The Dealmaker 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.

By Shawn Tully

January 26, 2004

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 Citigroup. "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, Salomon Brothers, and finally, in 1998, Citigroup.

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.

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