EXECUTIVE SUMMARY
This report is written to explore the nature of the merger between JP Morgan and Bank One. The primary objective of this report is to find out whether the merger is beneficial or otherwise. The team felt this merger as a friendly merger as no apparent hostile reports were found. JP Morgan and Bank One will become the global financial services company in the world. From the analysis, this take over is valued at about $58 billion, which is calculated after observing the data collected. Following the nature of this takeover, new antitrust law for financial services has been setup to avoid similar problems in takeover in the future. This report ,among others, will also answer some key questions such as is the merger worth the money paid, what value has been created, is the premium paid fair or otherwise.
The team deeply wishes this report will shed more lights into the mechanisms of how a corporate merger in actual took place as well as the key concerns to be considered.
1.0 Merger And Acquisition Background
Merger and acquisition has always been a popular means for companies to strengthen further their company portfolios and assets in facing today’s ever-dynamic corporate world. The key principle behind acquiring a company is to create shareholder value more than that of the sum of the two companies. This rationale is particularly useful for companies when times are tough and cash funds are low.
Stronger and dominant companies will act to buy other companies to create a more competitive, cost-efficient entity. There are many reasons as to why companies attempt to perform M&A regardless of the current condition. These reasons range from a potential turnaround situation for underperforming companies to as an opportunity for geographical expansion.
2.0 Merging Companies Information
• Bank One Corporation
Bank One Corporation, based in Chicago, Illinois, was the sixth-largest bank in the United States. The bank traces its roots to First Banc group of Ohio, founded as a holding company for City National Bank of Columbus, Ohio and several other banks in that state. These banks then were renamed "Bank One" when the holding company was renamed Banc One Corporation. With the beginning of interstate banking they spread into other states, always renaming acquired banks "Bank One", though for a long time they resisted combining them into one singular bank.
In 1998, Banc One Corporation merged with Chicago-based First Chicago NBD Corporation to form Bank One Corporation, and headquarters moved from Columbus to Chicago. Adverse financial results led to the departure of CEO John B. McCoy, whose father and grandfather had headed Bank One and predecessors. Jamie Dimon, a former key executive of Citigroup, was brought in to head the company. Bank One was notable for its excellent technology infrastructure and a brilliant executive team.
• JP Morgan
JP Morgan, based in New York City, is a leader in wholesale financial services serving one of the largest client franchises in the world. Their clients include corporations, institutional investors, hedge funds, governments, and affluent individuals in more than 100 countries. Clients turn to JP Morgan for its complete platform of financial services combined with flawless execution. JP Morgan businesses include asset management, commercial banking, investment banking, private banking, securities, and treasury services. JP Morgan is part of JP Morgan Chase & Co., a leading global financial services firm with assets of $1.5 trillion and operations in more than 50 countries.
The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JP Morgan Chase serves millions of consumers in the United States and many of the worlds most prominent corporate, institutional and government clients under its JP Morgan and Chase brands.
3.0 Procedures And Regulatory Framework
Overall, the group felt this merger as a friendly merger as no apparent hostile reports were found. The merger was officially announced on 15 January 2004 ending fully merged on 15 January 2005. The merger also has not violated any compulsory laws and regulations as far as the group’s research is concerned. As posted in Bank One’s press release dated June 14th, the Board of Governors of the Federal Reserve System has approved the proposed merger. This completed the regulatory approvals necessary to consummate of the merger. Prior to this announcement, Bank One has also press releases regarding announcement of merger date and Board of Directors post-merger composition. Thus, suffice to say both parties have done accordingly by the book.
4.0 In-Depth Analysis
• JP Morgan Chase And Bank One Merger Deal Terms
Under the deal announced on January 14 2004, New York-based Morgan said it would exchange 1.32 shares of its stock for each Bank One share. This would equate to $51.77 a share, or about $58 billion based on Bank One's roughly 1.12 billion shares outstanding.
Chairman and CEO William Harrison would take those roles at the merged company. Bank One chief Jamie Dimon, 47, will become CEO of the company in 2006, the companies said. That represents a coup for Dimon, who moved to the helm of Bank One in the spring of 2000 after leaving Citigroup, where he had been considered a leading contender for the top job.
The deal terms also included cost cutting as part of the merging exercise to eliminate redundant workers whilst maximizing its capital resources. An estimated 10,000 jobs (or 7 percent of U.S banks’ work force) will be removed although there were no indications as to where the cuts would be.
J.P. Morgan expected $3 billion of pretax merger costs and $2.2 billion of pretax savings over three years. It said it expects the merger to boost profit in 2005. ($58B bank deal set, 2007)
As of January 14 2004 Bidder (JP Morgan Chase) Target (Bank One)
Share Price $39.22 $26.67
Number of Shares 2.07 billion 1.12 billion
Firm Value $81.1854 billion $29.8704 billion
Return on equity(ROE) 16% 15.60%
Share offer 1.32 JP Morgan chase shares : 1 bank one share
Table 1: Relevant JP Morgan and Bank one data before merger (Sources; JP Morgan Chase Annual report 2003 and Bank one Annual report 2003)
Calculation of Table 1(Firm Value): = Share price * Number of shares
• JP Morgan Chase And Bank One Merger Performance
An event study extracted from the financial market is used to predict the financial gains and/or losses that are associated with the announcement of the JP Morgan Chase and Bank one merger. The event window for this analysis is [-7, 11]. Day 0 is the announcement date of the merger - January 15, 2004. The analysis will be carried out using a mean adjusted return.
• BANK ONE
Date Share price ($) Event day Return Abnormal return CAR
1/2/2004 26.99
1/5/2004 26.97 -7 -0.00074 -0.00032 -0.00032
1/6/2004 26.96 -6 -0.00037 5.18E-05 -0.00027
1/7/2004 27.04 -5 0.002967 0.00339 0.003123
1/8/2004 26.97 -4 -0.00259 -0.00217 0.000957
1/9/2004 26.99 -3 0.000742 0.001164 0.002121
1/12/2004 26.6 -2 -0.01445 -0.01403 -0.01191
1/13/2004 26.57 -1 -0.00113 -0.00071 -0.01261
1/14/2004 26.67 0 0.003764 0.004186 -0.00842
1/15/2004 26.73 1 0.00225 0.002672 -0.00575
1/16/2004 26.74 2 0.000374 0.000797 -0.00496
1/20/2004 26.63 3 -0.00411 -0.00369 -0.00865
1/21/2004 26.66 4 0.001127 0.001549 -0.0071
1/22/2004 26.66 5 0 0.000423 -0.00668
1/23/2004 26.71 6 0.001875 0.002298 -0.00438
1/26/2004 26.86 7 0.005616 0.006038 0.001661
1/27/2004 26.85 8 -0.00037 5.03E-05 0.001712
1/28/2004 26.77 9 -0.00298 -0.00256 -0.00085
1/29/2004 26.77 10 0 0.000423 -0.00042
1/30/2004 26.77 11 0 0.000423 1.63E-18
Average -0.00042
Table 2; Event study for target firm (Bank One)
Calculations for Table 2:
Return = (Share price2 – Share price1) / Share price1
Abnormal Return = Current Return – Average Return
CAR = ∑ Abnormal Return t
• JP Morgan Chase
Date Share price ($) Event day Rate of return Abnormal return CAR
1/2/2004 36.62
1/5/2004 36.55 -7 -0.00191 -0.00516 -0.00516
1/6/2004 37.47 -6 0.025171 0.021927 0.016772
1/7/2004 38.02 -5 0.014678 0.011435 0.028207
1/8/2004 38.67 -4 0.017096 0.013853 0.04206
1/9/2004 38.76 -3 0.002327 -0.00092 0.041144
1/12/2004 38.79 -2 0.000774 -0.00247 0.038674
1/13/2004 38.9 -1 0.002836 -0.00041 0.038267
1/14/2004 39.22 0 0.008226 0.004983 0.043249
1/15/2004 38.92 1 -0.00765 -0.01089 0.032357
1/16/2004 39.27 2 0.008993 0.005749 0.038106
1/20/2004 39.09 3 -0.00458 -0.00783 0.030279
1/21/2004 40.1 4 0.025838 0.022594 0.052873
1/22/2004 39.94 5 -0.00399 -0.00723 0.04564
1/23/2004 39.6 6 -0.00851 -0.01176 0.033883
1/26/2004 40.26 7 0.016667 0.013423 0.047307
1/27/2004 40.03 8 -0.00571 -0.00896 0.03835
1/28/2004 39.12 9 -0.02273 -0.02598 0.012374
1/29/2004 39.05 10 -0.00179 -0.00503 0.007341
1/30/2004 38.89 11 -0.0041 -0.00734 0
Average 0.003244
Table 3; Event study for bidding firm (JP Morgan Chase)
*Note: The calculations for table 3 are the same as those for table 2.
• NYSE Composite Index
This index is used to represent the Market Index and its returns since JP Morgan Chase is headquartered in New York. It is also used because this is a very important index in the United States of America.
Date Index Event day Rate of return Abnormal return CAR
1/2/2004 6451.26
1/5/2004 6534.58 -7 0.01292 0.01208 0.01208
1/6/2004 6541.15 -6 0.00101 0.00017 0.01226
1/7/2004 6525.3 -5 -0.0024 -0.0033 0.009
1/8/2004 6569.32 -4 0.00675 0.00591 0.01492
1/9/2004 6526.17 -3 -0.0066 -0.0074 0.00752
1/12/2004 6543.68 -2 0.00268 0.00185 0.00937
1/13/2004 6509.45 -1 -0.0052 -0.0061 0.00331
1/14/2004 6559.81 0 0.00774 0.0069 0.01021
1/15/2004 6550.04 1 -0.0015 -0.0023 0.00789
1/16/2004 6567.68 2 0.00269 0.00186 0.00975
1/20/2004 6599.48 3 0.00484 0.00401 0.01376
1/21/2004 6658.32 4 0.00892 0.00808 0.02185
1/22/2004 6657.09 5 -0.0002 -0.001 0.02083
1/23/2004 6626.82 6 -0.0045 -0.0054 0.01545
1/26/2004 6672.04 7 0.00682 0.00599 0.02145
1/27/2004 6639.78 8 -0.0048 -0.0057 0.01578
1/28/2004 6555.97 9 -0.0126 -0.0135 0.00232
1/29/2004 6555.71 10 -4E-05 -0.0009 0.00145
1/30/2004 6551.63 11 -0.0006 -0.0015 0
Average 0.00083
Table 4; Event study for Market Index (NYSE)
*Note: The calculations for table 4 are the same as those for tables 3 and 2.
• Performance Graphs
Market reaction towards JP Morgan is relatively uncertain with a mixture of negativity.
Market reaction towards Bank One is positive after the merger announcement.
• Combined Return
Bidder; JP Morgan Target; Bank one Index
Share Price -7 $36.55 $26.97 6534.58
Share Price 11 $38.89 $26.77 6551.63
Equity Value (EV) $81.1854billion $29.8704billion
Bidder; JP Morgan Target; Bank one Index
Return 0.064021888 -0.007415647 0.0026092
Abnormal Return (AR %) 6.141269182 -1.002484302
Combined Return = [(BidderEV * BidderAR) + (TargetEV * TargetAR)]
BidderValue + TargetValue
Combined Return = (29.8704 * -1.0025%) + (81.1854 * 6.1413%)
29.8704 + 81.1854
Combined Return = 4.2198%
Value created by bidding firm = 81.1854 billion * 6.14%
= $4.9848 billion
Value lost by target firm = 29.8704billion * -1.0025%
= ($0.2995 billion)
5.0 Determining The Cost Saving
One of the main reasons for M&A is the creation of synergies. According to Hubbard (1999), synergies exist when the combined assets are worth more than the individual assets of both the target and bidding firms used separately. Mergers & Acquisitions have little or no potential benefits when synergy does not exist. For a bidding firm, synergy can be considered as an improvement in operating efficiency based on economies of scale or scope, and sharing of one or more skills. The merger between JP Morgan Chase and Bank One is expected to have a cost saving of $2.2 billion over three years. ($58B bank deal set, 2007)
• Calculating Gain
Assuming the cost savings is equal over the three years,
Cost savings per year = 2.2/3
= $0.7333 billion
Gain, PV2004 = CF / (1+ r) n
= [0.7333 / (1.16)] + [0.7333 / (1.16)2] + [0.7333 / (1.16)3]
= $1.6469 billion
6.0 Determining Who Benefits The Most
• Calculating Premium
Alpha, α = Number of shares paid to target / Total number of shares of the merger firm
α = [(1.32 * 1.12 billion) / (2.07 billion + (1.32 * 1.12 billion)]
α = 0.4166
Give = α (PV JPM + PV ONE + Gain)
= 0.4166 ($81.1854 billion + $29.8704 billion + $1.6469 billion)
= $46.9519 billion
Get = PV ONE
= $29.8704 billion
Premium / Cost = Give – Get
= $46.9519 billion - $29.8704 billion
= $17.0815 billion
From the analysis above, it can be seen that the target shareholders (Bank One) are gaining a lot from this deal in the sense that they receive a hefty premium of about $17 billion.
• Calculating NPV
NPV = GAIN – COST
NPV = $1.6469 billion - $17.0815 billion
NPV = - $15.4346 billion
This merger investment results in a negative net present value for JP Morgan Chase. A major reason for this occurrence is the excessive premium being paid to Bank One compared to the cost savings to be derived from the merger. From this, it can be implied that the actual reason behind the merger is not aiming for the synergy or positive NPV.
Expansion in assets with the intention of surpassing that of Bank of America is most likely to be the core objective. This merger will create an entity that is ranked as America’s No. 2 bank behind Citigroup, with assets of $1.1 trillion and 2,300 branches in seventeen states. Although there is a negative NPV, it is expected that the combination of the management teams in the new firm JP Morgan Chase & Co would lead affairs at the top and stir the firm to long-term profitability.
7.0 Methodology
The event study is done to inquire overall the effects and contents of the merger in some economics and financial aspects. This would also answer some questions such as:
o What is the market reaction towards the merger?
o What value has been created?
o Is the premium paid fair or otherwise?
o Who will benefit most from this merger?
o Will there be cost savings incurred?
8.0 Conclusion
In the long run, the merger between JP Morgan and Bank One has successful because its achieves some of its objective, such as achieving an expansion in assets with the intention of surpassing that of Bank of America. The M & A of JP Morgan and Bank One has both pros and cons. The pros are JP Morgan has the access leading global financial services, while the cons include high debts for Jo Morgan Chase & Co.
This report is written to explore the nature of the merger between JP Morgan and Bank One. The primary objective of this report is to find out whether the merger is beneficial or otherwise. The team felt this merger as a friendly merger as no apparent hostile reports were found. JP Morgan and Bank One will become the global financial services company in the world. From the analysis, this take over is valued at about $58 billion, which is calculated after observing the data collected. Following the nature of this takeover, new antitrust law for financial services has been setup to avoid similar problems in takeover in the future. This report ,among others, will also answer some key questions such as is the merger worth the money paid, what value has been created, is the premium paid fair or otherwise.
The team deeply wishes this report will shed more lights into the mechanisms of how a corporate merger in actual took place as well as the key concerns to be considered.
1.0 Merger And Acquisition Background
Merger and acquisition has always been a popular means for companies to strengthen further their company portfolios and assets in facing today’s ever-dynamic corporate world. The key principle behind acquiring a company is to create shareholder value more than that of the sum of the two companies. This rationale is particularly useful for companies when times are tough and cash funds are low.
Stronger and dominant companies will act to buy other companies to create a more competitive, cost-efficient entity. There are many reasons as to why companies attempt to perform M&A regardless of the current condition. These reasons range from a potential turnaround situation for underperforming companies to as an opportunity for geographical expansion.
2.0 Merging Companies Information
• Bank One Corporation
Bank One Corporation, based in Chicago, Illinois, was the sixth-largest bank in the United States. The bank traces its roots to First Banc group of Ohio, founded as a holding company for City National Bank of Columbus, Ohio and several other banks in that state. These banks then were renamed "Bank One" when the holding company was renamed Banc One Corporation. With the beginning of interstate banking they spread into other states, always renaming acquired banks "Bank One", though for a long time they resisted combining them into one singular bank.
In 1998, Banc One Corporation merged with Chicago-based First Chicago NBD Corporation to form Bank One Corporation, and headquarters moved from Columbus to Chicago. Adverse financial results led to the departure of CEO John B. McCoy, whose father and grandfather had headed Bank One and predecessors. Jamie Dimon, a former key executive of Citigroup, was brought in to head the company. Bank One was notable for its excellent technology infrastructure and a brilliant executive team.
• JP Morgan
JP Morgan, based in New York City, is a leader in wholesale financial services serving one of the largest client franchises in the world. Their clients include corporations, institutional investors, hedge funds, governments, and affluent individuals in more than 100 countries. Clients turn to JP Morgan for its complete platform of financial services combined with flawless execution. JP Morgan businesses include asset management, commercial banking, investment banking, private banking, securities, and treasury services. JP Morgan is part of JP Morgan Chase & Co., a leading global financial services firm with assets of $1.5 trillion and operations in more than 50 countries.
The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JP Morgan Chase serves millions of consumers in the United States and many of the worlds most prominent corporate, institutional and government clients under its JP Morgan and Chase brands.
3.0 Procedures And Regulatory Framework
Overall, the group felt this merger as a friendly merger as no apparent hostile reports were found. The merger was officially announced on 15 January 2004 ending fully merged on 15 January 2005. The merger also has not violated any compulsory laws and regulations as far as the group’s research is concerned. As posted in Bank One’s press release dated June 14th, the Board of Governors of the Federal Reserve System has approved the proposed merger. This completed the regulatory approvals necessary to consummate of the merger. Prior to this announcement, Bank One has also press releases regarding announcement of merger date and Board of Directors post-merger composition. Thus, suffice to say both parties have done accordingly by the book.
4.0 In-Depth Analysis
• JP Morgan Chase And Bank One Merger Deal Terms
Under the deal announced on January 14 2004, New York-based Morgan said it would exchange 1.32 shares of its stock for each Bank One share. This would equate to $51.77 a share, or about $58 billion based on Bank One's roughly 1.12 billion shares outstanding.
Chairman and CEO William Harrison would take those roles at the merged company. Bank One chief Jamie Dimon, 47, will become CEO of the company in 2006, the companies said. That represents a coup for Dimon, who moved to the helm of Bank One in the spring of 2000 after leaving Citigroup, where he had been considered a leading contender for the top job.
The deal terms also included cost cutting as part of the merging exercise to eliminate redundant workers whilst maximizing its capital resources. An estimated 10,000 jobs (or 7 percent of U.S banks’ work force) will be removed although there were no indications as to where the cuts would be.
J.P. Morgan expected $3 billion of pretax merger costs and $2.2 billion of pretax savings over three years. It said it expects the merger to boost profit in 2005. ($58B bank deal set, 2007)
As of January 14 2004 Bidder (JP Morgan Chase) Target (Bank One)
Share Price $39.22 $26.67
Number of Shares 2.07 billion 1.12 billion
Firm Value $81.1854 billion $29.8704 billion
Return on equity(ROE) 16% 15.60%
Share offer 1.32 JP Morgan chase shares : 1 bank one share
Table 1: Relevant JP Morgan and Bank one data before merger (Sources; JP Morgan Chase Annual report 2003 and Bank one Annual report 2003)
Calculation of Table 1(Firm Value): = Share price * Number of shares
• JP Morgan Chase And Bank One Merger Performance
An event study extracted from the financial market is used to predict the financial gains and/or losses that are associated with the announcement of the JP Morgan Chase and Bank one merger. The event window for this analysis is [-7, 11]. Day 0 is the announcement date of the merger - January 15, 2004. The analysis will be carried out using a mean adjusted return.
• BANK ONE
Date Share price ($) Event day Return Abnormal return CAR
1/2/2004 26.99
1/5/2004 26.97 -7 -0.00074 -0.00032 -0.00032
1/6/2004 26.96 -6 -0.00037 5.18E-05 -0.00027
1/7/2004 27.04 -5 0.002967 0.00339 0.003123
1/8/2004 26.97 -4 -0.00259 -0.00217 0.000957
1/9/2004 26.99 -3 0.000742 0.001164 0.002121
1/12/2004 26.6 -2 -0.01445 -0.01403 -0.01191
1/13/2004 26.57 -1 -0.00113 -0.00071 -0.01261
1/14/2004 26.67 0 0.003764 0.004186 -0.00842
1/15/2004 26.73 1 0.00225 0.002672 -0.00575
1/16/2004 26.74 2 0.000374 0.000797 -0.00496
1/20/2004 26.63 3 -0.00411 -0.00369 -0.00865
1/21/2004 26.66 4 0.001127 0.001549 -0.0071
1/22/2004 26.66 5 0 0.000423 -0.00668
1/23/2004 26.71 6 0.001875 0.002298 -0.00438
1/26/2004 26.86 7 0.005616 0.006038 0.001661
1/27/2004 26.85 8 -0.00037 5.03E-05 0.001712
1/28/2004 26.77 9 -0.00298 -0.00256 -0.00085
1/29/2004 26.77 10 0 0.000423 -0.00042
1/30/2004 26.77 11 0 0.000423 1.63E-18
Average -0.00042
Table 2; Event study for target firm (Bank One)
Calculations for Table 2:
Return = (Share price2 – Share price1) / Share price1
Abnormal Return = Current Return – Average Return
CAR = ∑ Abnormal Return t
• JP Morgan Chase
Date Share price ($) Event day Rate of return Abnormal return CAR
1/2/2004 36.62
1/5/2004 36.55 -7 -0.00191 -0.00516 -0.00516
1/6/2004 37.47 -6 0.025171 0.021927 0.016772
1/7/2004 38.02 -5 0.014678 0.011435 0.028207
1/8/2004 38.67 -4 0.017096 0.013853 0.04206
1/9/2004 38.76 -3 0.002327 -0.00092 0.041144
1/12/2004 38.79 -2 0.000774 -0.00247 0.038674
1/13/2004 38.9 -1 0.002836 -0.00041 0.038267
1/14/2004 39.22 0 0.008226 0.004983 0.043249
1/15/2004 38.92 1 -0.00765 -0.01089 0.032357
1/16/2004 39.27 2 0.008993 0.005749 0.038106
1/20/2004 39.09 3 -0.00458 -0.00783 0.030279
1/21/2004 40.1 4 0.025838 0.022594 0.052873
1/22/2004 39.94 5 -0.00399 -0.00723 0.04564
1/23/2004 39.6 6 -0.00851 -0.01176 0.033883
1/26/2004 40.26 7 0.016667 0.013423 0.047307
1/27/2004 40.03 8 -0.00571 -0.00896 0.03835
1/28/2004 39.12 9 -0.02273 -0.02598 0.012374
1/29/2004 39.05 10 -0.00179 -0.00503 0.007341
1/30/2004 38.89 11 -0.0041 -0.00734 0
Average 0.003244
Table 3; Event study for bidding firm (JP Morgan Chase)
*Note: The calculations for table 3 are the same as those for table 2.
• NYSE Composite Index
This index is used to represent the Market Index and its returns since JP Morgan Chase is headquartered in New York. It is also used because this is a very important index in the United States of America.
Date Index Event day Rate of return Abnormal return CAR
1/2/2004 6451.26
1/5/2004 6534.58 -7 0.01292 0.01208 0.01208
1/6/2004 6541.15 -6 0.00101 0.00017 0.01226
1/7/2004 6525.3 -5 -0.0024 -0.0033 0.009
1/8/2004 6569.32 -4 0.00675 0.00591 0.01492
1/9/2004 6526.17 -3 -0.0066 -0.0074 0.00752
1/12/2004 6543.68 -2 0.00268 0.00185 0.00937
1/13/2004 6509.45 -1 -0.0052 -0.0061 0.00331
1/14/2004 6559.81 0 0.00774 0.0069 0.01021
1/15/2004 6550.04 1 -0.0015 -0.0023 0.00789
1/16/2004 6567.68 2 0.00269 0.00186 0.00975
1/20/2004 6599.48 3 0.00484 0.00401 0.01376
1/21/2004 6658.32 4 0.00892 0.00808 0.02185
1/22/2004 6657.09 5 -0.0002 -0.001 0.02083
1/23/2004 6626.82 6 -0.0045 -0.0054 0.01545
1/26/2004 6672.04 7 0.00682 0.00599 0.02145
1/27/2004 6639.78 8 -0.0048 -0.0057 0.01578
1/28/2004 6555.97 9 -0.0126 -0.0135 0.00232
1/29/2004 6555.71 10 -4E-05 -0.0009 0.00145
1/30/2004 6551.63 11 -0.0006 -0.0015 0
Average 0.00083
Table 4; Event study for Market Index (NYSE)
*Note: The calculations for table 4 are the same as those for tables 3 and 2.
• Performance Graphs
Market reaction towards JP Morgan is relatively uncertain with a mixture of negativity.
Market reaction towards Bank One is positive after the merger announcement.
• Combined Return
Bidder; JP Morgan Target; Bank one Index
Share Price -7 $36.55 $26.97 6534.58
Share Price 11 $38.89 $26.77 6551.63
Equity Value (EV) $81.1854billion $29.8704billion
Bidder; JP Morgan Target; Bank one Index
Return 0.064021888 -0.007415647 0.0026092
Abnormal Return (AR %) 6.141269182 -1.002484302
Combined Return = [(BidderEV * BidderAR) + (TargetEV * TargetAR)]
BidderValue + TargetValue
Combined Return = (29.8704 * -1.0025%) + (81.1854 * 6.1413%)
29.8704 + 81.1854
Combined Return = 4.2198%
Value created by bidding firm = 81.1854 billion * 6.14%
= $4.9848 billion
Value lost by target firm = 29.8704billion * -1.0025%
= ($0.2995 billion)
5.0 Determining The Cost Saving
One of the main reasons for M&A is the creation of synergies. According to Hubbard (1999), synergies exist when the combined assets are worth more than the individual assets of both the target and bidding firms used separately. Mergers & Acquisitions have little or no potential benefits when synergy does not exist. For a bidding firm, synergy can be considered as an improvement in operating efficiency based on economies of scale or scope, and sharing of one or more skills. The merger between JP Morgan Chase and Bank One is expected to have a cost saving of $2.2 billion over three years. ($58B bank deal set, 2007)
• Calculating Gain
Assuming the cost savings is equal over the three years,
Cost savings per year = 2.2/3
= $0.7333 billion
Gain, PV2004 = CF / (1+ r) n
= [0.7333 / (1.16)] + [0.7333 / (1.16)2] + [0.7333 / (1.16)3]
= $1.6469 billion
6.0 Determining Who Benefits The Most
• Calculating Premium
Alpha, α = Number of shares paid to target / Total number of shares of the merger firm
α = [(1.32 * 1.12 billion) / (2.07 billion + (1.32 * 1.12 billion)]
α = 0.4166
Give = α (PV JPM + PV ONE + Gain)
= 0.4166 ($81.1854 billion + $29.8704 billion + $1.6469 billion)
= $46.9519 billion
Get = PV ONE
= $29.8704 billion
Premium / Cost = Give – Get
= $46.9519 billion - $29.8704 billion
= $17.0815 billion
From the analysis above, it can be seen that the target shareholders (Bank One) are gaining a lot from this deal in the sense that they receive a hefty premium of about $17 billion.
• Calculating NPV
NPV = GAIN – COST
NPV = $1.6469 billion - $17.0815 billion
NPV = - $15.4346 billion
This merger investment results in a negative net present value for JP Morgan Chase. A major reason for this occurrence is the excessive premium being paid to Bank One compared to the cost savings to be derived from the merger. From this, it can be implied that the actual reason behind the merger is not aiming for the synergy or positive NPV.
Expansion in assets with the intention of surpassing that of Bank of America is most likely to be the core objective. This merger will create an entity that is ranked as America’s No. 2 bank behind Citigroup, with assets of $1.1 trillion and 2,300 branches in seventeen states. Although there is a negative NPV, it is expected that the combination of the management teams in the new firm JP Morgan Chase & Co would lead affairs at the top and stir the firm to long-term profitability.
7.0 Methodology
The event study is done to inquire overall the effects and contents of the merger in some economics and financial aspects. This would also answer some questions such as:
o What is the market reaction towards the merger?
o What value has been created?
o Is the premium paid fair or otherwise?
o Who will benefit most from this merger?
o Will there be cost savings incurred?
8.0 Conclusion
In the long run, the merger between JP Morgan and Bank One has successful because its achieves some of its objective, such as achieving an expansion in assets with the intention of surpassing that of Bank of America. The M & A of JP Morgan and Bank One has both pros and cons. The pros are JP Morgan has the access leading global financial services, while the cons include high debts for Jo Morgan Chase & Co.
