The Deal Maker and The Dynamo At last J.P. Morgan's William Harrison has made a deal the market loves. Why? Because in buying Bank One, he's bringing Jamie Dimon back to the big show, where he belongs.
(FORTUNE Magazine) – It was early January, and the merger talks between Jamie Dimon, CEO of Bank One, and William Harrison, his counterpart at J.P. Morgan Chase, were deadlocked. In the short time they'd been negotiating, Dimon, a brash boy wonder from Queens, and Harrison, a courtly Southern gentleman, had agreed on a host of issues. Succession was a snap: Dimon would get a virtually ironclad guarantee to replace Harrison as CEO in 2006. The board would be split fifty-fifty between Bank One and J.P. Morgan directors. Dimon's most trusted lieutenants would be given key roles in the merged company. Most of all, the two men agreed that if they could pull off this deal, combining Bank One's strong consumer businesses and J.P. Morgan's corporate banking franchise, they could create a true banking colossus--the second largest in America and one that could go toe to toe with giant Citigroup.
What was hanging up the deal was the price. Harrison was offering what he calls a "market deal," meaning that J.P. Morgan would simply buy Bank One at its current stock price--around $45 a share. His reasoning was simple. "We'd been criticized for overpaying on past deals, notably Chase's acquisition of J.P. Morgan in 2000," says Harrison. "I thought that if we paid a big premium again, the market would hammer our stock."
Dimon, however, was demanding a markup north of 20%. Pointing to Bank of America's bid to buy FleetBoston for a gigantic 43% premium in late October, Dimon argued that Harrison would be getting a bargain at 20% to 25% over market. In vintage, ultra-enthusiastic Dimon style, the Bank One CEO insisted that the fit was so compelling that even with a big premium, the market wouldn't discount J.P. Morgan's stock. "Jamie was so excited by the combination that he thought he could sell a high premium deal to investors," says Harrison with a grin. "I disagreed."
Ultimately the 47-year-old Dimon altered the banking landscape by taking less than he almost surely could have wrested from another buyer. In an exclusive interview with FORTUNE, Dimon described the difficult, often tortured decision-making that clinched the deal. "When Harrison wouldn't pay a big premium, the board and I talked extensively about selling the company to the highest bidder, especially in light of the Fleet deal," he says.
But then Dimon reflected on the legendary series of acquisitions he'd made as Sandy Weill's right-hand man while the two of them had built Citigroup. They had paid little or no premium for most of their acquisitions, including the final one: Travelers' purchase of Citicorp. "It's true that when you have a low-premium deal, you have a better platform to build value, because you can build the business instead of slashing and burning simply to save enough to pay for the premium," Dimon says. (To be sure, he and Harrison plan to cut J.P. Morgan's workforce by 7% over three years.) And in the end Dimon concluded that the potential long-term returns from a J.P. Morgan/Bank One combination would more than compensate for a low deal premium.
As it turned out, Dimon finally got not only his dream deal but a modest markup as well. Harrison did his part to break the stalemate by offering a small, 10% premium; then J.P. Morgan's stock jumped, so that with the same formula for exchanging shares, Bank One's premium would rise to 14%. Dimon took the deal. On Wednesday, Jan. 14, he presented the proposed merger to his board at the cavernous conference room of Manhattan law firm Wachtell Lipton. "Two or three times I felt deep anxiety about this deal," says Dimon. "It's terrifying. Do you push the button or not? But if you don't and this opportunity is gone when you want it later, you've made a horrible mistake. So I pushed the button."
Good move. In the days and weeks after Dimon and Harrison announced the $58 billion merger, the deal has been widely lauded. Analysts agree that the combined bank will be big and strong in a panoply of businesses in which one side or the other was undersized or weak. "Their strengths and weaknesses match up almost perfectly," says Thomas Brown, an independent analyst with Bankstocks.com. And the market weighed in with a positive assessment: Contrary to Harrison's fears, J.P. Morgan's stock has actually risen 2% since the announcement.
But the main reason the deal is getting kudos is that it brings Jamie Dimon back where he belongs, to the big stage. He's returning from the wilderness of regional banking to face the biggest challenge of his career: running an immense, complicated new creation, the hybrid of a giant investment and commercial bank. It's a role Dimon was born to play--and one in which he has no doubts that he'll succeed. "In the long term we'll enrich shareholders a lot more because I didn't get a big premium," he brags. "Okay, so maybe Bank One lost out on $8 billion or so, but we'll take J.P. Morgan's stock to $100 in five years. That will add over $200 billion in market value!"
Put simply, the deal replicates what Dimon and his mentor Sandy Weill succeeded in doing five years ago, when Travelers Group, the brokerage, investment-banking, and insurance conglomerate they had built over the previous decade, bought retail titan Citicorp to form Citigroup. In so doing they created the first giant in both full-service corporate and retail banking. The J.P. Morgan/Bank One combination will make it the second institution to occupy that rarefied summit, though Bank of America, the consumer specialist that's rising fast in investment banking, should soon join the club as well.
Dimon plays down the rivalry with Citi and Weill, who retired as Citi CEO in October (though he remains Citi's chairman). "In some businesses, like credit cards, our biggest competitor is Citigroup," Dimon shrugs. "But in everything from mortgages to middle-market lending, our biggest rivals are other banks. It's very different from business to business." Still, the impetuous Dimon can't totally conceal his delight at the prospect of taking on his former partner. "We'll give Citi a run for its money!" Dimon told the press after announcing the deal.
The dramatic arc of Dimon's career is well known. At age 26, straight from Harvard Business School, Dimon went to work for Weill as the master's apprentice at American Express. In 1986, after being ousted in a power struggle at American Express, Weill restarted his career--with Dimon at his side--by taking the reins of a grimy consumer-lending shop called Commercial Credit. What followed was one of the most amazing, long-playing feats of dealmaking in U.S. business history. Over the next 12 years, Weill and Dimon proceeded to buy--and revive--one ailing business after another, using their invariably bubbling stock to make the next, usually bigger acquisition. One after another, generally at bargain prices, they bought Primerica (owner of Smith Barney), Travelers, Shearson, Aetna's property and casualty business, Sal-omon Brothers, and finally, in 1998, Citicorp.
Weill shone at dealmaking and strategy. But it was Dimon who ran the numbers and did the grinding, day-to-day integration work that made the deals pay off. "Jamie was Sandy's numbers man, but he was also a great strategist," recalls Heidi Miller, Bank One's CFO and a Travelers and Citigroup veteran. "He was trumpeting Citibank as the perfect deal for us six years before we bought them."
When Weill and Dimon split, after 16 years together, it was public and painful. Two years earlier Dimon had upset Weill by refusing to make the boss's daughter, Jessica Bibliowicz, chief of asset management at Travelers. The legendary partnership was near the breaking point when Travelers bought Citigroup. When Weill made Dimon share the top position in commercial and investment banking with two other executives, Dimon was anything but a good soldier, making his fury known to anyone who would listen. On Nov. 1, 1998, Weill fired Dimon. Neither man will discuss the break, although Dimon acknowledges that it's the stuff of tragedy, recalling the plight of Shakespeare's Earl of Kent, who was exiled for challenging the imperious authority of King Lear.
When Bank One came calling a year and a half later, Dimon was ready. He arrived at the company virtually the day the stock market bubble started deflating. When the recession hit, Bank One, an unwieldy product of three big, undigested mergers, was heading for bankruptcy. The corporate loan portfolio was loaded with credits about to explode, from telecom highfliers like Global Crossing to flimsy middle-market borrowers that feasted on Bank One's loose lending standards. Dimon fired most of the old management and installed a team of loyalists he'd nurtured at Travelers and Citi, people like Heidi Miller and Jim Boshart, chief of commercial lending.
Dimon first slashed expenses by 17%, or $1.5 billion. Over the next three years he dumped almost all the unprofitable credits. He transformed a crazy quilt of seven deposit systems into one superefficient platform. He badgered the credit card division to improve its customer service, which had been horrible. By sheer force of will, he transformed a $511 million loss in 2000 into $3.5 billion in profits for 2003.
Dimon's management style is a curious blend of ultraconservative principles and a hyperactive, intrusive, frequently improvisational drive to know and control just about everything. On the one hand, Dimon cherishes strong balance sheets and hates taking big risks. "He always manages for the worst, assuming a recession is just around the corner," says Linda Bammann, Bank One's chief risk officer. One of his first moves at Bank One was to install a sophisticated risk-management system. That system pushed the bank to diversify its risks by avoiding dangerously large exposures to individual industries or companies. The warning signals from the new risk procedures are one reason Bank One to pare loans to WorldCom and other tech companies by billions of dollars before the bubble burst. As a result, Bank One sidestepped the heavy credit losses that swamped competitors--including, ironically, J.P. Morgan Chase.
Even so, Dimon's management style is anything but by the book. Dimon manages by relentlessly collecting information. His goal is to talk to as many people as possible at every level of the organization. At headquarters only half his day is booked with meetings. The rest of the time he's walking the halls quizzing his executives and making phone calls around the company, grilling office managers, systems analysts, sales reps, and, yes, customers. For Dimon it's the best way to uncover hidden problems and learn the detailed mechanics of how every business runs.
This hierarchy hopping has a downside: Even executives who've worked with him for years get miffed that he goes around them. "God help you if you go on vacation," says Bammann. "He'll meet with your people and start changing things." But Dimon's vigilance has advantages. "At Travelers he understood the minutiae of every business, from how clearing works to underwriting asset-backed securities," marvels commercial business chief Jim Boshart. "It's the same at Bank One." No amount of fuzzy, feel-good talk, however polished, will fool Dimon. If the facts are bad, he usually knows already.
Still, Dimon inspires fierce loyalty in his lieutenants. He forges personal bonds with hundreds of people in every company he runs. "Everyone at Travelers felt they had a personal relationship with him," says Steve Black, a Travelers alumnus who's now chief of equities at J.P. Morgan Chase. Most of all, troops follow Dimon because he's an inspiring leader who prizes results, not politics. "He'll drive you crazy, but I'd trust him with my life," says Miller, whom Dimon hired at Primerica in 1991.
At J.P. Morgan, Dimon's biggest challenge will be managing his own nature. The impetuous Dimon must avoid fomenting infighting and a damaging culture clash. He has to get along with Harrison, who'll be his boss for the next two years. Although many of his Bank One lieutenants will have top jobs in the combined company, he also has to convince the best people at today's J.P. Morgan to stay--notably David Coulter, head of investment banking.
Fortunately for Dimon, the outlook for the basic businesses is promising, for two reasons. First, the new J.P. Morgan will become a big player in branch banking on the day the merger is completed--and a far stronger competitor in other consumer businesses where Bank One is strong, including credit cards. After the merger J.P. Morgan will rank as America's second-biggest credit card issuer, with $125 billion in balances, within striking distance of No. 1 Citigroup. In branch banking, today's J.P. Morgan is strong in only two states, New York and Texas; by adding Bank One's network, it will rank first in Arizona, Illinois, and Indiana, and reach the top five in nine other states. By swelling to 2,300 branches, J.P. Morgan will boast a U.S. network that's an amazing three times larger than Citi's.
Dimon wants to blanket the nation with branches. He states bluntly that he'll do more deals in retail: "I would love to fill in the gaps across the nation by buying more banks," he says. "Banking is like retailing," he adds. "If I'm big, I can give you more. Look at Wal-Mart. It's all about your sales per square foot, how many mortgages, credit cards, and car loans you can sell through the same branch."
The new J.P. Morgan's second pillar, investment banking, also looks solid--finally. Between 2000 and 2002, J.P. Morgan Chase served as practically a textbook case of how to destroy shareholder value by making dumb mistakes. While Dimon mined gold from a weak franchise, Harrison looked as if he was trashing a potentially excellent one. For starters, he vastly overpaid for a string of acquisitions at the top of the market, culminating with Chase's $34 billion purchase of J.P. Morgan in late 2000.
Chase paid that huge price to become a player in investment banking, where J.P. Morgan had a significant presence. But three months after the merger closed, the capital markets tanked, and profits followed. To make matters worse, J.P. Morgan's huge venture capital arm made big bets on technology just before the crash.
The recklessness was even worse in lending. J.P. Morgan tried to drum up investment-banking business by granting cheap loans to telecom and energy companies, a rogue's gallery that ranged from Enron to a telecom disaster called Genuity. Most infamously, J.P. Morgan reaped giant fees by loaning hundreds of millions to Enron and disguising the loans as purchases of energy assets. Harrison didn't help matters by insisting for months that J.P. Morgan's conduct had been exemplary. Ultimately the bank paid a fine of $135 million to the SEC for its role in the Enron fraud.
But Harrison has engineered a comeback. Profits jumped from $1.7 billion in 2002 to $6.7 billion last year, an increase of 300%, while the stock has risen from $15 in late 2002 to $40. In the past J.P. Morgan was a power in derivatives and debt, but a weakling in investment banking. That's changing fast. As corporate customers move to one-stop shopping for everything from IPOs to cash management to lines of credit, J.P. Morgan's investment-banking business has been the happy beneficiary. This year it ranked fourth in global equity underwriting, up from 14th in 2001.
Driving the comeback is investment-banking chief David Coulter, 56. In the late 1990s Coulter was CEO of BankAmerica, which he sold to NationsBank in 1999 to create Bank of America, staying briefly as president and heir apparent to Hugh McColl. After the mercurial McColl fired Coulter, Harrison lured him to J.P. Morgan.
According to Harrison, Coulter was never a potential successor: "David is too close in age to become CEO after me," says Harrison, who is 60. "He's here to work with people he likes and build the investment-banking business."
A benchmark for Dimon's success is whether he's able to keep Coulter and other star J.P. Morgan managers. They've been accustomed to running their own businesses with minimal interference, and Dimon's damn-the-organization-chart approach could well antagonize them. To keep managers like Coulter, Dimon must exercise restraint, something he's not used to. Indeed, the management structure, as outlined in the merger agreement, is somewhat awkward. Coulter will report directly to CEO Harrison, while Dimon will run the entire retail business. So Dimon will have no authority over corporate banking, a field he knows a lot about from Citi, until he becomes CEO in 2006.
Still, both men insist that their relationship will work. For one thing, both managers are hawks on risk. "David and I think the same way about risk management," says Dimon. Says Coulter: "I never thought about leaving."
Dimon faces a second big issue. Though it now manages its risks far better than in the past, J.P. Morgan still depends heavily on proprietary trading, derivatives, and other volatile businesses. Count on Dimon to carefully assess whether the rewards of those businesses compensate for their risks--if he finds that J.P. Morgan is still taking too much risk, he'll sacrifice short-term profits for long-term stability. That will undoubtedly create turmoil--and could be bad news for shareholders until Dimon boosts earnings in retail banking and other sectors to pick up the slack.
Given Dimon's record, it's highly probable that he will squeeze maximum performance from the bigger, stronger business combinations forged by the merger. The questions are, How long will it take, and how much disruption will Dimon cause in getting there? Dimon insists that he'll take a kinder, gentler approach at the new J.P. Morgan. "I've gotten along with people at Travelers, Smith Barney, everywhere, and they were all different," he insists. "After the merger I won't say, 'I want A, B, or C.' I will try it their way. I'll put out ideas and let them work it."
The J.P. Morgan/Bank One deal is Dimon's first since he left Weill's side. And who was the first to call and congratulate him? It was Sandy Weill, who reminded Dimon that they had tried to buy J.P. Morgan years ago. "On the phone Sandy said to me either 'You finally got J.P. Morgan' or 'We finally got J.P. Morgan,' " recalls Dimon. "I'm not sure. But if he said 'we,' I should have said, 'Whaddya mean we?' "