Mergers Banking On Bigness

By John Greenwald

Among bankers these days, big is beautiful. In the largest combination of two U.S. banks ever, Chemical Banking last week agreed to acquire New York City rival Manufacturers Hanover in a $2.3 billion stock swap. The merger of the two huge but weak Goliaths, both burdened by hefty portfolios of ailing loans, will create a megabank with assets of $137 billion, second in size among U.S. banks only to New York's Citicorp. Moreover, the deal is likely to prompt a new wave of mergers across the country as other big banks struggle to remain competitive.

But the merger will inflict sharp pain on employees and the troubled New York economy. Chemical and Manufacturers said they would eliminate $650 million a year in costs through a series of deep cutbacks. The banks plan to pare 6,200 jobs, or nearly 15% of their combined work force, and shut 70 of their 436 branches in the New York City area. Manufacturers Hanover, which financed construction of the Brooklyn Bridge, will see its name vanish into corporate history. Nonetheless, Manufacturers chairman John McGillicuddy, 60, will head the merged company until 1994, when Chemical chief Walter Shipley, 55, will succeed him.

While banking experts generally praised the deal, they cautioned that executives could find themselves balking at the drastic cuts that will be needed for substantial cost savings. And the banks' underachieving loans, which range from troubled real estate mortgages in New York City to unpaid Third World debt, will erode their profits for years to come. "I hope they didn't just put two boat anchors together," says John McCoy, chairman of Ohio-based Banc One, a regional firm that has been aggressively buying up local banks. "If they did, they'll just go down at the same speed together."

But the banks plan to rev up quickly. Among other things, they intend to raise $1.25 billion by selling stock. If Congress approves interstate banking, the new Chemical could embark on a shopping spree for banks and savings and loans throughout the New York City region.

Yet the biggest impact of the merger could come from the pressure it exerts ( on other large banks. Just one day after the New York behemoths unveiled their agreement, C&S/Sovran, a regional firm based in Atlanta and Norfolk, Va., said it would press ahead in merger talks with North Carolina's NCNB to create the third largest U.S. banking company. In California experts said merger candidates include San Francisco's Wells Fargo and the ailing First Interstate and Security Pacific banks in Los Angeles. Any pairing among those would create a formidable new West Coast giant.

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With reporting by William McWhirter/Detroit and Sylvester Monroe/Los Angeles