JPMorgan and Wells face merger risk

By Jonathan Stempel - Analysis

NEW YORK (Reuters) - JPMorgan Chase (JPM.N) and Wells Fargo (WFC.N) may emerge as long-term winners in the quake that has shaken up U.S. banks. Their staying power will be tested by their ability to complete their high-risk mergers.

JPMorgan's $1.9 billion (1 billion pounds) purchase of Washington Mutual Inc's (WAMUQ.PK) banking units and Wells Fargo's planned purchase of Wachovia Corp WB.N, originally valued at $15.1 billion, add large, powerful retail branch networks to what were already two of the biggest banks in the United States.

Both purchase prices are only a small fraction of what the targets were once worth and reflected evaporating investor confidence that Wachovia and Washington Mutual would have the time and capital to combat soaring mortgage losses.

While JPMorgan and Wells Fargo quarterly results topped forecasts on Wednesday, their continued prosperity may be at risk as the economy slides into what some expect will be a deep recession.

"Trying to integrate companies in the midst of a difficult operating environment is challenging, to say the least," said Chris Hagedorn, who helps invest $21.4 billion at Fifth Third Asset Management in Cincinnati. "These companies have done big integrations in the past and I would give them the benefit of the doubt."

JPMorgan has had three large mergers in recent years: Chase Manhattan Corp's 2000 purchase of JP Morgan & Co, the 2004 purchase of Bank One Corp and May's rescue of Bear Stearns Cos. Wells Fargo has not had one since 1998, when Norwest Corp bought the old Wells Fargo and took its name.

Analysts said the success of the Washington Mutual and Wachovia takeovers depends on their acquirers' abilities to live up to their past records at merger integration and a presumption they properly assessed credit risks. JPMorgan is writing down $31 billion for Washington Mutual loans, while Wells Fargo expects to write off $74 billion from Wachovia.

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