$1.1 Trillion Bank Merger

J.P Morgan Chase & Co. and Bank One Corp. announced Wednesday that they are merging in a $58 billion deal that will create the second-largest U.S. banking company.

The merged company, to be headquartered in New York and retain the J.P. Morgan Chase name, will have assets of $1.1 trillion with 2,300 branches in 17 states, the two banks said in an announcement after the stock market closed.

Only Citigroup, with assets of about $1.19 trillion and operations in more than 100 countries, would be bigger if the deal is approved.

The agreement was unanimously approved by the boards of directors of both companies, J.P. Morgan Chase and Bank One said in a joint announcement.

J.P. Morgan Chase's William B. Harrison, 60, will be chairman and chief executive officer, while Bank One CEO James Dimon will be president and chief operating officer. The 47-year-old Dimon would succeed Harrison as CEO in 2006, with Harrison continuing to serve as chairman.

Bank One shares soared 10 percent in after-hours trading following initial reports of the transaction.

"It's a blockbuster of a transaction," said analyst Denis Laplante, who covers Bank One for Keefe, Bruyette & Woods Inc. "J.P. Morgan gets diversification out of capital markets into retail banking, and Dimon gets to run the combined company with the brokerage capability he was coveting."

Bank One shareholders would receive 1.32 J.P. Morgan shares for each share they own.

Based on J.P. Morgan's closing price of $39.22 on Wednesday, the transaction would have a value of about $51.77 for each share of Bank One stock and create an enterprise with a combined market capitalization of about $130 billion. The premium paid for Bank One amounts to about 14 percent based on closing market prices.

An acquisition of Bank One doesn't come as much of a surprise. After Bank of America Corp. announced in October it planed to merge with FleetBoston Financial Corp., which would create the nation's second-biggest banking company, there immediately was talk that Bank One could be a candidate for a similar move.

Brock Vandervliet, an analyst at Lehman Brothers, told CNBC that he had predicted such a deal just last week.

He said that J.P. Morgan — which has heavy involvement in volatile businesses such as investment banking and mortgages — would benefit from the addition of Bank One's retail franchise. The combination, he said, would help stabilize income.

He noted that Dimon had approached J.P. Morgan about a merger a year ago but had been rebuffed. At the time, J.P. Morgan was struggling with bad commercial loans and regulatory issues related to lending to Enron. Now, he said, "the financials have improved."

In response to suggestions that Dimon was expected to lead the combined banks after a year or two, Vandervliet said: "He has a very clear idea of what the company is and where it should go."

The Federal Reserve still must approve the merger of Bank of America Corp., based in Charlotte, N.C., and FleetBoston. Shareholders of record will vote on the deal Jan. 26 in Charlotte. The combined bank would have assets of about $966 billion, according to the American Banker trade daily.

Laplante said he did not think the Bank of America-Fleet deal was the trigger.

"J.P. Morgan probably found after the tech bubble that it needed to diversify. It acknowledged on a couple of occasions the desire to build a more national retail branching network," he said.

Bank One, meanwhile, "wanted a more diversified model out of retail," Laplante said.