Chase and Chemical

1.        Although the industry is moving towards a more focused business model, there are several reasons why a market expansion merger is a more suitable approach for Chemical and Chase. Firstly, the new bank would realize economies of scale and scope. Secondly, it would gain competitive advantages in providing not only more services, but better quality services in the market each bank already competes in. Lastly, the new bank would be better suited to serve larger firms.  

        While Chemical is pursuing a market expansion merger, economies of scale are still achievable and are a key benefit of this merger. The bank size would be much larger and it would be able to generate an increase in output while also obtaining significant cost advantages in areas such as credit card services.

        The quality and diversity of services provided by the merged bank would surely exceed those that can be provided by each individual bank. This is perhaps the greatest benefit of a market expansion merger. Chemical would be able to enter the global market and Chase would be in a better position to deal with being undervalued. This merger would also give the bank a better position to enter completely new markets that neither bank is currently competing in. Although some would see this expansion as losing service quality, many clients would prefer the “one-stop shopping” experience with their bank. The quality would also improve through innovation improvements and access to greater information.

        In sum, restructuring to downsize is not the better option for a bank like Chemical. At a time when innovation is key and the economy is becoming increasingly global, bigger really is better. Chemical should take advantage of the deregulation of the financial services industry and pursue a market expansion merger.        

3.        Although there are various other banks that Chemical could merge with, Chase is the only bank that makes sense if it truly wants to pursue a “merger of equals”. Other banks would either put Chemical in the underdog position and the merger would turn towards an acquisition or Chemical would receive the clear upper hand and acquire another bank. For example, a BankAmerica merger would give BankAmerica the clear upper hand. Its Net Income is almost double that of Chemical’s and its Total Assets greatly exceed those of Chemical’s (Exhibit 6). Chemical would lose out and the exchange ratio would be in favor of BankAmerica. In contrast, a merger with First Union would make more sense geographically as they are both on the East coast but this would also result in a clear dominant bank, Chemical. The only other bank that would make sense financially and geographically is J.P. Morgan but it is less than half the size of Chemical with only 17,055 employees compared to 42,130 and might not be prepared to work in a bigger is better environment.