Chase Manhattan Case Study

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Table of Contents

Rationale of the Merger 2
Overview of the Banks History2
Analysis of the Banking Market2
Motives behind Merger and Acquisition Transactions2
Rationale behind the Chase-Chemical Merger 4 Relative Merits of a Merger and an Acquisition 5 Present Value of the Gains from the Merger 6 Estimating the Exchange Ratio 8 Overview:8

Problem Definition:8
The Expected Market Exchange Ratio:8
The Acquiring Premium:9
The Expected Value Added of the Merger:9
The Expected Value Added of the Focus Program:10
Proposed Solution:10
Ex-Post Analysis:11
Literature12

List of Tables
Table 1 Estimated Impact of Merger between Chemical and Selected Banks4 Table 2 Beta Calculation7
Table 3 Banks merger premium multipliers in the US during 19959

List of Figures
Figure 1 Projected Growth in Online Banking4

Rationale of the Merger
Overview of the Banks History
In 1955 Chase National Bank and the Manhattan Company merged with Chase Manhattan Bank. David Rockefeller, who became Chairman of Chase in 1969, was significantly involved in the merger. By the end of the 1979s Chase evolved to the third largest Bank in the United States (U.S.). In the 80s Chase saw itself confronted with difficulties, which were caused by investments in bad real estate loans. In the year of 1990 Chase suffered from a record loss of $1 billion. The company however managed to regroup and presented a solid balance sheet in the next four years leading to the merger (Gilson and Escalle, 1998). Chemical Banking Corporation was formed in 1824. In 1844 it became the Chemical Bank of New York and eventually completely left the manufacturing business seven years later. During the period from 1946 to 1972 Chemical was able to seriously increase its assets (from $1.35 billion to $15 billion). At the same time Chemical acquired several banks, enabling it to expand into new markets, offer new products and services and therefore diversify (Gilson and Escalle, 1998). Whereas during the financial crisis of 1991 Chemical had to book a loss of $1 billion, Chemical Banking Corporation and Manufacturers Hanover Corporation merged, giving life to the first major bank merge amongst equals (Gilson and Escalle, 1998) in the history of the U.S. . The resulting bank became the second largest bank, in terms of assets, in the U.S. (Gilson and Escalle, 1998). Analysis of the Banking Market

Between 1991 and 1995 U.S. commercial banks increased their net-profit from $20 billion to $80billion. At the same time the industry was marked by several mergers, which led to an increase in the average total value of bank equity acquired in acquisitions per year by over 300%. This trend resulted in a consolidation of the U.S. banking industry, in which a few banks were holding a great deal of total bank assets, for instance the top 50 banks now held 65% of the total assets compared to 53% in 1985 (Gilson and Escalle, 1998). This period of mergers created new competitors. As a result Chemical and Chase were both under pressure to react to the rise in competition for national and international market shares in order to hold their market position. Despite the leading position Chemical had achieved thanks to its merger in 1991, the bank had fallen by late 1994 to fourth place in terms of size (Gilson and Escalle, 1998). Motives behind Merger and Acquisition Transactions

As Brealy and Meyers (2005; pp. 455) mentioned mergers can be divided into different categories: horizontal, vertical or conglomerate. A horizontal merger is defined as a merger between two firms of the same line of business. Hence the merger between Chase and Manhattan would clearly belong to this category as they both are commercial banks. In contrast a vertical merger takes place between companies in different stages of product (Brealy and Meyers, 2005) and conglomerates are mergers or...
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