Chase Manhattan Corp.'s acquisition of J.P. Morgan & Co. in a blockbuster $36-billion (U.S.) deal has everyone wondering who will be snapped up next in the global wave of financial services consolidation.
Smart money is on Lehman Brothers Inc. and Bear Stearns Cos. Inc., two of Wall Street's last remaining mid-sized investment banks. Their shares, buoyed by the speculation, are both up more than 80 per cent so far this year.
The much larger Merrill Lynch & Co. Inc., which looked last year at combining forces with J.P. Morgan, is also said to be a takeover target, and some insiders are also speculating that someone might take a run at Goldman Sachs & Co.
Germany's Deutsche Bank AG, looking for a bigger foothold on Wall Street, is a likely buyer. It was reported a few weeks ago that it was on J.P. Morgan's trail, but failed to strike a deal. Closer to home, Bank of America, Fleet Boston Financial and Bank One International are cited as potential buyers.
"At this point, what happens next is anyone's guess," said Steve Eisman, a financial services analyst at CIBC World Markets Inc. in Manhattan.
But there is no question that the pressure is on to become a one-stop financial supermarket, able to offer customers everything from basic banking to underwriting capabilities.
The recent pace of consolidation has been breathtaking.
A few weeks ago, Credit Suisse forked out $13.4-billion for Donaldson Lufkin & Jenrette Inc., and in July UBS AG agreed to pay $16-billion for PaineWebber Group Inc. Last week, Citigroup Inc. swallowed Associates First Capital Corp.
"This is a story about growth, and it's really just that simple," J.P. Morgan chairman William Douglas told analysts yesterday. "Combined, we stand ready to accelerate far beyond what either of us could expect alone, or for that matter, with any other partners."
While everyone seems to be pairing up on Wall Street, Canada's banks have been forced to sit out this round of consolidation. The move by the government in late 1998 to ban mergers among the big banks hasn't sat well with senior executives at the Big Six.
The only significant deal to pass muster in Ottawa was Toronto-Dominion Bank's 1999 purchase of Canada Trust. But yesterday, speculation was swirling on Bay Street that Citigroup had bought as much as 9.9 per cent of Royal Bank of Canada's shares.
"These guys have been sidelined," remarked one Canadian banking analyst, who had heard that Citigroup had bought a stake in Royal.
However, analysts were quick to praise the Chase-J.P. Morgan marriage, a $207-a-share stock deal that unites two of America's oldest banks.
Both are steeped in history. J.P. Morgan was formed 150 years ago by J. Pierpont Morgan. Chase was founded in 1877, and in 1930 merged with Equitable Trust, whose largest shareholder was John D. Rockefeller.
The new bank will be called J.P. Morgan Chase & Co. J.P. Morgan's chief executive officer Douglas Warner III will serve as chairman, while William B. Harrison, Chase's chairman and CEO, will become CEO of the combined company.
The two executives will have to meld two very different corporate cultures. Morgan has historically served the money set through its private banking operations and it has a very elitist culture. Chase, on the other hand, is considered a much more aggressive organization.
Concerns that Chase had perhaps overpaid for Morgan took a back seat yesterday to comments that the two are a good fit.
Chase is a force to be reckoned with in areas such as syndicated lending, while Morgan is strong in the lucrative area of private banking. The new company is expected to emerge with a much stronger investment bank and will have assets of $675-billion, making it the third largest financial services firm in the United States behind Citigroup and Bank of America.
Together they will be better positioned to compete with Citigroup, one of the undisputed giants of Wall Street.
Through a series of acquisitions, Citigroup owns Salomon Smith Barney Inc., Citibank NA and Travelers Property and Casualty.
As Chase found out yesterday, the price of admission into this tier is now steep. Chase has been trading at about 12 times earnings, but it is paying 17 times earnings for J.P. Morgan.
Looking at another multiple, Chase is paying about three times book value for J.P. Morgan -- in line with other recent Wall Street deals but still expensive.
One analyst said this is at the high end of what Chase can afford, while other observers feel Chase might have in fact overpaid.
Lehman and Bear Stearns are likely candidates for a takeover, not only because they are some of the last few mid-sized players, but also because they are dominant in a single line of business.
Lehman is said to be a more likely takeover candidate because it has a stronger presence in Europe, considered to be the next front for expansion by Wall Street players.