J.P. Morgan Mines a Dimon at Bank One

The Bank One acquisition neatly ends the William Harrison controversy.
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Updated from 8:44 a.m. EST

J.P. Morgan Chase's

(JPM) - Get Report

$59 billion acquisition of

Bank One

(ONE) - Get Report

, the deal everyone wanted a year ago, is finally a reality.

It looks like a good one.

The storied New York banking powerhouse gets a long-coveted Midwest consumer presence and the services of Bank One Chief Executive Jamie Dimon, who was unceremoniously ousted as No. 2 man at

Citigroup

(C) - Get Report

by Chairman Sandy Weill four years ago.

Dimon, long a darling of Wall Street, will take the reins of the combined bank in two years, succeeding J.P. Morgan Chase Chairman and Chief Executive William Harrision. Dimon's ascension is a godsend to J.P. Morgan critics who have wanted Harrison out ever since the bank disclosed its sordid involvement in the

Enron

debacle. The bank had to shell out $135 million in July to settle

Securities and Exchange Commission

allegations that it helped the fallen energy trader cook its books.

"I don't know how anybody can be that surprised," said Tim Ghriskey, a hedge fund manager. "Jamie Dimon was determined to get back into the big time and prove that Sandy Weill had made a mistake in letting him go.''

For J.P. Morgan investors, it's a chance to get the national retail presence they've longed for, particularly after rival

Bank of America

(BAC) - Get Report

paid up for

FleetBoston

in October.

"Net-net, it will be a good deal," said Ghriskey, whose Ghriskey Capital Management owns Bank One shares.

In buying Bank One, J.P. Morgan adds a huge credit card portfolio to its sprawling consumer franchise and in so doing prevents Bank of America from vaulting ahead of it in the never-ending battle for size. It's doing it on the cheap, as well: The estimated 14% premium over Bank One's Wednesday close is not nearly as frothy as the one paid in Bank of America's $47 billion acquisition of FleetBoston, which is scheduled to close in March. BofA coughed up a 40% premium for Fleet.

The card business may be the big winner in the deal for both banks. Combined, they will have more than 90 million credit cards issued, making them the No. 2 credit-card company behind Citigroup.

J.P. Morgan will exchange 1.32 shares of its stock for every Bank One share outstanding, valuing Bank One's shares at about $51.77 based on Wednesday's close. The combined entity, to be called J.P. Morgan Chase & Co., would have a market capitalization of about $130 billion, $1.1 trillion in assets and 2,300 branches in 17 states. The stock will trade under the J.P. Morgan ticker symbol.

For now the merged bank will not change the names of any of its retail branches, but eventually it will settle on a single name for its retail operation. The banks intend to conduct a study to see which retail brand name sells best with consumers.

Harrison and Dimon, who have known each other for years, began talking in earnest about a marriage of their two banks in early November, just days after BofA announced its deal for Fleet. Harrison said in a Thursday morning conference call that the merger made a lot of sense from the J.P. Morgan Chase perspective because the bank was "overly weighted on the investment banking, market-sensitive side.''

Harrison's statement is an admission what many have long held: that J.P. Morgan's earnings are too dependent on unpredictable trading revenues and its consumer banking business couldn't compete with Citigroup's.

Of the course, investors can question whether Bank One if the best fit for J.P. Morgan. San Francisco-based

Wells Fargo

(WFC) - Get Report

, the nation's biggest mortgage lender, might have given J.P. Morgan more retail clout. Even after the Bank One merger it will be the No. 4 home lender in the country.

But it's hard to quibble with the deal since it's a recognition that J.P. Morgan had to do something to stay in the race with Citigroup and Bank of America.

"This merger gives us real balance,'' said Harrison. "This is about creating a balanced business model between wholesale and retail.''

Dimon said he will be disappointed if, a year from now, the merged J.P. Morgan Chase and Bank One can't point to tangible results that demonstrate the ability to cross-sell banking products to customers of both institutions.

Bank One shares closed Wednesday at $45.22, giving the company an overall market capitalization of roughly $50.6 billion. The shares were trading Thursday morning at $51.30, up $6.08, or 13.4%. J.P. Morgan shares were up 23 cents, or 0.6%, to $39.45; its market cap is about $80 billion.

"I think it's a great deal," said Michael Stead, a Wells Capital Management portfolio manager, who owns both bank stocks in his fund. "It will smooth out J.P. Morgan's revenue stream.''

Earlier this week, a Lehman Brothers bank analyst issued a research note speculating on a potential merger of the two banks, a possibility that has been talked about on and off for the past year. In his report, the analyst said the deal is "potentially extremely compelling,'' although he doubted anything was imminent.

The early returns on the mega-deal were much more positive than they were for the Bank of America/FleetBoston transaction.

Sean Egan, president of Egan Jones Ratings, a small independent rating service, said the deal will finally bring J.P. Morgan Chase closer to competing with Citigroup as a full-service consumer and commercial bank. He said Bank One will strengthen J.P. Morgan's consumer and retail offerings and bring needed management "new blood'' in the form of Dimon.

One of the criticisms of the merger of J.P. Morgan and Chase Manhattan is that the combination never lived up to expectations. Harrison and other J.P. Morgan executives had boasted that the 2000 merger would let the nation's No. 2 bank compete head-to-head with Citigroup.

In many respects, J.P. Morgan never caught up with its crosstown rival. J.P. Morgan has never had the consumer dominance of a Citigroup and its investment banking business has been too dependent on bond trading, never a particularly reliable revenue stream.

It remains to be seen if J.P. Morgan can do a better job integrating its latest acquisition than it did with the Chase Manhattan transaction.