J.P. Morgan to Acquire Bank One

Parrying rival Bank of America's recent move, J.P. Morgan scoops up the Midwest credit card giant for $59 billion.
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Updated from 6:16 p.m. EST

J.P. Morgan Chase

(JPM) - Get Report

agreed to acquire

Bank One

(ONE) - Get Report

for about $59 billion in stock, snapping up the Midwest credit card giant in a bid to maintain its advantage over

Bank of America

(BAC) - Get Report

, which announced its own mega-merger in October.

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 on the basis of 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.

Bank One shares closed Wednesday at $45.22, giving the company an overall market capitalization of roughly $50.6 billion. The shares were recently trading on the Instinet after-hours session at $49.74, up $4.52, or 10%. J.P. Morgan shares were down $1.52, or 4%, to $37.70; its market cap is about $80 billion.

J.P. Morgan is currently the second-largest bank in the country behind

Citigroup

(C) - Get Report

but -- prior to today's news -- was expected to drop to No. 3 following the acquisition of

FleetBoston

by Bank of America. Bank One is the sixth largest bank in the country.

The acquisition would return Bank One CEO Jamie Dimon to New York three years after he was ousted from the No. 2 spot at Citigroup in an acrimonious struggle with Citigroup CEO Sandy Weill. The banks said William Harrison will remain chairman and chief executive of the combined company until 2006, when he will be succeeded as CEO by Dimon, currently the combined company's president and chief operating officer.

"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."

Stead also said Dimon's ascension would be a good thing, helping clean house after J.P. Morgan's sordid involvement in the

Enron

debacle.

The estimated 20% premium 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 is coughing up a 40% premium for Fleet, based on the price of the shares the day the deal was announced.

Early returns on J.P. Morgan's mega-deal are positive.

Sean Egan, president of Egan Jones Ratings, a small independent rating service, said the deal finally will 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 has been that the merged bank never lived up to expectations. Harrison and other J.P. Morgan executives had boasted that that merger in 2000 would let the nation's No. 2 bank compete head to head with Citigroup.

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

The banks expect pretax cost savings of $2.2 billion over the next three years and the transaction to be accretive to GAAP earnings starting in 2005. Merger-related costs are expected to be $3 billion before taxes. Bank One expects to increase its quarterly dividend to 45 cents.