Mergers And Acquisitions Case Study JP Morgan Chase
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Published: Mon, 5 Dec 2016
Mergers and acquisitions have become the most frequently used methods of growth for companies in the 21st century. With them a company can have a potentially larger market share and open itself up to a more diversified market. If the acquiring firm’s value is increased then only a merger is considered to be successful. M&As have raised important issues both for business decisions and for public policy formulation. Most mergers have been known to benefit both competition and consumers. However, some mergers and acquisitions have the capacity to decrease competition in many ways.
The merger between JP Morgan Chase and Bank One gave JP Morgan Chase an opportunity to expand its access to retail banking markets and clientele in those regions where its previous exposure was almost inexistent. With the merger, it gets an extra growth and competitive edge that it was looking for to compete with Citigroup and other rivals. Mergers and acquisitions have become more frequent today then ever before because it has been proved by research that it makes the transaction and other processes of the business more efficient and effective.
There are various kinds of mergers like horizontal, vertical and conglomerate merger. It is interesting that with the controversies and fierce price wars, many mergers and acquisitions are taking place.
In the today’s world of globalization, major companies both in domestic markets and international markets struggle to achieve the optimum market share possible. Every day business people from all the levels of management work to achieve a common goal and try to get it as fast as possible by being the best at what they do. Companies assume various tactics to beat their competitors. Some of their tactics includes competing in the market of their core competence, thereby ensuring that they have the optimal knowledge and experience to fight against their rivals in the same business; hostile takeovers; or the most popular way to achieve growth and dominance – MERGERS AND ACQUISITIONS.
Mergers and acquisitions have become the most frequently used methods of growth for companies in the 21st century. With them a company can have a potentially larger market share and open itself up to a more diversified market. At times, a merger or an acquisition makes a company larger, expands its staff and production, and gives it more financial and other resources to be a stronger competitor in the market.
MERGER OF JP MORGAN AND BANK ONE
A JP Morgan Chase press release dated January 14, 2004 announced that JP Morgan Chase and Bank One had agreed to merge in a “strategic business combination establishing the second largest banking franchise in the United States, based on core deposits.” The combined company is expected to have assets of “$1.1 trillion, a strong capital base, over 2,300 branches in seventeen states and top-tier positions in retail banking and lending, credit cards, investment banking, asset management, private banking, treasury and securities services, middle-market, and private equity.” With earnings contributions that are balanced out between retail and wholesale banking, the combined company is expected to be “well-positioned to achieve strong and stable financial performance and increase shareholder value through its balanced business mix, greater scale, and enhance deficiencies and competitiveness.”
The agreement, which was approved by the boards of directors of both companies, provided for a stock for- stock merger in which “1.32 shares of JP Morgan Chase common stock would be exchanged, on a tax-free basis, for each share of Bank One common stock.” Based on JP Morgan Chase’s closing price of $39.22 on Wednesday, January 14, 2004, the transaction would have a value of “approximately $51.77 for each share of Bank One common stock, and would create an enterprise with a combined market capitalization of approximately $130 billion.”
Under this agreement, the combined company will be headed by William B. Harrison, as the chairman and chief executive officer, and by James Dimon, as the president and chief operating officer, with Dimon to succeed Harrison as CEO in 2006 and Harrison continuing to serve as the chairman. The merged company will be known as JP Morgan Chase & Co. It would continue to trade on the New York Stock Exchange, under the symbol JPM, and its corporate headquarters will still be located in New York. The JP Morgan brand will continue to be used for the wholesale business; and the combined company will continue to use both brands (JP Morgan Chase and Bank One) in their respective markets and products. It is expected that the pretax cost savings of $2.2 billion will be achieved over the next three years. The combined corporation is also expected to have “excess capital and subject to Bank One board approval, Bank One expects to declare an increase in its quarterly dividend to $0.45 per share.” Both company heads commented on the merger saying that will create one of the world’s great financial
REASONS BEHIND MERGER
The merger between JP Morgan Chase and Bank One makes sense on multiple levels. Being the dominant bank in Chicago, Bank One opened up to JP Morgan Chase a retail banking market, to which JP Morgan Chase would not have been exposed to otherwise. As stated in the press release, JP Morgan Chase gained over 2000 branches and client exposure in areas in which it had not been as well known before; namely, a stronger presence in the credit card business, and branches in the Chicago area. By merging with Bank One, JP Morgan Chase gained market share and covered more ground on the map of the United States with its presence.
As known in the financial industry, Citigroup it the biggest competitor of JP Morgan Chase. After the merger, JP Morgan Chase with Bank One, has a much bigger chance at beating its competition. Merging with Bank One, has given JP Morgan Chase access to a new and much more expanded market without JP Morgan Chase’s having to specialize and spend its valuable assets in order to penetrate a new market, establish itself, build new branches, attract clients, and then compete with Bank One in the Chicago area. Rather then performing all of the steps above, JP Morgan Chase made the more valuable and financially sound choice of simply acquiring Bank One, which already has the expertise and the reputation in the area of retail banking.
PROBLEMS IN THIS MERGER :
This process is not only complex and multidimensional, but it is also challenging for people in all lines of businesses in both companies. Mergers take a toll on senior managers, in whose hands lie, the fate of their company and the fate of all the people who work in that company. Also, of course, the idea of mergers is alarming and sensitive for the people not included in the senior management team (and for multi business corporations, these people include anyone from vice presidents to assistants), due to their fear of job loss, or an anticipated potential shift in their position within the company.
On June 3, 2004, “JP Morgan vice president says he will retire.” Since the purchase of Bank One had now been relatively complete, Donald Layton, a JP Morgan Chase and Company vice chairman and one of the three members of the bank’s office of the chairman decided to retire in order to pursue other opportunities. When these resignations take place, the discussions around them become very controversial, especially since in Layton’s case his role was not replaced my another senior figure, but overlooked, supported by the fact that now, the finance, risk management and technology divisions report directly to James Dimon, without the need of a middle figure. Surely, Donald Layton’s role in the company was essential, but to cut costs, the firm decided to pursue the strategy of division’s direct reporting to higher officials, which in no way reflects on the professional capabilities of Layton.
STEPS TAKEN TO RESOLVE PROBLEMS :
Every day, internal newsletters came out to all of the employees of JP Morgan Chase in order to inform everyone of the new steps being taken by senior management towards the completion of the merger with Bank One, as well as to inform the staff of the senior management’s insights into the future for both corporations.
This action is a very effective step on the part of senior management, not only because it keeps the merger on track and well organized, but more importantly, because it makes the people in the firm feel as though they are a part of the merger, which they rightfully so are, because everyone in the firm matters, and contributes in some way to the aggregate well being on the entire company. This action lets the people know that senior management thinks of them during the merger, and takes them into consideration when taking various actions on the merger. Furthermore, a discussion board was created on JP Morgan Chase’s website, in order for anyone internal to the firm to be able to ask questions, or to voice any concerns with regard to the merger.
Mergers and acquisitions have become the most frequently used methods of growth for companies in the 21st century. With them a company can have a potentially larger market share and open itself up to a more diversified market. If the acquiring firm’s value is increased then only a merger is considered to be successful. The question is whether mergers improve company’s performance. At times, companies make predictions that it will result in increased efficiency, growth and greater profits but there are certain imperfections in the capital markets which lead to imperfect information and at times even merger failures. Most mergers have been known to benefit both competition and consumers. However, some mergers and acquisitions have the capacity to decrease competition.
Usually, a merger can be construed as being anti competitive if it makes the market very saturated after the merger, as opposed to before the merger’s completion, and if the merger in addition makes it impossible or highly difficult for new firms to enter the market and present a challenge to the existing corporations.
There are three main types of mergers: horizontal mergers, vertical mergers, and potential competition or conglomerate mergers.
The United Nations’ suggests that the recent increase in cross-border mergers and acquisitions is mainly due to an increase in the globalization of markets. It is proved by the fact that more than 24,000 [mergers and acquisitions] have taken place during the last 20 years. One major factor in increasing mergers and acquisitions is the ease of communication. Several controls have been put into place to regulate M&As to make the process fair for both the consumers and firms. By concentrating on removing entry barriers to a market, the only way by which monopolies and mergers can remain strong is by efficiently producing high quality products. The main economic argument because of which a merger a can be rejected is that they contribute to the risk of monopolies, because in the case of monopolies, resources become misallocated and consumers become exploited. These mergers create entry barriers which restricts competition and can potentially lead to market failure and a decline in economic welfare. As a case in point, JP Morgan Chase is a perfect example of how a smart strategic move can make significant improvements to a company’s performance. After the “merger” between Bank One and JP Morgan Chase, the latter company’s market share, revenues, and net income all rose to impressive heights, marking the initial success of the acquisition.
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