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Both sides’ second choice

Chase Manhattan has never made a secret of its desire to buy an equities franchise to complete the line-up of its wholesale and investment-banking operations. So the announcement on September 12 that it was buying JP Morgan for about $35 billion was no great surprise. But it is also well known that JP Morgan was far from being Chase’s first-choice partner. It would have preferred a deal with Merrill. Inside Morgan, too, there is lingering disappointment that the bank could not complete its transformation into global investment bank unaided. The two sides must put these disappointments aside quickly.

The merger of Chase and JP Morgan has caused few shock waves. "This is the deal that should have been done a year ago," says Mike Mayo, a bank analyst who left CSFB last month. "But better late than never." Another analyst, Ron Mandle at Sanford Bernstein, had even recommended such a deal in a report at the end of August.

The proposed merger brings together the two commercial banks in the US that have enjoyed the most success in transforming from lenders to investment banks. In doing so they have followed very different strategies.

Chase and Chemical concentrated on extending their credit markets franchises by leveraging off their loan platforms, claiming by 1997, two years after the banks merged, a formidable presence in high-grade and high-yield debt, foreign exchange and derivatives, where it focused on the plain-vanilla end of the market.

They then used that to muscle their way into M&A mandates, reaching sixth in the US last year - although M&A league table standings can be notoriously misleading. Chase would often gain credit despite its role being simply on the merger financing side, not pre-merger corporate advisory. Only after the Chase-Chemical merger was complete did the combined firm even start to develop an equities strategy.

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