Chase, J.P. Morgan Tie Up

Once the smoke clears from Chase Manhattan Corp.'s US$31 billion stock acquisition this week of J.P. Morgan & Co., Chase will face significant challenges in pulling together the IT empires of the soon-to-be former rivals, clarifying the future of a major outsourcing agreement, and rationalizing its business redundancies, said industry analysts.

The new entity, J.P. Morgan Chase, expected to pass regulatory hurdles by the first quarter of next year, will likely see Chase have the upper hand but pursue a team-oriented conversion when it comes to the IT infrastructure -- the same approach it took with its acquisition of Chemical Bank, analysts said.

In this case, however, Chase, which has a history of internal IT development, will have to contend with J.P. Morgan's 4-year-old Pinnacle Alliance outsourcing agreement, said Lawrence Tabb, an analyst at the Tower Group, a market research firm based in Needham, Mass.

When Chase acquired Chemical Bank, it was very "aggressive at having [Chemical] adopt their technology," Tabb said. "I would assume that the Chase people will end up dominating the situation. The question is: What happens to the Pinnacle Alliance?"

Chase is likely to buy out or cancel the Pinnacle Alliance agreements and pursue a best-of-breed strategy when it comes to consolidating IT, said Bill Bradway, an analyst with Meridien Research, a market research firm based in Newton, Mass. To Bradway's thinking, Chase's best-of-breed approach is the best option. Otherwise, Chase would have to impose its technology over J.P. Morgan's, regardless of quality, or leave the situation unchanged. "I would not expect paralysis," he said.

But there are also signs that Chase may be more amenable to outsourcing, especially in its nontraditional banking efforts. In a recent interview for a separate story, Betsy Werley, vice president at Chase.com, an Internet ventures group, said Chase is "certainly very open" to outsourcing. "As we look at what our customers need and how can we bring it to them, we then look at which parts we should own and which parts are not very cost-effective to own," Werley said.

Chase will have many technology parts to contend with -- in-house, outsourced, and third-party -- in support of "a fair amount of overlap in derivatives, foreign exchange, and bond trading," said Tabb. Both Chase and J.P. Morgan are in the financial clearing business. "This is not going to be like Merrill Lynch/Herzog [Heine Geduld]," he said, referring to Merrill's recent market maker acquisition. "It won't be completely complementary."

Tabb added that the union will "make them more of a power in the IPO marketplace."

The Chase/J.P. Morgan tie-up follows Credit Suisse buying Donaldsen, Lufkin and Jenrette.

While no green light is expected, U.S. government regulators "are probably pretty happy," Tabb said. "They'd very much like to see a U.S. bank rather than a foreign one" take over J.P. Morgan.

A mass exodus of IT personnel from either institution is not likely initially, said Alan Geller, managing director of AG Barrington, a New York-based headhunting firm specializing in financial technology. The financial options, end-of-year bonuses, as well as the golden parachute that each bank can offer are reasons to stay put, said Geller. "They don't want to leave these things on the table if they don't have to," he said.

The players' IT investments

Like other financial institutions, J.P. Morgan and Chase are major developers and buyers of leading-edge technology.

J.P. Morgan:

* Implemented 7-year outsourcing plan, Pinnacle Alliance, working with other vendors to manage data centers, desktops, and LANs* Developed financial risk management products, including its Financial Products Mark-up Language (FpML), co-created by PricewaterhouseCoopers* Presented the Application Instrumentation and Control application management standard to the Open Group in November 1999Chase:

* Uses a variety of third-party infrastructure products, including the Endevor configuration management software from Computer Associates, the Universal Data Interface middleware from Universal Data Interface, and offerings from CommerceQuest* Involved in many online efforts, including Chase Global Capital Markets Trading and Research Website, Chase Workspace, and i-Vault* Uses trading-room technology from Reuters Trading Solutions, a division of Reuters.

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