This is an exercise carried out within our Investment Banking area to fully understand the transactions.
Justification of transactions
At the beginning of the year 2000, negotiations were carried out for the acquisition of the renowned bank J.P Morgan by Chase Bank. This negotiation resulted in an agreement whereby Chase agrees to deliver 3.7 shares of its own in exchange for each old J.P Morgan share, which at the time gave the transactions a value of over US $30B.
This decision is made thanks to a mutual interest by both banks in gaining both a greater market share, as well as consolidating their businesses in a stable and lasting manner. By then, Chase was a commercial bank valued at over $70B, was one of the world's leading credit card issuers, and advertised a large part of its revenue structure in loans to the public. On the other hand, J.P Morgan was a successful investment bank valued at around US$27B, and was hit hard by the tech bubble. The bank found itself unable to sustain its previous growth on its own, and recognized a need for integration with a commercial bank to consolidate its market position on a more permanent basis.
This transaction was closed in December 2000, for a total of US $31B, and thus the financial conglomerate known as J.P Morgan Chase was created.
Financial position of the buyer and target before and at the time of signing/closing
Initially conceived as Chase National Bank in 1877, it starts out as a small commercial bank. In 1930, it acquired the Equitable Trust Company, whose largest shareholder was John D. Rockefeller, through which it inherits such giant clients as General Electric and Rockefeller's oil subsidiaries, transactions with which it becomes the largest bank in the United States. Later, in 1955, Chase also acquired Manhattan Bank, thus forming the conglomerate known as Chase Manhattan Bank.
By the 1990s, partly due to parallel mergers between other banks, Chase lost its pedestal to Citigroup, and began to look for possible acquisitions or mergers to consolidate its position again as the largest player in the market. Chase had a very strong commercial branch, positioned as the second credit card issuer in the US, and continued to buy small investment banks, the best known being Hambrecht Quist in 1998. But it lacked a strong investment banking and capital markets arm with which to compete with Wall Street giants like Citi and Goldman.
A bank founded in 1871 by the Morgan Family, this company saw most of its growth in the early 20th century by financing multiple government contracts, the birth of giants U.S Steel, ATT, and the merger that created General Electric Company. . J.P Morgan grew steadily until the 1990s, when it began to lose market share to financial giants like Goldman Sachs. Its greatest strength remained in the business lines related to capital markets, as well as investment banking. By this time J.P Morgan was the 5th largest bank in the United States, with a total AUM (Assets under management) of US $266B at the end of Q2 2000.
However, it lacked participation in the commercial banking sector, and found itself at a point where it could not sustain its growth on its own. Faced with a possible risk of redundancy by its giant competitors, J.P Morgan begins to consider the possibility of a merger with another company of the same nature with which it can join forces to remain competitive. At the beginning of the 20th century J.P Morgan assisted in the creation of U.S Steel and ATT, however towards the end of the century, this inertia failed to materialize in the new technology companies to develop the new ATT's of the 21st century.
Industry landscape: players, size comparison, etc.
In the year 2000, the American economy is severely affected by the DotCom crisis, great skepticism is generated around working with new technology companies, and a great restriction is seen in the liquidity that flows through the market. For this reason, IPOs and financing projects are considerably reduced, directly affecting the main business lines of investment banks. This situation considerably violates the position of J.P Morgan in the market, and this is especially affected by not having a link with the real estate market, which was projecting very rapid growth in the coming years.
At the same time we see very accelerated growth from Citigroup with more than US $792B in AUM, thanks in part to its recent acquisitions. On the other hand, Chase at this time managed only US $396B and found itself with large amounts of liquidity, and an ambition to acquire new companies to increase its share in both the American and international markets. At this same time, Bank of America ranked second in the American banking hierarchy, managing US$680B in assets.
News about the transaction
On September 13, 2000, plans for an acquisition of J.P Morgan by Chase Manhattan Bank were disclosed to the press. By this time, the transaction had already been approved by the board of both banks, and the structure of the new conglomerate J.P Morgan Chase had already been defined. J.P Morgan CEO Douglas Warner would serve as co-Chairman of the new board along with Chase CEO William Harrison, who would remain as chairman of the conglomerate. In this press release, Harrison repeatedly said that Chase's extensive merger and acquisition experience in the past had prepared them for this next big step, which he was confident would be a smooth and efficient transition. CNN Money, Wall Street Journal, and the New York Times, among others, published the news that same day and through these publications the details of the transaction were disclosed.
Officials from both companies explained that the biggest benefit for Chase would be to be able to offer the widest range of J.P Morgan products to its broadest customer base. Warner even said that combining the companies could grow at a much faster rate than either company could achieve on its own, or even with any other partner. Harisson on the other hand said that the integration of two companies was more of an art than a science, and that he considered Chase to be artists thanks to the experience they had accumulated in the past in integrating with other small and medium-sized companies.
However, it was clarified that this transaction would be more of an acquisition than a merger, which is why the new board of directors would be made up of eight members from Chase, and only five from J.P Morgan.
Multiples of comparable companies and transactions before, but close to, the signing of the transaction
On April 7, 1998, CITICORP announced its merger with Travelers Corp. This transaction broke the record for the largest merger in history, with a stock swap of more than US $70B, creating a new bank called Citigroup, with a new market capitalization of more than US $140B. This merger resulted in the consolidation of the largest bank in the United States, with a new total assets under management of almost US $700B at the time, thus making Bank of America the new number one bank in the United States. At the end of the 1990s, a variety of similar transactions took place through which the large banks bought the medium-sized investment banks. By 1999, only three well-known independent investment banks remained; J.P Morgan, Lehman Brothers and Bear Sterns.
Multiples of the transaction at the time of signing.
The transaction was agreed in such a way that each shareholder would receive 3.7 Chase shares for each J.P Morgan share, which, based on stock prices at the time, would put a value on the transaction at more than US $31B, depending on the Chase's share price at closing. This means that you would be paying a premium of more than 20% over the current value of the J.P Morgan share price, which was trading around $177, and this multiplier would value it at a price of more than $200. Analysts took this increase as the “mark-up” that the J.P Morgan name costs, and no major change was noted due to this premium over the spot market price. It was budgeted that the total costs of the merger of the companies would be higher than US $2.8B, however it was expected that there would also be a cost reduction of close to US $1.5B per year due to the integration of the systems, costs payroll and real estate.
This acquisition would mean that the new total AUM for J.P Morgan Chase would be US$662B, which at the time would put the company in third place in the US ranking, behind Bank of America with $680B and Citigroup with $792B. . By this time Chase had a market capitalization of around US$71B, and this transaction would give J.P Morgan a new capitalization of more than US$30B, when in reality the market valued this company for only US$27B at the time. time of negotiation.
Analysis of the merger / purchase / after signing
The transaction was finalized in December 2000, honoring the commitment to deliver 3.7 Citi shares for each J,P Morgan share, which at closing was equivalent to US$31B. The agreed name of J.P Morgan Chase was maintained, which is used today.
According to a J.P. Morgan consolidated financial position report for the second quarter of 2001, they reported a net income of just $378M in this period, compared to $1.2B in the prior quarter, due in large part to costs. related to the merger and restructuring of the company. By this time, most of the costs related to the acquisition of the company had already been covered, and the approval of a share repurchase for more than $6 B was even announced, which indicates the rapid recovery of the new bank in the face of the recent fusion.
This reduction in revenue is attributed to the market vulnerability related to the DotCom crisis, but excellent progress is announced with the integration and restructuring process, and emphasis is placed on satisfying the new competitive advantage gained over the market thanks to the integration of the business models of both banks.
