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Why The Chemistry Is Right At Chemical


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WHY THE CHEMISTRY IS RIGHT AT CHEMICAL

Leisure Bowling Centers, with $8 million in sales, doesn't exactly rank in the upper reaches of the corporate elite. The Syosset (N.Y.) company is just opening its eighth alley. Where did Leisure go for the financing? Chemical Banking Corp., the third-largest bank in the country, with $82 billion in outstanding loans.

Down the road, in Hicksville, Long Island Lighting Co. is also a Chemical client. In fact, after borrowing from the New York bank for years, the $10.3 billion utility just enlisted Chemical to help underwrite and sell a $200 million bond offering. "We have always been extremely pleased with their performance," says chief financial officer Ralph T. Brandifino.

Chemical Bank wants to do business with just about every kind of customer. Flush from its merger with the former Manufacturers Hanover Corp., the new Chemical is pursuing a strategy that flouts current fashions in banking. Other major banks are narrowing their focus and concentrating on niches, both business and geographical. But Chemical seeks to become an old-fashioned, widely diversified bank, with a major presence in retail as well as corporate banking, both in the U.S. and abroad.

Like proud parents, Walter V. Shipley and John F. McGillicuddy delight in explaining how the merger has given the new Chemical the wherewithal to achieve a commanding position in a variety of markets. "I think the greatest single event the merger produced was it took two good banks, both of which had very little in the way of leadership positions, and in putting them together created leadership positions right across the board," says Shipley, 57, the tall, patrician president who is slated to replace McGillicuddy as chairman and chief executive on Jan. 1. McGillicuddy agrees: "I think we've got a great run in front of us."

A MODEL? Shipley believes Chemical, boasting new capital and improved credit ratings, can make money both advising GM on syndicating $25 billion in bank credit and selling a $1,000 CD to John Q. Public. "We feel there's strength in the diversity we have," he says. If he's right, Chemical stands to become a model for other banks that are looking to merge as the banking industry consolidates.

But the strategy also has risks. Shipley and McGilicuddy pledge that they'll focus on markets where the bank is strong, but if they're not sufficiently disciplined, Chemical could find itself trying to do too much. Some of the largest and proudest banks in the country--including Citicorp, the nation's biggest--have stumbled after they attempted a broad diversification.

Although the new Chemical has saved nearly $350 million in operating costs since the merger, it has yet to prune many businesses that lack a strong competitive advantage. Indeed, Chemical, intent on preserving the collegiality that has marked this first bank megamerger of equals, has been rather slow in dealing with many of the challenges posed by the deal. The bank, for instance, has yet to develop a distinctive culture. The old Manny Hanny's culture was relatively fraternal and hierarchical. At the old Chemical, individual entrepreneurship was rewarded more. Asked about the new institution's culture, Shipley describes it as "developing."

DEBATES. Consider the formulation of the new Chemical's mission statement. Last spring, Shipley, McGillicuddy, the bank's two vice-chairmen, and a consultant holed up for three days in Chemical's corporate suite at the Waldorf-Astoria to hammer it out. Ultimately, they produced a clear summary description of the bank they hope to build: "the best broad-based financial institution, a leader in our chosen markets." But their arguments while putting the statement together underscore some of the challenges a diversified bank faces. Hours went to debates over how to characterize the process of working together. Chemical Vice-Chairman William B. Harrison Jr., the aristocratic North Carolinian in charge of the global bank, argued for the investment banking-like "partnership," while McGillicuddy pushed for the more plebeian "teamwork." Vice-Chairman Edward D. Miller, head of the consumer bank, worried whether tellers were really ready for "empowerment."

These potential problems are arising just as Chemical's biggest competitors are getting back on their feet. NationsBank Corp., the superregional based in Charlotte, N.C., is making deep inroads in the market for big corporate loans. For all these real and potential roadblocks, the new Chemical has already made dramatic progress. The merger has given the bank the size it needs in a range of businesses to concentrate its advertising, realize economies of scale, and drive its revenues higher than almost anyone expected. "I'm astounded by how well they've done on the revenue-producing sides of the business," says Eugene M. McQuade, the former executive vice-president and controller of Manny Hanny who is now an executive vice-president and soon-to-be chief financial officer for Fleet Financial Group Inc.

SERVICE BENT. Retail banking is a good example. Red, white, and blue Chemical signs dot hundreds of New York street corners, and the bank is second only to Citicorp in its share of the consumer-banking market there. In a bid to differentiate itself from Citi's emphasis on technology and Chase Manhattan Corp.'s subtle play for affluent customers, Chemical's friendly-sounding advertisements, many of which include employees' signatures and photographs, portray the bank as the one with the best all-around customer service. Some bank executives even have buttons on their desk that read: "It's the customer, stupid."

The same mindset prevails in the middle-market lending group. Senior Executive Vice-President William H. Turner got his lending officers to make 180,000 calls last year in New York State--more than any other New York bank. Turner himself makes calls on occasion, as do Shipley and McGillicuddy. Leisure Bowling's Reitzig remembers meeting Shipley at a golf outing arranged for middle-market clients.

As for corporate BWdomestic banking, Chemical dominates the market for large loan syndications, the business of leading groups of banks in major loans to corporate clients. "Jimmy Lee [head of loan syndications] and his people have done a great job of capitalizing on the Manny Hanny client list, and they've been able to maintain a lot of presence," says James J. Fuschetti, head of syndicated credit facilities at J.P. Morgan & Co. Chemical did nearly twice as much business as its closest competitor in 1992, and it kept up the pace in the first quarter of 1993.

The new Chemical is also proving that bigger is better in fee-based businesses. "We can match our size and scale in most businesses with the biggest players that are banks," says Richard J. Matteis, head of Geoserve, Chemical's transaction-processing unit. "The new, merged operation puts us right in the big leagues." Geoserve's scale, he says, will let him be a buyer as fee-based businesses consolidate.

RATINGS BOOST. Chemical is striking it rich in Texas as well. When Shipley bought Texas Commerce Bankshares Inc. in 1987, the deal was roundly criticized by Wall Street, which felt Shipley overpaid. But Shipley held on, and the new Chemical, bolstered by $1.5 billion in capital raised following the merger with Manny Hanny, was able to buy the assets of the former First City Bancorp. when that bank failed in 1992. Today, Chemical's Texas unit is the leading corporate bank in the Lone Star state, and it ranks second in the highly lucrative business of banking for wealthy individuals. That's especially helpful given the improvement in the Texas economy since the mid-1980s.

Chemical is even making inroads in the booming market for derivatives. At the end of 1992, the bank held interest-rate and currency swaps tied to $422 billion of assets, up from $245 billion a year earlier. The derivative business is highly credit-sensitive, and Chemical has been benefiting from its likely imminent advancement to double-A credit ratings from the major rating agencies. Says Harrison: "Our trading revenues have been way ahead of where we thought they would be. We have begun to close the gap between [Chemical and] Morgan and Bankers Trust in terms of trading revenues."

Further expansion is in the works. Just this month, Chemical received Federal Reserve authorization to underwrite corporate bonds, and it aims to be a major player in the next three or four years in the market for below-investment-grade debt. On the consumer side, the bank is weighing possible additional investments in its credit-card and mortgage businesses.

At headquarters, there's a new campaign to promote "cross-leveraging." Bankers working on products from credit cards to cash management are developing seven- or eight-person task forces to identify ways the bank can expand its sales of, say, cash-management services to middle-market borrowers.

Chemical still has plenty of hurdles to clear, though. Chief among them: an apparent slowness in making tough decisions. Shipley and McGillicuddy have been striving to avoid making officials from either Manny Hanny or the old Chemical feel disenfranchised, but the emphasis on consensus has slowed down the consolidation of the two companies. Although the merger was announced nearly two years ago, Chemical's top four officers, along with the consulting firm First Manhattan Consulting Group, are only now starting detailed reviews of the bank's various business lines. Chemical is selling its upstate New York retail branches to Fleet Financial Group, and it is unloading some small operations in Texas. But senior officers on both sides of Chemical demur when asked to identify other businesses they think don't make sense for the bank. Indecision about strategic focus could leave Chemical with its fingers in too many businesses where it doesn't have the scale to dominate, thereby diluting its overall clout.

"A CHALLENGE." Consider Chemical's New Jersey operation. It's the fifth-largest bank in the state, according to Turner--hardly the stature bank officials say they're aiming for in their major businesses. "New Jersey is a challenge for us," concedes Turner. But he says the subsidiary is more profitable than many banks in that state. In fact, he says, Chemical is considering acquisitions in the Garden State.

The strategic uncertainties may stem in part from the current absence of a strong corporate culture. Even though Manny Hanny and the old Chemical were more similar than many other New York banks, the disparity in personality styles between executives from the two banks is marked. McGillicuddy, extraordinarily gregarious, is a fixture at New York charity events. He had a reputation for protecting mediocre employees even several levels down who were particularly loyal to Manny Hanny. Chemical executives tend to be cooler and more remote. And there is a class difference: Chemical "brought a lot more suspenders to the organization," says a former Manny Hanny employee. According to one Chemical banker: "We've certainly killed the old cultures. But if you put 12 new Chemical people in a room and asked them to describe the new Chemical culture, would you get the same 12 answers? No." The absence of that common bond puts Chemical at a disadvantage to, say, Morgan, where lateral hires are rare and where virtually all the bankers are steeped in Morgan's way of doing business.

The improving health of the banking industry is also creating a challenge for Chemical. The bank was able to make big inroads in corporate lending and the like while other banks around the world were pulling back from lending. "There was obviously a vacuum after Citicorp stepped back," says Robert Cohen, head of Credit Lyonnais' American subsidiary. "Chemical had the momentum to become the leading U.S. bank in terms of [loan] underwriting." But many big banks' profits are rebounding, so Chemical will soon face stiffer competition.

"GOOD LUCK, GANG." There's also been some question about the CEO succession. At the time of the merger, McGillicuddy planned to depart as CEO at the end of this year, but he left open the possibility that he would stay on as chairman. Rumors have swirled about whether he would in fact leave either post. But both McGillicuddy and Shipley say emphatically that Shipley is taking over on Jan. 1. McGillicuddy is particularly explicit. "Would I like to be here? You bet your booties I would, because this is a great organization," he says. "I love the people, I love what we're doing...but I feel even more strongly that I've had my time. When you have as strong a group as we have, then the best thing you can do is put your hat on, say, `Good luck, gang,' and go out and do something else."

But even an orderly succession might not quiet some of the cavilers in the bank. Noting the relatively large number of former Manny Hanny bankers near the top of the bank now, their brethren worry that old Chemical bankers could replace many of them in the top ranks.

Chemical executives expect that such questions as the development of a common ethos will be resolved over time. Meanwhile, Chemical is generating earnings momentum from merger-related cost savings as well as the power that comes with a dominant market share in some very lucrative businesses. "It could be the greatest bank in America with the market shares it has," says a former employee. "I wouldn't bet against it." The new Chemical's com-petitors would be well advised not to, either.Kelley Holland in New York


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