From commuter trains to board rooms, New York City was abuzz last week with the news of the third giant Wall Street merger in two months: Chase Manhattan Corp. is buying J.P. Morgan & Co. for $33.6 billion in stock.
The latest blockbuster comes only two weeks after Credit Suisse First Boston announced its intent to buy Donaldson, Lufkin & Jenrette for $11.5 billion, and two months after UBS AG said it would buy PaineWebber Group for $10.8 billion.
The move immediately vaults J.P. Morgan Chase, which is what the new firm will be called, into the top ranks of global financial firms, with $660 billion in assets. Its market capitalization of about $95 billion places it below Citigroup Inc.'s $252 billion and Morgan Stanley Dean Witter's $121 billion, but well ahead of Goldman Sachs' $64 billion and Merrill Lynch & Co.'s $57 billion.
The proposed Chase Manhattan/J.P. Morgan merger makes Chase even stronger in sectors of the debt capital markets it was already beginning to dominate, adding credence to Street beliefs that Chase pros will wind up heading much of the combined entity's debt operations.
In many major fixed-income categories, Chase's track record for the last year has been superior to Morgan's. Given that so far Chase officials have tended to come out ahead of their Morgan counterparts in overall control of the newly merged enterprise, it makes sense that Chase will have the upper hand in determining who lands where in debt.
"You tend to keep your job if your boss keeps his job," says one rival fixed-income banker. "So far, Chase has been winning most of the leadership roles."
When Credit Suisse First Boston, after announcing its merger with DLJ, basically ceded control of high-yield bonds to DLJ group head Bennett Goodman, that indicated that the CSFB brass realized the DLJ franchise was the superior product, sources said. There is no parallel debt operation in J.P. Morgan that can make that claim with Chase.
For ABS, Chase had been ranked fifth with $13.5 billion in proceeds, up from eleventh in 1999. Under the leadership of Michael Malter, the division had made several key hires from the likes of Merrill Lynch & Co. and was reported to be making a bid for top three status in the ABS market. With the bulk of Morgan's operations incorporated, they may have achieved that wish.
Mortgages Outperform
As all of the market was abuzz with speculation about the merger, mortgages again outperformed in active two-way trading, coming up against close to $7 billion in corporate supply and Freddie Mac's Euro 5 billion deal.
Near close last Thursday, 30s were leading by 3.6 ticks with discounts beating currents and premiums. Fifteens remained flat on the day.
All the spread sectors had seen active buying on the supply last week; this was expected as players are holding higher-than-normal levels of cash. Investors have also been inclined to sell Treasuries and pick up yield in the spread sectors now that the Fed appears to be on hold as the economy heads for a soft landing.
CMBS Pipeline
In commercial mortgage-backed securities, the $771 billion Bank of America issue was priced within talk for the triple-A to double-A tranches and slightly wider for the single-As.
The calendar is quickly filling up. Next week sees at least three deals on tap totaling $2 billion: Morgan Stanley Dean Witter's conduit for $598 million, Lehman Brothers/UBS' deal for $999 million and a $450 million single-asset deal from Morgan Stanley.
Bank of America is also slated to issue another conduit by the end of the month, in the range of $900 million.
J.P. Morgan is waiting in the wings with a $738 million offering, sources said.
