Before completing their high-profile merger just after the first of the year, both Chase Manhattan Corp. and J.P. Morgan & Co. responded to the growing possibilities of electronic commerce by creating in-house divisions dedicated to finding, investing in and sometimes spinning off promising technology companies-a combined total of 65 to date.
Within Chase’s formidable midtown New York headquarters was a subsidiary known as chase.com. And downtown, in the shadows of the New York Stock Exchange, was Morgan’s entry, known as Heritage LabMorgan. Whenever major entities merge, one of the key questions is how the combined departments and divisions will fit together.
Will they leverage off one another’s work and create-to use one of the most overworked words in business-synergy? Or will sometimes conflicting and redundant parts add up to something less than the hoped-for greater whole?
At Chase, the in-house e-business development effort was headed by Denis O’Leary, whose focus was on consumer technology, development of a consulting practice and, not surprisingly, tech companies specifically focused on the banking industry.
His counterpart over at Morgan was Nick Rohatyn, son of famed investment banker and ambassador to France, Felix Rohatyn. The focus at Heritage LabMorgan was on international infrastructure, knowledge management and, equally predictably, tech companies interested in the securities industry. So far, so good.
And yet, when the two began to discuss the plans each had for their companies, they found some overlap did exist-or, at least, similar targets.
“Each of us was, I was on my way to doing that,'” said Rohatyn, now EVP and co-executive manager of the rechristened LabMorgan. O’Leary is now the other co-executive manager.
It might be said then, that the merger came at just the right time. Of the combined 65 different investments, only a handful overlapped. Had the parent companies tied the knot even a year later, who knows what that number might be? “The pieces actually fit pretty well together,” Rohatyn said. One example of an overlap was in foreign exchange, where Chase’s investment was in Atriax Ltd., a marketplace also backed by Citibank, Deutsche Bank and Reuters Group Plc.
Meanwhile, J.P. Morgan had bet on FX Alliance Llc’s FXall, a competing marketplace that was founded by J.P. Morgan with Bank of America, Credit Suisse First Boston, Goldman Sachs, HSBC, Morgan Stanley Dean Witter and UBS Warburg. In the end, LabMorgan decided to go with Atriax.
According to Dana Stiffler, an analyst at AMR Research, most of the big Wall Street firms have made investments in technology companies and joined industry consortia. LabMorgan stands out, she added, in the way its been branded and promoted as a separate entity, and in the additional services it provides to its portfolio companies.
While some Wall Street firms may invest in a number of competing technologies as a way of hedging their bets, LabMorgan prefers a closer relationship with its portfolio companies. It’s also a customer, an incubator and a business consultant.
Ethan Berman, CEO of RiskMetrics Group, a provider of risk analysis applications, said LabMorgan helped his company with setting strategy and provides resources that a small company may have trouble finding on its own.
“It can range from little things like building maintenance and how to find real estate, to bigger things around legal issues and introduction to clients,” he said.
This kind of involvement requires much more commitment on the part of LabMorgan than if it were merely an investor-and it requires more staff. Fortunately, because of the compatibility of the two groups, LabMorgan was able to keep most of the chase.com and Heritage LabMorgan personnel, Rohatyn said, and, with the exception of the few overlaps, investments in portfolio companies will continue.
However, there is a big difference between the new LabMorgan and the two groups it was formed from. Last year, chase.com and Heritage LabMorgan found about 40 new companies to invest in and partner with.
So far this year, there have only been eight. On the surface, one has to wonder whether that is the result of the tough times- and flat revenue-affecting the industry. For the record, Rohatyn insists not, saying that budget constraints aren’t an issue. He points out that J.P. Morgan Chase is spending $4 billion on technology this year and that LabMorgan would continue to provide financing and support to its existing portfolio companies while seeking out new investment possibilities.
“We’re going at a pace that reflects the market,” Rohatyn said. “Last year was certainly a year of big movements, big ideas. We are spending a lot of time this year developing and fostering the ideas we helped grow last year. It’s very logical that if you’re working on big changes in the marketplace, it’s a multiyear effort.” LabMorgan isn’t the only group taking a respite from the frantic pace of the new-economy revolution, according to Damon Kovelsky, an analyst with Meridien Research.
“It’s where we are right now,” he said. “Everyone is taking a breath and seeing what works, what doesn’t work and what has really changed. I don’t think there’s a real reason for innovation like we had in the mid-’90s. We had enough of that. Now let’s figure out these new tools, how to use them best.” And LabMorgan is doing just that-not only externally but internally as well. In fact, the lab has become something of an incubator for technology-and methodology-that J.P. Morgan Chase would like to see spread.
For example, LabMorgan shares its e-strategists with individual J.P. Morgan Chase business units. In fact, the e-strategists have two offices-one at LabMorgan and the other at a particular line of business-and they split their time between the two locations. When they go to other parts of the company, they also bring with them the lab’s productivity technology.
Rohatyn’s personal favorites are the collaborative tools that the lab is developing with help from portfolio company Intraspect.
“It’s a big theme now in financial services: leveraging knowledge vs. leveraging capital,” he said. The collaboration starts with searchable, personal Web pages-each LabMorgan employee is setting up a Web page that details his or her history and expertise, which is particularly useful in the wake of a merger, when people are only starting to get to know each other, but also invaluable for finding in-house experts.
“I use it all the time to find out what’s going on in the lab as well as outside the lab,” said Ameet Patel, LabMorgan’s CTO and the man responsible for the rollout of the knowledge management program. Patel is also working on an unstructured document repository, which will be used as a base for a knowledge management platform called Deep Thought.
The platform will gather together deal-flow information and project management data so that it can be leveraged throughout the firm, Patel said.
“What we plan to do is then wrap it with an enterprise portal and other collaborative tools-peer to peer, instant messaging,” Patel added.
He’s also looking at portable devices such as RIM pagers and Windows CE hand-helds and video streaming. In the near future, J.P. Morgan Chase employees could be walking around with the equivalent of portable videophones, he said. Some already have video conferencing systems on their desktops.
A more immediate aspect of LabMorgan’s innovative approach to doing business is the layout of its two floors on 60 Wall Street, where there are no offices or cubicles, but plenty of areas in which to hold everything from large meetings to one-on-one sessions to individual naps. The layout is drawing interest from other parts of the company. “Our real estate people are taking notice of what we’re doing here,” Rohatyn said.
In addition to the sexier desks, LabMorgan boasts wireless local area networks on both floors that let employees move around freely while staying in touch, networked whiteboards, free beverages, a meditation room and a Foosball table. “LabMorgan is clearly the part of the company that is working a little differently,” Rohatyn said.