Investment Portfolio

Introduction

In financial investment, one can invest in stock, bond, mutual fund, properties, bank or setting up a new business. When public company needs addition fund for their company operation, they can issues share (stock) which is listed in Bursa Malaysia. Company sell bond to generate more funds into the company which return will be given based on interest rate agreed. A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, or other securities. Properties in this assignment tend to be house, land or machinery. Meanwhile, fix deposit is where most of Malaysian places their money which is in the bank.

The different investments have different risk and return with its own criteria. Financial assets are essential for each individual or group because it is a way to against economy biggest enemy, inflation rate. Inflation gives a definition of general increase in prices and fall in the purchasing value of money, meaning every year the value of our money will depreciate and the value of RM1,000 present and 10 years ago are different. Investment may for other purposes such as retirement or success in financial goals.

After the 1997/1998 financial crisis, people tend to avoid the words “stock market” as it remind of people where lots of money are lost in Bursa Malaysia. However, it proved to be wrong because when the market is crashed, that is the period of purchasing bargain stock. Furthermore, some says that stock is part of gambling. Yet, invest in a stock similar to doing a business without get into the business daily operational personally and anticipate it to grow managed by other people.

For this portfolio assignment, stock will be the choice of financial asset due to its advantages and benefits. This assignment contained details and information on the stock selected for this portfolio using RM50,000. The main reason this assignment was undergone is to focus on the risk and return of stock market in Malaysia associates the reason to change the negative mindset of the people on stock market perception. Furthermore, the assignment comes with appropriate graphs and diagrams for deeper understanding, as a graph contain thousand of words.

Risk and Return

First of all, before selecting stock as the financial asset, one should analyze the expected risk and return of the financial investment as it effect greatly on one’s portfolio. The reason why the creation of this portfolio is purely on stock because of its high return compared with other investment assets.

Referring to appendix 1 graph drawn, it gives better view on the risk and return for stock, bond, mutual fund, fix deposit and new business in Malaysia. With the limitation amount of RM50,000 it is difficult to set up the new business successfully unless the time allocation and additional fund for the new business is maximized. So with acquiring a properties, with RM50,000, it is reasonably impossible to buy a properties with the limited RM10,000 – RM50,000 fund. Although mutual fund gives fairly return on investment, but with the knowledge of investment one had, why should one seek for fund manager to manage their money while picking own stock can give more return yield? Beside that, low interests are paid in fixed deposit and bond. The value of money soon will be eaten up by inflation since Malaysia inflation rate are around 4 – 5% per year. Thus, the best choice to allocate the RM50,000 fund is on stock market, the benefits and advantages will be reveal later.

In Malaysia market, the expected risk and return on stock investment around 21% – 30% per annual. People always kept talking about the high risk in stock market investment, but they never really did find out why other investor such as Warren Buffett, Jim Slater or Peter Lynch could make money and success in stock market investment. The reason why people losing money in stock market typically are those who never do their study and only buy based on news or tips from other investors. It not bad at all getting tips from people; however risk will be minimized if proper research been conducted before buying a stock.

Investors are familiar with the phrase of “do not put many eggs in a basket, but put few eggs in few baskets”. This phrase delivered the meaning of spreading the risk by divided the fund and buy in few stocks. When comes in mutual funds investment, fund manager will buy shares in numerous companies. This is because to diversify the risk rather than bet on only a single stock by hoping it will turn to be a star. This portfolio will split the RM50000 to be invested in five difference stock which is potential to bring high value of profits, by doing so, the risk will be spread. According to the book “Corporate Financial Management” written by Carlos, Correia, Mayall, Peter, O’Grady, Barry, and Pang, Johnney, it stated that the risk of the portfolio decreases rapidly with the first few shares held and then levels off until here is no meaningful reduction in the risk resulting from an increase in the number of different shares in the portfolio (2005, p 4-17).

Foresee Profit of Investment

Malaysia current market is volatile on the event of US rising interest rate, crude oil price hike and tension of nuclear in Iran and North Korea. (Reference) It’s unavoidable that these affair resulted market uncertainty. However, this does not indicate that investor should withdraw from stock market as most of the stock heading south because it will create an opportunity looking for bargain or undervalued stock. Arms by appropriate study and research, we can avoid no falls into the shrinking stock price trap. As future returns are uncertain, investors should not place all their funds in one investment. Initially, the market will be invested is gaming, pharmaceutical, plantation, industrial, and retail.

As mentioned earlier, allocating RM50000 in five different companies that could gives expected 21% to 30% annual return would be Berjaya Sports Toto Berhad, CCM Duopharma Biotech Berhad, Golden Hope Plantations Berhad, CB Industrial Product Holding Berhad, and Lion Diversified Holdings Berhad.

The research and information obtained for his assignment will eventually boost confidence of the future profit. Therefore, research materials from research firm were attached in the appendix for reference on the reliability of this financial portfolio assignment.

Berjaya Sports Toto Berhad - BJTOTO (1562)

Berjaya Sports Toto Berhad (BJTOTO) is an investment holding company in Malaysia engaged in the operations of Toto betting; leasing of online lottery equipment, and manufacture and distribution of computerized lottery systems. The Company has two direct subsidiaries. Its Sports Toto Malaysia Sdn. Bhd. subsidiary is a betting system and lotto operator in Malaysia. It operates 680 outlets throughout Malaysia, and offers six lottery games: 4D, 5D, 6D, Toto 4/49, Toto 6/42 Jackpot and Super Toto 6/49. The Company's other subsidiary, Berjaya Lottery Management (HK) Limited, is an investment holding company. Its holdings include Prime Gaming Philippines Inc., which is involved in lottery operations in the Philippines; Philippines Gaming Management Corporation, which focuses on leasing an online lottery system to the Philippine Charity Sweepstakes Office, and International Lottery & Totalizator Systems Inc., which provides computerized wagering equipment and systems to racing organizations worldwide (Berjaya Sports Toto Berhad’s s annual report 2005).

Most sin stock is well-known in paying lucrative dividend to shareholders and BJTOTO among the one. Although considered as a sin stock, yet the profit from lottery business was stable because of there is no limitation of people will gamble on lottery in the market. Many research house call for buy on BJOTO, among are Avenue group, HLG research and OSK188. It was believed that the stock is undervalued. As Malaysia market today is volatile, some stock which offer return not mainly on the appreciation of stock, but also dividend payout should be considered. See appendix (NUMBER)

BJTOTO is selected not only for the reason of its undervalued, yet the investment is for defensive against the uncertainty market condition in Malaysia nowadays. Thus, High dividend yield payout like BJTOTO is where defensive stock is picked for protection against in volatility market. However, investor should beware of dividend policy as the boards of director in company have the right not to distribute dividend to shareholders, although it’s unlikely to happen o BJTOTO. Hence, investment on BJTOTO expected to contribute 15% per annual in the next ten years based on its past performance in financial result.

CCM Duopharma Biotech Berhad - CCMDBIO (7148)

CCM Duopharma Biotech (CCMDBIO) is a local pharmaceutical company, whose niche is primarily in the manufacture of small volume injectables (SVIs). It is the largest local manufacturer of SVIs in Malaysia with an estimated 85% market share of SVIs manufactured in the country. The company changed its name from Duopharma Biotech to CCM Duopharma Biotech with effect from June 8, 2006 (CCM Duopharma Biotech’s annual report 2005).

Referring to analysis done by Loo Yee Ting/ Teoh Cheng Guan from K&N Kenanga on CCMDBIO (see appendix Number), the Revenue and profit is growing year by year as past financial statement showing healthy result of the company due to the increasing demand from public sector and government pharmaceutical supply contract. This respectively reflected the increase of earning per share (EPS) on the company which driven the increase in share price. However, for the future outlook the company will gain under the 9th Malaysian Plan where government had allocated RM3.3 billion on public health compare to 8th Malaysian Plan total RM1.3 Billion. (Reference)

The 149.1% increased will secure CCMDBIO pharmaceutical business in government contract as the other major pharmaceutical player is Pharmaniaga. The company should be alert with the major rivalry in drug business especially Pharmaniaga, in the advance of research & development of new drug. Over the long term, Pharmaniaga may start distribute same drug which would ease the sales and profit margin for the reason that price war will occur.

The targeted return on investment for the next five years in CCMDBIO is 18% due to the increase in sales to private and government sectors in the near future; in addition, the dividend payout is expected to rise gradually as profit increase.

Golden Hope Plantations Berhad - GHOPE (1953)

Golden Hope Plantations (GHOPE) is one of the larger fully integrated plantation groups in the country with 197,998 hectares of plantation land in Malaysia and Indonesia. It has downstream palm oil operations both in Malaysia and overseas, which involve the manufacturing of oil palm-based edible oils & fats, oleochemicals and bio-diesel (Golden Hope Plantations Berhad’s annual report 2005).

Recently GHOPE’s core plantation profit declined by 19% to RM344.2 million as the drop in selling prices of palm products and higher costs of production. His is because downturn on fresh fruit bunch (FFB) harvests and the oleochemical businesses were impacted by the rising costs of raw materials. However, the net profit forecast of RM432 million in 2007 and introducing net profit projection of RM482 million for 2008. Earnings growth will be driven mainly by higher plantation earnings due to increasing crop production and stronger selling prices. The expected jump of earning will be reach as long as average crude palm oil price above at RM1,500 per tonne. See appendix (NUMBER)

The stock been picked in the portfolio since biodiesel as new energy being use rapidly and its anticipated this alternative sources of energy will widely used due to the benefits to the environment. According to the article “Players seek more biodiesel perks” by Danny Yap, it stated that the European Union (EU) legislation is prepared to raise the quantity of biodiesel in Europe's transport energy mix to 2% for 2005, 5.75% by 2010 and 20% by 2020 (2006). In addition, the consumption on fuel by United States, China and India’s continued growth, which bring alternative sources of energy such as biodiesel would be in great demand. Consequently, Malaysia plantation player like GHOPE would be the beneficiary as the company is venturing into biodiesel with foreign company to reach the future market demand.

The stock is expected to bring a return of over 15% a year in a decade as the company biodiesel plant was in construction. The treats to the targeted return include slower growth in demand for palm oil from the biofuel sector, which may against the palm oil prices going forward.

CB Industrial Product Holding Berhad - CBIP (7076)

With its patented in-house modular mini mills (modipalm mills) technology and continuous sterilization system for palm oil fruits, CB Industrial Product Holding Berhad (CBIP) designs, builds and commissions complete palm oil mills of various sizes. CBIP recently diversified into plantation development and operations with the acquisition of 3,720 hectares of plantation land in Sarawak. (CB Industrial Product Holding Berhad ‘s annual report 2005).

Refer to appendix (NUMBER). At the growing in palm oil price, numerous plantation companies is expanding the palm oil production to meet the demand. More mills are needed increase the capacity to process palm oil. With CBIP’s well-known Modipalm technology, it is capable to increase the production of palm oil and been used in Southeast Asia to Africa. According to the managing director of CBIP, LIM Chai Beng in the article of “MD steers CBIP to greater heights”, he stated the only company which has the capability to build and operate palm oil mills in Malaysia is CBIP and the group's modular palm oil mills (Modipalm) with processing capabilities ranging from five to 45 tonnes per hour, can be seen in oil palm plantations in Indonesia, Thailand, Colombia, Ivory Coast, and West Africa (www.thestar.com.my 2006).

The group will projected to gives a return of 15% annually for five years time in support of Modipalm was one of the key drivers for the group's future growth in the medium term. It is a patented technology with the rights to last until year 2021. Besides that, the group is planning to development and operations into plantation sector. While the risk for CBIP is market price of steel comprises almost total production costs, which driven lower would contract as the cost of construction hike. In addition, as the majority of the group contract comes from overseas, hence the increase in Ringgit Malaysia would lead negatively impact on profits.

Lion Diversified Holdings Berhad - LIONDIV (2887)

Overview: Lion Diversified Holdings Berhad (LDHB) is a Malaysia-based investment holding company. LDHB is organized into five major business segments: retailing, which is engaged in the operation of departmental stores and supermarkets; property, which is engaged in property development and management; computer, which is engaged in the manufacturing and sales of computer and related products; beverage, which is engaged in the manufacturing and sales of beer and non-alcoholic drinks, and others, which is engaged in investment holding and others (Lion Diversified Holdings Berhad‘s annual report 2005).

As this portfolio is aiming on long term investment, LIONDIV certainly is a good buy for the reason the investment company entered China market under its Parkson Retail managed by its subsidiary Parkson Retail Group Ltd (PRG). It’s unquestionable that China is a giant market with the population over 1 billion of people, this would made LIONDIV an opportunity to growth in the chinese market by merge and acquisition on departmental stores and supermarkets existed. Currently, LIONDIV operating 39 stores in 26 cities in China, PRG plans to open 30 more across China as part of a nearly one billion yuan (RM469 million) five-year expansion plan (Lion Diversified Holdings Berhad‘s annual report 2005).

LIONDIV is expected to bring 12% per annual return as the main reason is vast market in the republic which is an opportunity to growth rapidly. In addition, China political and economic is stable and growing. It should take note that appreciation value of yuan will panic foreign investor invest in the country.

More details on the return of investment for the future profit had been put together on the appendix (see NUMBER). Calculation had been made based on expectation for the ten years investment on the five different sector stocks. Some assumption on the calculation had been made to attain the future profit. As;

Share Price = based on current market price.

Expected Return Per Annual = from the analysis made and research house.

Expected Dividend Yield Per Annual = from the annual report and past dividend payout.

Assume Inflation Rate = Based on Malaysia current market inflation rate.

The results of the summary from the calculation are:

After 10 Years Investment = RM651,449.94

The Present Value = RM399,933.94

The Average Growth on Investment = 23%

Pro and Con of Stocks

Stocks are a form of ownership; they represent participation in a company's growth. Generally, the initial investment gives no promises about return to investors. In fact, the profitability of the investment depends almost entirely upon rising stock price, which, relates directly to the performance and growth (increasing profits) of the company. It is uneasy to identity the pro and con just only looking on stock alone.

Advantages of Stock:

• The profit gain from appreciation of stock price will eventually belong to the investors, unlike mutual fund, the profit from investment made have to pay for fund managers who made the investment.
• As known stock is a liquidity asset, which allows investors to request that the investment shares to be converted into cash at any time.
• Invest in stock not just benefits on profits, yet it help to gain more knowledge on the market perform. An investor always needs to know how the invested company performs thus; media information on the market and company has to take alert.
• Investor for profit would invest in the stock which they have faith that the company will perform well in the near future based on their study or research. Contrasting with mutual fund, it is the fund manager allocates the money on their judgment. Yet the investment made by fund manager does not mean will bring a promised return.

Disadvantages of Stock:

• To pick a good stock which expected excellent return, investors are required time and effort to do research as well as study the market.
• There is some stock which is expensive to purchase in a “lot”, so, investor would need more fund to own the company shares. And mutual fund offered minimum small amount of money for investment.
• Demanding with occupation investor has no time or the expertise manage their own portfolio.

Conclusion

In conclusion, this portfolio has been made based on current market and with all the analysis made using reliable source and data. It is believed that RM399,933.94 in a decade expectation return will achieved using assumption made after taking care of he inflation rate. The year on year growth rate of 23% is calculated from the information that obtain indicate stock could bring return of 16% – 30% annually o investors.

In financial asset investment, there is no guarantee securities that gives 100% return in the future as we can not predict the future uncertainty. Therefore, investors who are willing to take on greater risks and who would prefer the benefit of having partial ownership in a company and the unlimited potential of a rising stock price would be better off investing in stocks.

JP Morgan Chase and Bank One Merger Deal Terms

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.