Cramer: Chase Merger

N E W   Y O R K, Sept. 14 -- How can Chase possibly pay so much for J.P. Morgan?

Put simply, how can it not? This acquisition is the type of transaction that, short term, will put a ton of pressure on Chase, but long term will be regarded as a huge win.

Here’s why: First, banking is one of those businesses that does really well on a large scale. You put the apparatus in place, and it can handle a ton of transactions. The more breadth, product line and capacity you can offer, the better you do.

If you want to be big in financial services, you will want to operate on a mammoth scale. This is not a business where being a boutique is a good thing. (Boutiquers, don’t get all upset. I know you can offer quality, but a lot of what banks do is quantity, whether you like it or not.)

Think of these banks as giant technology users. Once they have shelledout the money for the technology, they want to use it with all the power and volume theycan.

Narrowing Down the ChoicesSecond, the lending business has way too much capacity. Just likewhen First Boston acquired DLJ, this Chase takeover of J.P. Morgan isgoing to remove a huge amount of competition, particularly when itcomes to bonds. (Neither has a dominant position in stocks, but I thinkthat both are very underrated in what they do in equities.) Thecompetition in banking is keen, and it won’t go away. But it is alwaysbetter to pit 10 firms against each other than four or five. And it looks like we are headed toward the handful.

Third, these mergers allow management to pick among the producersand get rid of the deadwood much easier. All of these places have too many people. While some of theworkers are pulling their weight, some aren’t. When you put two firms ofthis high caliber together, you can cherry pick the best personnel and send the rest packing.

Fourth, the business has gone completely global with some of the bestprofit margins occurring outside the country. These two companies have incrediblystrong global franchises, but one is stronger than the other in differing places. They match up well.