany could realize substantial savings as it is able to improve itseconomies of scale, and both companies will benefit from the increasedinternational presence and the combined asset size that the new companywill have; the combination resulted in the largest bank holding company inthe United States.[xxviii] Shareholders expected to realize better performance from the newcompany, taking advantage of the cost-cutting measures that the companywill put into effect. Once highlyregulated, the industry has recently undergone significant deregulation,which has resulted in restructurings, increased competition, and a highnumber of mergers and acquisitions. This research examinesthat merger, the regulatory environment which led to the merger, themerger's effects on both of the financial institutions involved, and thefuture of mergers in the banking industry given the current regulatory andcompetitive environment. In the banking industry, the business environment includes competitionfor the various products that are offered (including types of savings anddemand accounts as well as insurance and other financial offerings), andcompetitors can be regional or national since interstate bankingregulations have been relaxed. As money centerbanks, however, and members of the Federal Reserve System, both of thesebanks lent money to other financial institutions. "OCC Will Allow Banks to Levy More Fees Across State Lines." American Banker, February 9, 1996, 2.Ferrara, Peter J. End Notes Bibliography1994 1 -K SEC Filing, New York: Chemical Bank Corporation.Biggar, Stephen R. M. The savings and loan crisis which has garneredheadlines in recent times is a result of these government organizationshaving to pay depositors those guaranteed funds in institutions which havefailed. This is followed byapproval by the shareholders for both corporations, and then a closing.Most deals take the form of mergers and may involve an exchange of stock;this qualifies them as poolings of interests for accounting purposes.Under poolings the acquiring company can amortize the goodwill representedby the premium paid for the stock of the acquired company over 4 years,and can immediately consolidate its earnings. The "tax andspend" theorists hold that the increased revenue from corporate taxationcan be spent elsewhere in the economy, thus creating jobs by increasing therevenues of companies; this would increase the amount of deposits in banks,as well. Customers expected to benefit from the standpoint that they will beable to consolidate their operations with a single bank rather than usingmultiple institutions for their financial needs (if they were doing soprior to the merger). "Glass-Steagall: Is Repeal Necessary?" Bankers Magazine, January-February 1991, 37-42.----------------------- [i]1996 Moody's Bank and Finance Manual, New York: Moody's InvestorsService, 1996, 2155. The rate at which these funds are borrowedis called the discount rate. Ideally, the price of the stock increases in the meantime topermit the margin to be paid with profit from the stock. Even under Glass-Steagall, commercial banks were allowed to engage in underwritings abroad;this became a significant market after 197 s with Eurobonds. Globalprivate banking assets had become increasingly important at Chase, as theyhad at Citibank. By doing so, interstate banking effectively took hold. By raising interest rates, the Fed hoped toincrease the cost of funds to the point that businesses would slow downexpansion plans and the economy would veer away from inflation. Credit cards and cash management (depository) accountsas well as the insurance business were entered into by companies such asSears and General Electric, yet banks were effectively prevented byregulation from entering the markets of their competitors.[x] By 199 , American banks faced increased competition not from otherAmerican banks as much as from institutions from around the world.Technology made this competition possible with instant transmission ofinformation and transactions. At the same time, while banking companies were effectively regulatedthrough various pieces of legislation, other companies began to enter thefinancial market. During the next few years, the banking industry is likely to see anincreasing number of mergers and acquisitions as smaller and weakerinstitutions are merged with larger or stronger ones. [xvii]1994 1 -K SEC Filing, New York: Chemical Bank Corporation,1995, 4. M. Deal prices involved the payment of a premium to book valueof twice book or more, and have run at 3 to 5 percent of quoted marketprices. ) suggested that it may have been ableto bring its volatility under control.[xxiv] The Merger In late 1995, Chemical and Chase Manhattan agreed to merge, resultingin the largest American bank holding company; the deal closed at the end ofthe first quarter of 1996.[xxv] The new company has a global wholesalefinancial presence with approximately $3 billion in total assets, andapproximately 26 million retail customers. At the end of 1995,Chemical operated 227 offices throughout New York, and a network of 2 foreign branches and representative offices in major markets around theworld. In fact, Chemical has a long history of growth through acquisition,beginning with a merger in 192 when the bank merged with Citizens NationalBank of New York. Inaddition, Federal Reserve member banks cannot be affiliated with companieswhose principal activity is within the securities market. Banksand other institutions now participate in transactions throughout theworld, which means that the global business environment is now the bankingindustry's environment. "American Banks or the Glass-Steagall Act--Which Will Go First?" Southwestern University Law Review, 1992, 1511-1542.Ward, S. In addition, Chemical maintained corresponding bankingrelationships with a number of international institutions. Because of the perception thatthe depression was brought about by banks which were also heavily involvedin the securities markets were unable to cover their margin losses when themarket crashed in 1929, the Glass-Steagall Act of 1933 placed severelimitations on banks' abilities to participate in the securities market.(Margins in the stock market permit buyers to purchase stocks for apercentage, or margin, of the actual price, with the full price due at alater date. In addition,the newly formed company is able to cross sell from one set of customers toanother, resulting in improved marketing activities and efficiencies. The financial services provided by the Chemical's domesticsubsidiaries included personal and commercial checking accounts, savingsand time deposit accounts, personal and business loans, consumer financing,leasing, real estate financing, investment banking, mortgage banking, moneytransfer, cash management, safe deposit facilities, personal trust andestate administration, corporate and institutional trust and securitiesprocessing services, full investment services, discount brokerage, UnitedStates Government and Federal agency securities dealership, corporate debtand equity securities dealership and underwriting, and United Statescorporate tax depository facilities. These restrictions were liftedin the early 198 s by a series of federal laws which also permit nonbankdepository institutions to offer third-party payment services. In fact, there have been calls for additionalregulations to be implemented in order to protect taxpayers from additionalliability in the future.[v] Regardless of the regulations which may be imposed, the bankingindustry enjoys a close relationship to the economy and the politicalenvironment as a whole. [vi]O. The failure of a number of savings and loansduring the 198 s also led to some mergers and acquisitions as institutionswere able to acquire their competitors at significantly reduced prices asthese competitors faced going out of business altogether; in these cases,mergers were the only way that the institutions could remain solvent. During the 199 s, bothChemical and Chase Manhattan grew through acquisitions, but throughdifferent types of acquisitions. Rogers, The Future of American Banking, New York: McGraw-Hill,1993, 289. [iv]R. These products include interest-rate and currency swaps,interest rate options, future rate agreements, forward interest-ratecontracts, foreign exchange contracts and financial futures. [xiv]Teresa Brophy, "Bank Industry," Value Line Investment Survey,March 17, 1995, 2123. This effectively limited the effect of Glass-Steagall, though itdid not erase it completely. Mergers and Acquisitions in the Banking Industry More than 5 mergers involving publicly traded banks took place in1993 totaling more than $22.5 billion. During the previous ten years, its earnings declined atan annual rate of three percent, the company posted losses in 1987 and1989, and had earnings of only 11 cents per share in 1991.[xviii] Overview of Chase Manhattan Activities Prior to the Merger Chase Manhattan was a bank holding company also, and the sixth largestsuch company in the United States; Chase Manhattan Bank was the fifthlargest American bank at the time of the merger.[xix] Wholesale bankingservices at Chase included global corporate finance, global capitalmarkets, global risk management, and transaction and information processingfor multinationals, local corporations, governments and financialinstitutions. The merger also made strong businesssense because Chase had a high higher presence in the commercial market,while Chemical had a strong presence in the consumer market. [iii]1996 Moody's Bank and Finance Manual, 2154-2155. Thesetactics seemed to have been successful, according to recent reports, buthave left companies such as Citicorp facing other difficulties. To be successful,banks must lend money (or make other investments) at rates which exceed therates they pay depositors, but they must also make loans to customers whohave the ability to pay back those loans. These competitors include banks, securities andinvestment banking firms, insurance companies, and large financial servicefirms. The public expects the government to provide protection forfinancial assets, and there is a close relationship between the policiesthat the government follows (through the actions of the Fed, among othertools), and the actions taken in the banking industry. Money Center Banks Banks accept deposits from customers and use those funds to loan toother customers. Recent Chase Manhattan Stock Performance The company's last stock split occurred in 1986, when it had a two-for-one split. Such consolidation is a direct resultof changes in public policy and the strategy of the Fed. Whencorporate taxes are increased, the amount that companies are able to leaveon deposit with banks is decreased, which lowers the amount of money whichcan be invested elsewhere by the financial institutions. However, critics suggest that companies that engagein both lending and investing, and underwriting and trading securities,have inherent conflicts of interest.[ix] The Fed has also permitted banks to enter traditional insurancemarkets, through such instruments as selling annuities. This places additional marketing pressure on banks to make upthe shortfall in other areas, either through aggressive marketing programs,or through international presence. It must be notedthat size is not a guarantee that a bank is healthy, and it may be thatsome smaller banks actually purchase larger ones in order to gain access tothe larger company's loan portfolio. "The Urge to Merge." Barron's, April 18, 1994, 17-18.Whiting, R. While the revenues to banks increases aswell, the quantity of financial goods demanded (in this case, loans),decreases. This was a direct result of the failure of 1 , of the nation's27, banks between 1928 and 1933.[vii] The banks which failed during the early years of the Depression wereprimarily small rural banks which lacked the capital necessary to withstandthe adverse economic conditions of the time. The bank alsoengaged in mortgage origination and servicing at the retail level. However, hearings held by thePecora subcommittee of the Senate Banking and Currency Committee focused onthe 591 large banks which had dominated the securities underwriting marketduring the 192 s. Because of the pivotal role that banks play in the economy, it isunlikely that the government can remove all consumer protection regulationsnow in place. The result is that there hasbeen a blurring in the role of each type of institution, with banks nowoffering savings accounts and mortgages and savings and loans participatingin other types of activities. Because of the eventsof the late 198 s, there is pressure to raise this amount. [xxviii]Biggar, "Chase Manhattan," Standard & Poor's NYSE StockReports, 1 March 1997, 5 1V. With 12, of the combined 75, jobs on the line,morale is likely to suffer as those who survive the merger watch long-timeassociates face unemployment. Unlike many other industrialized nations, theUnited States does not have a central bank per se; instead, this functionis fulfilled by the Federal Reserve which, in addition to setting thediscount rate, also sets the reserve requirement, which is the percentageof assets which banks are required to keep on hand. By bringing together banks who are strong in thecommercial and consumer industries, the merger could increase the level ofservice that individual customers can expect from the new bank, althoughthe number of branches and employees available to serve any one customermay actually diminish as a result of the merger and resultant downsizing. The merger with Chase will alsoincrease Chemical's presence in the credit card market, which has not beenas active as Chase Manhattan's, and which certainly does not rivalCitibank's. Chase Manhattanmaintained executive offices in New York with 159 branches around the worldand 1 2 overseas branches; Chase Manhattan was also a member of the FederalReserve System and the Federal Deposit Insurance Corporation.[iii] Business Environment The business environment comprises all of the components that acompany faces in a particular industry. As a result, the company should be able to realizesignificantly strong financial performance in the coming years, and thebetter than projected performance of the combined organization during itsfirst year of operation bodes well for the long-term success of ChaseManhattan.[xxxii] Conclusion Public policy affects the banking industry more than most privatesectors. Since taxpayers are ultimately responsible forguaranteeing the deposits of failed institutions, greater emphasis wasplaced on creating an environment in which institutions would not put theirdepositors' funds at such great risk. Thecompany had also been forced to cut dividends (from a high of $2.38 pershare in 1989 to $1.2 in 1991-1993, increasing to $1.46 in 1994).[xxi] Chase Manhattan's merger history extends to the 195 s, but the companydid not take advantage of recent deregulation in the banking industry asChemical did until the merger with Chemical. In the banking industry,competition is fierce, but it has also been marked by consolidation inrecent years as large banks take over smaller institutions in order to gaina foothold in new markets. While Chemical and Chase will eventually have a bank that isstrong in both the commercial and consumer side of the business, there willbe an initial period during which customers must become familiar with newbank personnel (and vice versa) who do not yet understand the customers'individual needs. Banks must obey consumerprotection regulations of the state in which they are based. [xvi]"Regional Banks Eastern Region, Wall Street Transcript, April 25,1994, 114. [vii]P. Tavelman, "American Banks or the Glass-Steagall Act--WhichWill Go First?" Southwestern University Law Review, 1992, 1513. These sections prevented investment banksfrom accepting bank deposits. Although the merger was viewedby some analysts as an acquisition of Chase by Chemical, with Chemical'sCEO (Shipley) and President (Labrecque) assuming the same responsibilitiesat the new company, the resulting banking conglomerate carries the Chasename.[xxvi] The merger was intended to result in an operation that will enable thecompany to compete with one of the lowest cost structures and a high levelof efficiency in the various markets. [xxi]Thomas Mulle, "Chase Manhattan," Value Line Investment Survey,September 8, 1995, 211 . In 1993, Congresslimited this type of activity through prohibiting federally insured, state-chartered banks from engaging in insurance underwriting. Interaction Between Public Policy and the Banking Industry The last time that financial institutions failed on a large basis wasduring the Great Depression of the 193 s. "Chase Manhattan." Value Line Investment Survey, September 8, 1995, 211 ."NYSE Stock Quotes." Wall Street Journal, April 1996 through April 1997, n.p."Price Jumps Precede Many Mergers." American Banker, December 22, 1994, 2 ."Regional Banks Eastern Region." Wall Street Transcript, April 25, 1994, 113-114.Rogers, D. At the same time, the bankingindustry was increasingly affected by globalization, with Japanese banks inparticular posing competitive threats to American business banking, andEuropean banking interests also taking an active role in the internationalbanking market. Some of theprojected $1.5 billion in cost savings that the company expects to realizeby 1998 will be borne by the laying off of more than 12, employees, andthe closing of approximately 16 percent of the combined company's branches. However, the merger was filled with it difficulties, which were notedby opponents to the deal (which required federal approval). Such a strategywould result in a decrease in the amount of funds which can be otherwiseinvested, which would cause interest rates to increase. Ferrara, "The Regulatory Separation of Banking FromSecurities and Commerce in the Modern Financial Marketplace," Arizona LawReview, 1991, 589. As a result of issuing largequantities of commercial papers, business began to effectively short-circuit the traditional banking industry, and the regulations that governedit. [xxx]"NYSE Stock Quotes," Wall Street Journal, April 1996 throughApril 1997, n.p. The net effect of the essential lifting ofRegulation Q was increased competition across the banking industry asfinancial institutions began to enter markets and market segments whichwere formerly closed. Interstate Banking The McFadden Act of 1927 prohibited banks from establishing branchesoutside their state of origin except as permitted by state law. Thisrepresented a strong opportunity for other institutions who were able totake over deposits of the failed organizations and thus gain additionalfinancial strength through acquisition. Mergers and acquisitions swept the banking industry during the early199 s, and culminated in 1996 with the merger of two of the nation'slargest banks, Chemical and Chase Manhattan. When Chemical acquiredManufacturers Hanover, for example, Manufacturers charged a "referencerate" to its best customers; transactions based on that reference rate wereconverted to the Chemical Bank prime rate, which represented a shift ininterest for some customers.[i] Commercial banks are heavily regulated because accounts are guaranteedby the Federal Deposit Insurance Corporation (FDIC), the Federal Savingsand Loan Insurance Corporation (FSLIC) and similar organizations up to$1 , per institution. One example of how this can occur is when branches of the twocompanies are located within the same block; after the merger, one of thesebranches can be expected to close (as redundant), resulting in a loss ofjobs and fewer banking options available to the community.[ii] Both Chemical and Chase Manhattan were members of the Feeral ReserveSystem and the Federal Deposit Insurance Corporation. Garsson, "Consumer Groups Worried About Protections, UrgeClinton to Support House Branching Bill," American Banker, May 17, 1994, 4. The banking industry strongly supports repeal of Glass-Steagallbecause it holds that the repeal would greatly strengthen competition in anindustry where the top 1 investment banking firms control 91 percent ofthe securities market. There was increased demand bythe public for greater regulation of an industry which, once deregulated,had engaged in speculative investment practices and other activities whichled to widespread failure. Stock Performance Since the Merger The stock market has reacted favorably to the merger between Chemicaland Chase Manhattan, and the stock has appreciated in the year since themerger took place. Where Chemical used its acquisitions to gain accessto new regions, Chase Manhattan used acquisitions as a way to enter newproduct markets. Factors Contributing to Deregulation During the 197 s and 198 s, large corporations and corporations withquestionable credit ratings found alternatives to traditional bankfinancing through commercial paper. The Future of American Banking. "Consumer Groups Worried About Protections Urge Clinton to Support House Branching Bill." American Banker, May 17, 1994, 4.Mulle, Thomas. In other cases,investors adopt a cautious attitude and wait to see whether the merger willhave the expected result of higher earnings relative to the per shareearnings dilution. [viii]F. The current status of national banks and their fee structure isthat they will be able to add several types of fees, such as late paymentcharges, to interest charged out-of-state clients, according to rules fromthe Office of the Comptroller of the Currency. The Riegel-Neallaw faced strong opposition from small state banks and the insuranceindustry, but the larger banks, including the BHCs, lobbied heavily for itspassage and were successful in their efforts. [xii]"Price Jumps Precede Many Mergers," American Banker, December 22,1994, 2 . In 1957, the company mergedwith the Staten Island National Bank, and in 1959, with the Clinton TrustCompany. Competition Banks now face a number of large competitors both in their domesticand international markets. Under the Riegle-Neal Interstate Bank and Efficiency Act of 1994, BHCscan establish a bank anywhere regardless of state law; over 3 percent ofcommercial bank assets are now owned by out of state BHCs. The actions of the Fed, particularly with regard to interest rates,have a greater impact on the company. Fiscal (taxation) policy can also affect the banking industry. In addition, the banking industry is now an international industrywhich is not confined to local, regional or even national markets. Where the two companies have had sluggish growth (ornegative growth), the new, larger organization should be able to bettercompete on an international level and thus enjoy improved performance,bringing additional investors to the stock. [xxxii]Biggar, 1997, 5 1V. For most companies, these rates indicate the price atwhich additional capital can be obtained; this differs somewhat in thebanking industry where interest rates are also the rate of return thatinstitutions receive on funds loaned out. Anticipated Disadvantages of the Merger Employees and customers are likely to see the disadvantages of themerger. In addition to receiving funds from depositors, banks can also borrowfunds from the Federal Reserve. When such mergers and acquisitionstake place, consumers are at risk in terms of losing customer service. Under FIRREA, the Federal Home Loan Bank Board was disbandedwith the regulatory role it provided taken over by the new Office of ThriftSupervision, part of the Treasury Department. Regulation Q Regulation Q of the act restricted competition among and with banks byprohibiting the payment of interest on checking accounts and restrictingthe interest allowed on savings accounts.
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