JP Morgan's plan to purchase Bank One will still leave it as a wannabe in the world of mergers and acquisitions, but it will gain stability of earnings

David Wells

in New York

JP Morgan Chase's $58 billion (€46.4 billion) bid this week for Bank One highlights the desire for financial services companies to bulk up their retail banking businesses, but what does it mean for investment banking?

JP Morgan Chase was created when William Harrison of Chase Manhattan decided to buy JP Morgan so that - at a time when doing initial public offerings, large stock trades and arranging blockbuster transactions was all the rage - he could create an investment banking powerhouse out of his prey's operations.

That $32 billion transaction, completed at the end of 2000, was meant to be Mr Harrison's last mega-merger.

However, by the time he started integrating the two companies, the bear market was entrenched.

JP Morgan's earnings collapsed, as did its stock price. And a strategy of dealing with blue-chip clients, such as the then stock market darling Enron, failed.

For a while in 2002, the combined company was trading for less than the price Mr Harrison paid for the acquisition and even dipped below book value.

Buying Bank One is not meant to be a sign that Mr Harrison is throwing in the towel on investment banking, analysts said.

He simply realised that he needed a business that would complement his existing lines and, at the same time, keep earnings more stable.

And then: enter Bank One and its retail branches, small business lending, credit card business and mutual funds.

But buying Bank One does little to improve JP Morgan's investment banking business.

While the acquisition will boost JP Morgan's balance sheet, which normally can be used to lend money to companies, build a relationship and move it up the food chain, that was not something analysts felt JP Morgan lacked.

Also, the problem with pushing clients up the chain is that the first link-up tends to be fixed-income underwriting, a business JP Morgan is not struggling with as badly as it is with equities and mergers and acquisitions.

Mr Brad Hintz, an analyst at Sanford C Berstein, says: "The acquisition does not give JP Morgan any advantage over anyone else.

"Market share doesn't change at all. JP Morgan will remain a wannabe in mergers and acquisitions and equities.

"But what it does do is provide a stability of earnings for them."

Stability of earnings is something any financial services company with an investment bank is seeking.

For instance, Goldman Sachs and Lehman Brothers have bulked up their asset management businesses to offset swings in profits from trading, underwriting and advisory work.

While it is admirable to find a way to smooth out earnings and help boost a company's stock price, Mr Hintz says that the strategy also allows too many investment bankers to ignore the fact that some of their operations and people are not up to scratch and should be retired.

He reckons that too many financial services companies are using their marquee businesses - whether trading operations or arranging mergers - to subsidise other units that drag down earnings.

Investment banks, Mr Hintz says, need to admit to themselves that they own a lot of low-margin businesses that are unlikely to get better and that it is a bad idea to keep them simply because they want the glamour that comes with being a premier investment bank.

"We have too many management teams with too many dreams of investment banking grandeur that are unwilling to step away," he says.

"Too many people have one business that supplements the development of other businesses."

Several senior Wall Street investment bankers, who declined to be named, said someone should take capacity out of the industry through an acquisition of an investment bank or brokerage.

But they are not sure who will do it or when.

No chief executive wants to be the first to jump because most mergers of investment banks in the past 10 years have been disappointments.

Another problem is that the investment banking industry is recovering. Demand for high-margin work such as initial public offerings and mergers and acquisitions is rising. So why sell a business that might improve?

"Unfortunately, it's a war of attrition," says Mr Hintz.

"This is going to be a long process of people leaving. But we know what the end game is going to be.

"There are going to be fewer players." - (Financial Times Service)