Chasing Citigroup, J.P. Morgan Falls Short of Merger's Goals
Matthew Goldstein
10/25/02 - 11:59 AM EDT
Top brass at
J.P. Morgan Chase(JPM Quote - Cramer on JPM - Stock Picks) insists it isn't retreating from a 2-year-old ambition to create a financial services juggernaut that can compete in everything from commercial lending to stock underwriting to trading --
a la Citigroup(C Quote - Cramer on C - Stock Picks).
But that's not the way many on Wall Street see it, especially after the bank's announcement two weeks ago that it will shed some 2,200 jobs in its investment banking division and dramatically scale back operations in Asia and Latin America.
While J.P. Morgan executives portray the job cuts as a measured effort to reduce operating costs by some $700 million during a rough economic time, critics see a firm in the midst of a transformation that represents the death of the merger's original vision.
That's because nearly 25% of the job cuts are coming in J.P. Morgan's equities business, an area that was central to the merger's grand scheme but which has never lived up to its billing. Now, that business is likely to get only weaker, as an already lean operation gets cut to the bone.
"They will likely just about kill the equity and retail side of the investment bank," said one Wall Street observer, who didn't want to be identified. "They'll probably get rid of most of the equity research analysts."
Tweaking
J.P. Morgan officials strongly dispute that anything so drastic is in the works. Kristin Lemkau, a bank spokeswoman, said that in light of the sharp downturn on Wall Street and the stock market, "we are adjusting our business to meet those conditions."
In fairness, J.P. Morgan isn't the only Wall Street firm shedding jobs. Citigroup, the nation's biggest financial services firm, is planning to eliminate 1,000 positions, including 200 investment bankers, according to
The New York Times. Over the past year,
Merrill Lynch(MER Quote - Cramer on MER - Stock Picks), the nation's biggest brokerage, has slashed more than 20% of its workforce. Overall, the securities industry has eliminated more than 50,000 jobs since the bear market began.
Yet already there are signs that J.P. Morgan's cuts are more than the typical Wall Street bloodletting that comes during a downturn.
The ax-wielding at the bank means that J.P. Morgan, for the moment, doesn't have a full-time research analyst covering Citigroup,
Bank of America(BAC Quote - Cramer on BAC - Stock Picks) or
Bank One(ONE Quote - Cramer on ONE - Stock Picks) -- three of its main banking rivals -- as well as some other financial firms, according to Thomson Financial/First Call. A J.P. Morgan spokesman said that in the coming weeks, coverage of those institutions will be assigned to other analysts.
Sources, meanwhile, say there's just about nothing left of J.P. Morgan H&Q, a technology investment bank and retail brokerage operation that Chase Manhattan acquired in 1999. Most of the stock analysts who worked at the old Hambrecht & Quist are no longer with the bank, and H&Q's high-net-worth retail brokerage business is a shell of its former self.
Big Boys
Indeed, the initial postmerger claim that a combined J.P. Morgan and Chase Manhattan could go toe to toe with Merrill Lynch,
Morgan Stanley(MWD Quote - Cramer on MWD - Stock Picks) and Citi's Salomon Smith Barney in snaring stock underwriting, and corporate advisory work seems to have been just wishful thinking.
This year, J.P. Morgan is pulling up the rear on Wall Street, as it ranks seventh in stock underwriting and sixth in advising on corporate mergers and acquisitions, according to Thomson Financial Securities Data.
And while it's been hard times for all investment banks, things have been downright awful at J.P. Morgan. In the just-completed third quarter, J.P. Morgan's investment bank posted a net operating loss of $256 million, as the nation's second-largest bank saw year-over-year profits tumble 91%.
The poor performance of the investment bank, coupled with a mountain of bad loans to ailing telecommunications companies, has helped slice nearly 40% off of J.P. Morgan's share price this year.
"J.P. Morgan's equity business was never at the top of the market. One of the original goals of the merger was to invest in equities," says Reilly Tierney, a Fox-Pitt Kelton bank analyst. "But they are making no progress."
David Hendler, a financial services analyst at Credit Sights, an independent credit-rating agency, contends J.P. Morgan would do its suffering shareholders a favor by abandoning the pretense that's its operating a broad-based investment bank that's on par with other Wall Street firms. "They just aren't a player" on the equity side, he said.
Hendler said the main reason J.P. Morgan is unwilling to bite the bullet and acknowledge its weakness in equities is because it would be an embarrassing about-face for William Harrison, the bank's chairman, who was the prime mover behind the December 2000 merger of Chase Manhattan and J.P. Morgan.
Role Model
Indeed, some say that whether J.P. Morgan executives acknowledge it or not, its investment bank eventually will look more like
Lehman Brothers(LEH Quote - Cramer on LEH - Stock Picks) than Merrill Lynch in the future. Some are even saying the new J.P. Morgan will be a "Lehman Plus" -- that is, Lehman with a big commercial and retail banking operation joined at its hip.
In other words, after the bloodletting is over, J.P. Morgan probably will focus on those investment banking activities in which it's strongest: derivatives underwriting, fixed-income trading, bond underwriting and commercial lending. Lehman, which serves mainly institutional clients, is strongest in bond underwriting and trading.
Some say a more narrowly focused investment bank might not be a bad thing for J.P. Morgan because it will be able to concentrate on its core businesses.
For its part, J.P. Morgan rejects the Lehman analogy and the suggestion that the job cuts are anything more than a restructuring that will allow it to ride out the rest of the economic slowdown. The bank contends that once the stock market and economic outlook brightens, its investment bank will be ready to compete with the likes of Citigroup and Merrill.
"Our strategy hasn't changed," said bank spokeswoman Lemkau. "The bottom line is that there isn't a piece of business that we could not do today that we did prior to the downsizing."
Of course, a cynic would point out that's not saying much.
