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Except for historical information, all other information in this filing
consists of forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based upon the
current beliefs and expectations of J.P. Morgan's and Chase's management and
are subject to significant risks and uncertainties. Actual results may differ
from those set forth in the forward-looking statements. These uncertainties
include: the ability to obtain governmental approvals of the merger on the
proposed terms and schedule; the failure of Chase and J.P. Morgan stockholders
to approve the merger; the risk that the businesses will not be integrated
successfully; the risk that the revenue synergies and cost savings from the
merger may not be fully realized or may take longer to realize than expected;
disruption from the merger making it more difficult to maintain relationships
with clients, employees or suppliers; increased competition and its effect on
pricing, spending, third-party relationships and revenues; the risk of new and
changing regulation in the U.S. and internationally. Additional factors that
could cause Chase's and J.P. Morgan's results to differ materially from those
described in the forward-looking statements can be found in the 1999 Annual
Reports on Forms 10-K of Chase and J.P. Morgan, filed with the Securities and
Exchange Commission and available at the Securities and Exchange Commission's
internet site (http://www.sec.gov).
The proposed transaction will be submitted to Chase's and J.P. Morgan's
stockholders for their consideration. Such stockholders should read the joint
proxy statement/prospectus regarding the proposed transaction that will be
filed with the SEC and mailed to stockholders. The joint proxy
statement/prospectus will contain important information that stockholders
should consider. Stockholders will be able to obtain a free copy of the joint
proxy statement/prospectus, as well as other filings containing information
about Chase and J.P. Morgan, without charge, at the SEC's internet site
(http://www.sec.gov). Copies of the joint proxy statement/prospectus and the
SEC filings that will be incorporated by reference in the joint proxy
statement/prospectus can also be obtained, without charge, by directing a
request to The Chase Manhattan Corporation, 270 Park Avenue, New York, NY
10017, Attention: Office of the Corporate Secretary (212-270-6000), or to J.P.
Morgan & Co. Incorporated, 60 Wall Street, New York, NY 10260, Attention: Julie
Wojcik (212-483-2323).
Chase and J.P. Morgan and certain other persons named below may be deemed
to be participants in the solicitation of proxies of Chase's and J.P. Morgan's
stockholders to approve the transaction. The participants in this solicitation
may include the directors and executive officers of Chase and the directors and
executive officers of J.P. Morgan. A detailed list of the names and interests
of Chase's directors and officers is contained in Chase's proxy statement for
its 2000 annual meeting, and a detailed list of the names and interests of J.P.
Morgan's directors and officers is contained in J.P. Morgan's proxy statement
for its 2000 annual meeting.
As of the date of this communication, none of the foregoing participants
individually beneficially owns in excess of 5% of Chase's common stock, or 5%
of J.P. Morgan's common stock. Except as disclosed above and in Chase's and
J.P. Morgan's proxy statement for their respective 2000 annual meetings, to the
knowledge of Chase and J.P. Morgan, none of the directors or executive officers
of Chase and J.P. Morgan has any interest, direct or indirect, by security
holdings or otherwise, in Chase or J.P. Morgan.
1
J.P. MORGAN CHASE & CO. PRESS CONFERENCE
SEPTEMBER 13, 2000
THE EQUITABLE CENTER
787 SEVENTH AVENUE
NEW YORK, NEW YORK
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MR. WARNER: Good morning
everybody. Thanks for coming. I'm delighted to
welcome you in person, on the phone, and on the
web.
Needless to say, this is a
momentous day. It's a momentous day for Bill
Harrison, it's a momentous day for me, it's a
momentous day for two management teams who
worked over the last three weeks to put together
this very exciting transaction. And in the end,
today, this morning, at 6 o'clock, a great day
for our two firms.
Together, we want to introduce
you to the powerhouse created by a breakthrough
transaction: That powerhouse, J.P. Morgan Chase
& Company.
This is a story about growth.
And it's really just that simple. Combined, we
stand ready to accelerate far beyond what either
of us could expect alone. Or for that matter,
with any other partner.
The combination has phenomenal
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potential.
I'm going to tee up that theme in
just a few remarks, the growth theme, and then
Bill and Marc Shapiro are going to take you
through the reasons why the transaction is
strategically and financially compelling. And
also with us to answer specific questions that
may come up, are members of the executive
committee, Geoff Boisi, Don Layton, Tom Ketchum,
Ramon de Oliviera, Walter Gubert and Jimmy Lee.
So why this combination? And why
now? It really starts with acknowledging that
Bill Harrison and I have been friends for
approximately 25 years. We've talked often over
those years to see and understand each other's
thinking evolve. And we've seen our respective
firms evolve at the same time.
So when he called me, about three
weeks ago, it was pretty quickly apparent to
both of us that we were speaking in the context,
in a context that had changed materially from
the context of even a few years ago. And let me
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just give you a sense of that, a couple of
examples.
The Chase changes that were
important to us, small targeted acquisitions
like Hambrecht & Quist and Flemings, just make a
huge difference to us when combined with what we
have been doing in the equities business.
That's a big change. A big synergy, a big
opportunity.
And for Bill and for Chase, the
progress that J.P. Morgan has made in these past
years in building our equities business and in
asset management, make a huge difference to him.
And the way both of our firms have changed how
we think about and approach the credit business,
that's evolving and coming together. And the
power of our combined risk management leadership
platforms. All of these kinds of things Bill
and I talked about, and many others, and they
contributed quickly to the stars being aligned
at this moment in time.
As we dug deeper in our
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conversations, we recognized the growing
convergence of both firms' vision, what's out
there two, three, five, ten years from now, in
these wholesale financial markets. Both of us
were focusing our energies on the areas of
greatest growth, that is, the global capital
markets, strategic advice, asset management, and
the enormity of the potential in private
banking.
We each knew that the only way to
deliver growth and returns was to combine top
tier content and capabilities with a broad and
diverse client base. Said as simply as I can,
we saw a great opportunity to capitalize on the
complementary momentum of both firms.
Looking at the pro forma numbers,
you've seen them, the immediate power of the
combined franchise is I think obvious, 7-1/2
billion in pro forma net income, 31 billion in
pro forma revenues, 36 billion in equity
capital. Formidable beyond a doubt. But if
this deal were primarily about size, we wouldn't
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be standing up here today. Rather, this
combination is first and foremost about
accelerating growth.
And J.P. Morgan Chase & Company
has everything it takes to unleash that growth,
starting with a combined client base of
unparalleled scope across widely diverse
segments. Those segments, just think about it,
corporations from start-ups to the blue chip
investment grade franchise. Old economy and new
economy companies, governments and financial
institutions around the world, institutional
investors, financial sponsors, professional
traders and dealers, affluent individuals, and
those with very substantial wealth. And
consumers. Together we can deliver to those
clients all of those segments, a comprehensive
set of capabilities.
Our product leadership platforms,
that's the two firms' combined execution and
expertise, represent the highest quality content
across the broadest spectrum of capabilities of
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any wholesale financial firm. The highest
quality content across the broadest spectrum of
capabilities of any wholesale financial firm.
That means a full range of
advice, ranging from cross border M&A to complex
risk management strategies to comprehensive
wealth management. That means the ability to
raise capital in every major financing market
from private equity to high yield debt to
equities to syndicated debt to structured
finance solutions. That means superb trading
and risk management capabilities ranging from
huge flows of high volume instruments to highly
tailored complex solutions to client risk
problems. That means asset management
capabilities spanning all asset classes and
geographies for a total of over $700 billion of
assets under management. And that includes a
private bank with $245 billion in assets. And
above all, the combined firm, powered by
intellectual capital, and delivered and executed
by first rate technology.
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And, it's important, it's global.
Not just important, it's necessary. From one of
the oldest and strongest European franchises,
which will now account for 30 percent of the new
firm's revenues, to the Flemings franchise in
Asia and a strong presence of our combined firms
in Japan and in Latin America and beyond. In
all, half of our combined revenues come from
outside North America.
And finally, a pool of talent
across this firm which is truly awesome. Our
people, not the three of us, not this executive
committee, our people will be the real
architects of growth. And we have a common
foundation of principles to build on. That is,
integrity, dedication to clients, pursuit of
excellence in everything we do, and teamwork and
partnership in getting it done.
Growth, client reach, leadership
and capabilities, expertise and values. Put it
all together and J.P. Morgan Chase & Company
create a spectacular opportunity for our
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shareholders, for our clients, and for the
people of both organizations. Indeed, of our
one organization.
With that, let me introduce and
hand over to my friend and now partner, Bill
Harrison. Bill?
MR. HARRISON: Thank you, Sandy.
Thanks Sandy. Let me just say to
you that you can't imagine how pleased I am to
be here giving you this presentation versus the
presentation I was going to give at 8 o'clock
this morning at Merrill Lynch. That was
different.
I couldn't agree more with what
Sandy said, and I couldn't be -- our teams
couldn't be more excited about what this
combination can produce for our shareholders. I
think it's unique. We want to share this
morning our thinking with you on that in more
detail, because I think if you understand it,
you'll understand our excitement.
As many of you have heard me say
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over the years, we've had a vision, particularly
on the wholesale investment banking side, that
basically says we believe in consolidation, we
believe that, I believe very much that there
will be perhaps a less than handful of end game
winners in this space. We are an end game
winner with this platform. We do not have to do
another major acquisition.
And if there is one thing that,
among many, that I'm excited about, is I won't
have to answer that question 18 times a day
about when are you going to do a big deal. This
is it. This is it. And we will look
opportunistically at things and small
acquisitions, but we think this is it as a major
acquisition.
This is a global financial
powerhouse, with scale and leadership positions
in a broad array of product and client sense,
and leadership positions, leadership position
and capital. All surrounded by what I think is
a very, very talented group of professionals at
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all levels. And I've gotten even more excited
about that as we've gone through all the
negotiations and due diligence, which I will
talk about more in a minute, to give you a feel
for that.
I've also said repeatedly in
this, on this question about what is Chase going
to do next, that we like mergers, they've been
very kind to our shareholders, they have created
growth. Our three key criteria when we look at
a combination is is it good for the shareholder,
is it the right strategic fit. And quite often
those are easy to get to. The hard one is the
willingness to want to do a deal on both sides,
which tends to relate to the social issues and
the cultural fit.
And we've always said when those
three things are aligned, we are very receptive
to doing a merger. As Sandy said, those three
things were aligned certainly for us, and I
think for him. And it's created something that
I think is going to be very, very special.
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In terms of the financial
benefit, this is a situation I am convinced
where one plus one will significantly accede
two. And we've had, again, a lot of experience
in our mergers on that story.
I want to first focus on, and
primarily focus my remarks on the integration
execution risk here, because -- and then I'm
going to turn it over to Marc to talk more about
strategy, then we will open it up to Q and A to
the three of us.
But if you understand the
components of this deal as a business fit
matter, there is no doubt that on paper this
deal is a home run. And I think you'll feel
more and more comfortable the more you
understand that. So to us, this will come down
to our ability to execute and integrate the
great businesses on both sides.
And let me just talk about that.
Slide, please.
In terms of integration and the
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cultural fit issue, I have been part of all of
the old Chase's mergers, starting first in 1987
with TCB, that's where I got to know Marc
Shapiro very well. So I'm very experienced at
it. It's an art, it's not a science, for sure.
But we think we are pretty good artists at it,
because we have been through enough of them.
And I can tell you that we would not do a merger
with someone if we didn't have a high level of
confidence that the cultural fit and the social
issues here created a very positive environment
to pursue this enterprise.
The other thing that's
interesting, interesting, I think, comment
that's very relevant to the growth notion that
we keep talking about, is if you go back to all
of our mergers, on the wholesale side, the
marketplace was very skeptical on whether or not
you can get revenue growth out of it. They
understood the expense side of it, but can you
get revenue growth out of it. You know the
story, in each one substantial revenue growth
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created on the wholesale side.
And I can tell you, having gone
through the due diligence we have in detail over
the last couple of weeks, I would feel much more
comfortable that the revenue opportunity here on
the upside, when you put these two together, is
much greater, should be much greater, than it
was in our prior mergers.
Let me just give you a little
example in terms of the flavor of a merger
integration, and how we approached this one is
very similar to how we approached our others.
And it started with a meeting that Sandy and I
had that he described, we were five minutes into
the conversation and Sandy and I both agreed
that if we could convince ourselves that this
was good for the shareholder, we could get very
excited about this transaction.
And we set out to get some of our
key people involved, which we did. It didn't
take us long to get even more excited about this
combination. And through a process that really
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accelerated over the last couple of weeks, where
we kept bringing in more and more of our key
people, we kept getting more excited about the
fit, both from a business perspective, the lack
of overlap in terms of where you might lose
revenue. And most importantly, I personally got
comfortable, and I think Sandy did as well, with
the people fit. I think the people fit here is
going to be very, very good.
And we say that because we have
spent the last week and a half, two weeks with
the senior people on both sides, hammering out
what is the organization structure, how are we
going to run the place, what are the key jobs,
and who's going to be in them. So that today on
day one we can -- we have already decided, and
the people know, basically the top 40 or 50 jobs
in the company, not necessarily exactly the top
40 or 50 jobs, but we have 40 or 50 of the key
jobs established, it will be announced, they are
known.
That does two things: The most
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important thing it does is enables you to go
into day one with momentum and commitment of the
new management team; that is hugely, hugely
important. That may sound really simplistic,
but most mergers are not done that way, and I
can tell you if you go into day one without
that, you get on the defensive very quickly and
it takes you six months to a year to recover.
We are off to a great start here.
The second thing this does, it
does give you a very good feel for what the
other side is like, what the cultural fit is
going to be. And that's why I can stand up here
today and feel very good that this cultural fit
social issue, and our ability to integrate this,
should be very good. Again, it's an art, not a
science, there is a risk in it, but I think we
are good at it, and I think it's going to be a
very good merger integration. And I think we
will once again be known after this deal is done
of having integrated something very well,
because it is a merger, it is a combination, and
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that's the way it will be managed.
The other thing I would say is
that this is also not as broad in a lot of ways
as some of our prior mergers, our global
services business is not really part of any
merger integration. Our retail business is not
part of any merger integration. You had huge
system issues in all of those, it gets
complicated, this is really wholesale asset
management private banking.
We think we are off to a great
start. Next slide. Execution is the key. And
this is a winning growth story. And once you
really understand that, I think you will get
very comfortable that it is an execution issue.
And hopefully you can get comfortable that we
have the team on both sides to do that.
Next slide, please.
This opportunity is really the
new competitive model in wholesale financial
services. And as I said earlier, we are quickly
coming down to less than a handful of in game
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winners in this wholesale investment banking
space. And we can provide clients now, with
this combination, the complete range of
capabilities anywhere in the world. Anywhere in
the world at a top tier level of execution.
And as other companies outside
the financial services industry, our clients
consolidate and get bigger, they want to use
companies like us that can provide the full
range of services, provided we are good at all
of them. And that's why we believe so much in
leadership, it's not scale that matters, it's
leadership quality in each of these respective
disciplines. This transaction delivers that in
a very significant way.
Next slide, please.
Marc is going to come up and talk
about the complementary nature of this
transaction, and the strategic fit. Sandy
touched on it, I will touch on it as well.
As we got into this more and
more, we got more and more excited about how
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complementary these businesses are in terms of
revenue. And not only when you put two
businesses together that you are not going to
lose revenue, but the growth opportunity that
you have, because of our client base, in
particular. I don't think anybody in the
business can claim that they have a broader,
deeper, richer client base than this new firm.
That is hugely leverageable.
And let me have Marc take you
through some of the components of that. Marc?
MR. SHAPIRO: Thank you, Bill.
It's a great pleasure to be here on what I think
is an exciting day for both companies.
When you look at the strategic
fit of these two companies, it's been my
experience that the way you make money in our
business is to have a broad set of clients using
a broad set of products across broad geography.
That's what we are producing in this merger. We
are filling the needs that both of us have:
Morgan for more clients, Chase for more
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products. When you put those two together is
what creates value.
Let me elaborate on that a little
bit by talking first about the clients. Bill
talked about the due diligence sessions and the
discussions that we went through. For me, I
think the defining moment in those discussions
is when we were reviewing some of the business
that we had done, and we showed Walter Gubert a
list of the top hundred transactions we had done
in the last year and the fees generated by those
transactions. We started flipping through this
book and he said, you know, we don't have any
customers on this list. And we went through the
hundred, and I think there were about half a
dozen that were customers in common.
And the power of that client
base, complementary to the Morgan client base,
driven through the platform that Morgan had
built, is really the great opportunity of this
merger. Even where we have clients in common,
and strengths in common, like financial
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institutions, we often approach them from
different angles. Morgan has a great advisory
business with financial institutions. We have a
great operating service business. If you put
the two of them together, we have $4 billion in
revenue from financial institutions. And we
think the opportunities to cross sell are even
greater.
When you look at geography, the
story is compelling there too. About half of
our revenues in the wholesale banking operation
will be outside the United States. One thing we
found about our friends from Morgan is that they
think totally in global terms. As much as we
are a New York institution with international
outposts, it's clear to me that they are a truly
global firm that thinks first about the global
possibilities. The opportunity to put that
together in a world where globalization is the
key to growth, I think is very exciting.
Finally, if you look at product
leadership, it's been our observation that the
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key to generating a high return on equity is to
have strong product leadership.
Am I going the right way or the
wrong way?
-- is to have strong product
leadership. There are some products where we do
very different things and have very different
strength, operating services is an obvious
example. There are some products where we
appear to have the same strength, as in FX
business. It turns out that when you examine
those with a microscope, it's not really true.
The great Morgan strength is in structured
derivatives. Out great strength has been in
more plain vanilla derivatives and cash trading.
You put that together, you get a clear product
leadership position.
When you have a product
leadership position, you have the ability to
track the best people to that platform. You
make the most money, you can afford to pay the
most money. And it's a virtuous cycle, because
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that reinforces your ability to attract the best
people. There is no doubt in my mind that high
returns on equity are generated by leading
product positions. And that is what this merger
gives us across a broad scale.
It's true in particular, if you
examine the fact that we are in growth markets,
these are all markets that are growing very
rapidly, at double digit and higher rates. And
because of that, we've got the wind at our back
in terms of revenue growth even if we don't gain
market share, which we expect to gain.
And finally, we get to the
inevitable lead tables, and I want to make a
comment about this slide. First of all, there
is no question that we are the unparalleled
leader in providing corporate debt around the
world. Unparalleled. But I want to move to the
other two, because that's where most the
questions have been raised, and where it seemed
to be the two yardsticks by which investment
banking operations are judged.
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The first is M&A. By lead table
status I guess we are number 4. What I tend to
look at is revenues generated. And if you look
at the two companies combined, we are running at
an annualized revenue rate from M&A transactions
of about $1.8 billion a year. By my measure
that's third in the world, ahead of Merrill
Lynch. And we haven't begun to realize the
benefit of putting our two client bases
together.
The next big product is equities.
And there what I've heard from people that I
talked to this morning is okay, but you are not
there. And my answer to that is you really
don't know. You really can't just combine what
we have done previously, because what you don't
know is what the benefit of taking the massive
Chase client base against the platform that J.P.
Morgan has built. The answer to that question
really we will know in about a year or two. And
that will determine, I think, whether we are
among the leaders. My bet, strong bet, is that
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we will be.
And of course in risk management,
we already are the leader, hands down. I think
our two firms were the top two firms in this
business. We had different strengths. Putting
the two of them together I think absolutely
makes the unparalleled leader in risk
management. We are the preferred counterparty
for any institution in the world.
Let me just talk about three
quick examples of where I see the potential of
these complementary strengths coming together.
The first one of these is wealth management. We
will be second largest active manager of money
in the United States. Behind Fidelity, but
ahead of everybody else. This is a remarkable
position to be in in what is clearly perceived
as a high growth market. For us it will be very
well balanced, both by asset class, by
geography, and by type of investor. We think
that that balance is a key element in terms of
generating growth and fueling the necessary
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platforms that it take to support these
businesses. We are not precariously balanced on
one particular geographic area or product class.
This is a great money management firm, it will
take a while to put it all together, but I
believe it's going to be one of the great
hallmarks of this company.
Secondly, equity derivatives.
About three weeks ago we had a meeting at Chase
on what it would take to get to a billion
dollars in equity derivatives, because we
thought that was an achievable target. But we
would have to spend about $400 million to get
there. Now we don't have to spend that money.
Because Morgan has built a great platform, one
that has had very sharp growth in the last three
years. And can you imagine the revenue
potential that comes from putting a much larger
client base against the platform that has been
built in this product.
And finally, if you look at
Europe, which is the acknowledged hot spot for
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growth today, again, this was another investment
that we were focused on how much it would cost
to build up a presence in Europe. Morgan has an
indigenous presence in Europe that goes back a
century. And deals with the best clients in
that region of the world. If you add additional
products capabilities, and add some additional
capabilities in the high tech area, then I think
you have a world class player in Europe today
without having to spend much additional money.
We will continue to build this platform, but the
challenge for either one of us today is not half
as great as it was a week ago.
That brings me to the question of
whether this is financially beneficial. The
lawyers tell me I need to give you a disclaimer,
which is more legalistically described in the
back of your book. What I would say is I
interpret what they say to mean there is nothing
that I'm going to tell you from this point
forward that you can rely on in your own
estimations of what's going to happen. But I'm
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going to give it my best shot anyway and you can
form your own opinions.
The next slide I think you can
rely on, because it states the facts of the
merger, the exchange ratio, the tax free nature
of it, and the dividend rate. We do expect this
merger to close in the first quarter of next
year.
The second one I think is the
math, that's the interesting part of this
equation, and that is is it accretive to
earnings per share. We believe it will be.
My math on this is not terribly
sophisticated, take the number of shares
outstanding on a fully diluted basis times the
exchange ratio, and we need to produce earnings
on 688 million shares that will be at least
equal to what Chase is earning on those shares
today. Which is estimated to be $4 a share this
year. That produces an earnings requirement of
2.8 billion against an estimate for Morgan's
earnings this year of 2.1 billion, and a gap of
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700 million. Against that gap we have
conservative expected synergies of 1.2 billion.
Now, there are two points on that
that I've heard in talking to people this
morning. The first is is Morgan at a very high
level of profitability that you can't project
into the future. I don't see that. I don't see
a return on equity that is extraordinarily high,
it's about 19 percent this year. I don't see
any unusual elements of trading or equity
investing that lead me to believe that this is
not a sustainable base from which to grow.
The second comment I've heard is
well, when you get out to 2002, and you look at
the earnings estimates that are out in that
area, you still get dilution. I say look, I
have trouble estimating what our earnings are
going to be in September, much less in 2002.
The simple way to look at this is are we at
reasonably sustainable levels of earnings today,
and how are those earnings going to grow. And
it's my belief that the earnings growth pattern
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that Morgan would have had on its own would be
as high, at least as high, as what we would have
had on our own, and together it's going to be
higher for both of us.
As to whether we can get the
synergies, I don't think there is any question
about that, I think we have been very
conservative in our assumptions. We assume the
revenue number of about a billion dollars, net
of expenses, incremental expenses to service
that revenue. You get about $400 million to the
pre-tax bottom line.
Let me give you some examples of
how we quantify that. We looked at the equity
underwriting business, and we said all right,
let's look at our -- we took about a thousand
clients of ours, out of a corporate client base
of about 5,000. Said let's look at these
thousand domestic clients. And what was their
annual fees that they paid in underwriting
revenues over the last three years. We said
well, what's a reasonable market share that we
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could expect to gain, which we thought would be
about 20 percent. When we did that, we produced
a number of about $400 million a year in fresh
underwriting revenues to this company.
I think we will do better than
that because we have a larger client list than
that. And I think there will be other benefits
that will drive it. But in equity underwriting,
in equity derivatives, in M&A, in asset
management, I believe we will clearly get
incremental revenue growth.
The other thing that's been asked
to me about well, do you have revenue loss,
you've got a lot of overlap, especially in fixed
income and foreign exchange. All I can tell you
is in every merger we have done we have not had
revenue loss. It turns out we have
complementary client base and complementary
product strengths even within a defined area,
and that produces revenue gains. We haven't
assumed any in this case in those two areas, but
neither have we assumed that we would lose
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revenue.
As to the savings, $1.5 billion
in savings is about 12 percent of the relevant
expense base of both companies, excluding for
Chase's part the consumer business and the
operating services business. 12 percent
compares to the previous two mergers where the
target that we had was 20 percent. No question
in my mind that we can reach 12 percent.
We feel we are in an environment
where the technology is changing and where we
need to shift some dollars, and therefore we
wanted to be very conservative in these
estimates. There is no doubt in my mind that we
can do it, and we can do over the next two
years.
As to up front reserves, we
estimated at around 2.8 billion. Some of that
will be taken as up front charge at closing.
Some of it will, under current accounting rules,
need to be expensed over the next few years as a
nonoperating testimony. But we have included
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money in that to vigorously protect the people
that we need to protect on the short term until
we've got a clear stabilized situation and
people can see the benefits to them of being
with this platform. We think the total
synergies that we are looking at of $1.2 billion
after tax are conservatively estimated.
When you put this company
together then, if it can produce, we think the
deal will be accretive to earnings per share,
the question is what is the quality of the
earnings per share that you are producing. And
what I would say is that first of all we've got
a very well balanced company with a portfolio of
good businesses. We are combining investment
banking, and including in that global markets.
Because in the organization structure we are
announcing today, it's a combined organization
structure bringing together what previously for
us was global markets and global investment
banking.
But if you look across our
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businesses, investment banking, wealth
management, private equity, operating services
and consumer, we have high returns in each of
those businesses. We have leadership positions
in each of those businesses. And we think we
have a more attractive growth model going
forward than we had before.
Most importantly, I think the
question is how are you going to value these
earnings per share. And my argument would be
that they should get a higher value than they
are today. Why? First of all, I think the
growth projectory is stronger. I think one
number I was looking at today is that Chase has
about 37 percent of its revenue from net
interest income. For us net interest income
grows at about 2 or 3 percent a year. And we
don't really want it to go a lot faster than
that. On a combined basis, we are down to about
25 to 30 percent in terms of net interest
income. So we've lessened the dependence on a
slow growth revenue stream and increased the
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dependence on a higher growth revenue stream.
The second point I've already
made, leadership drives higher returns. No
question about that, that we are going to be in
more leadership positions and higher returns.
Third, we believe the key to risk
management, and both firms have pretty good
reputations for risk management, is in
diversification. The more diversification we
can get, the better risk management we are going
to have. And we think that the benefit of
bringing these companies together is a more
stable earnings stream with less risk.
Fourth, we think there is
enormous free cash flow generation. And I would
argue that the single determinant of stock
market value is the ability to generate free
cash flow. We haven't talked about the balance
sheet efficiencies that come from putting these
two companies together. Morgan estimates on its
own that it has excess capital of several
billion dollars. We agree with that analysis.
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We also know that by putting the two companies
together, there will be many assets -- that we
won't need as many assets as simply putting the
two companies together, and that will create
additional capital surpluses. With an earnings
stream that at some point should exceed $8
billion. And without the need to grow assets to
support that revenue stream, we believe that we
can generate an enormous amount of free capital
in this company.
And finally, we think that this
merger completes the platform for both of us.
It answers the number one question for both of
us. For us, when are you going to have an
equity platform. For Morgan, when are you going
to have more clients to drive through it. And
by eliminating the overhang in both stocks that
are associated with solving that strategic
puzzle, we think that alone has the opportunity
to increase the valuation of the company.
Finally, what I would say is that
I believe this is a winning growth strategy.
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It's a new competitive model with one of the
largest client bases in the world across a whole
globe in terms of capabilities, and with great
product leadership, great breadth of product
leadership. We think if you combine that
competitive position with a strong commitment to
financial discipline, risk, capital and expense
discipline, then the result will be a strong
increase in shareholder value. We are all
significant shareholders in this company, and we
believe that the actions that we've taken today
will improve our values and your values long
run.
Thank you very much. At this
point turn it over to Bill to moderate the
questions.
MR. HARRISON: Thank you, Marc.
We would be happy to respond to
any questions.
QUESTIONER: Thanks, Bill. I
wanted to ask Marc to expand about how he looks
at the balance sheet in terms of Morgan had been
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a big user of credit derivatives, if you see
ability to use that to reduce the economic
capital you have in the business.
And you referred to fewer assets.
Could you quantify that a bit more.
And then related to use of free
cash flow, I was wondering why you were doing
this deal as a pooling rather than as a
purchase, so that by you doing a pooling you are
tying up your ability to use the free cash flow.
MR. SHAPIRO: We haven't
quantified exactly the freed up assets.
With regard to the question of
using derivatives to hedge credit risk, I think
what you've had is a company that's a world
class company in terms of originating credit
risk, and a company that's a world class company
in terms of hedging away that credit risk and
not tying it up on the balance sheet. We
philosophically agree with both of those things
as a strategic course. And the ability to take
greater use of hedging mechanisms, we think
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gives us greater capacity to originate. And yet
eventually will result in a significant
reduction of capital associated with holding
those loans.
To your question of why we did it
as a pooling, we think that that's still
apparently a preferable way of looking at
earnings per share across the broad spectrum of
the analyst community. While there are timing
issues that relate to what you can do with the
capital, we think we have a good track record of
looking after your capital. And in the long run
we think it will find its way to the right home.
MR. HARRISON: Question in the
back. Yes, sir?
QUESTIONER: My question relates
to valuation. And Mr. Shapiro correctly pointed
out that investment banking is faster growing
than the net income spreads.
Could you describe the nature of
your investment banking revenues in more detail
so that we could understand better how much is
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sustainable, recurring investment banking
revenues as opposed to those revenues which are
available only when the markets are facilitating
new issue transactions?
MR. HARRISON: Marc, I'm glad you
are here this morning to answer that question.
MR. SHAPIRO: I think the great
benefit of this merger is the diversified
revenue stream. We have certain key elements,
including trading which is about $5 billion, and
M&A which is about $2 billion, and equity
business which I guess is about a $4 billion
business.
But the point is really in any
kind of marketplace people need to do
transactions. The equity markets may not always
be the best way to do it. And when they are
not, we find that debt markets are more
attractive, and the leadership position we have
in debt markets makes it a more attractive
proposition for us. We find that people need to
trade in almost any environment, and so we have
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found tremendous stability in the growth rate of
trading revenues over a long period of time.
We are not including in any -- to
any meaningful way significant proprietary
trading. There is some in that number. But not
a significant percentage of the total revenue.
Although we think that's an opportunity. So
most of it is client driven across a broad
product set, and one where if any particular
product is out of favor, we think there is an
opportunity to move resources and pick up the
benefit from the other products.
MR. HARRISON: Yes, sir?
QUESTIONER: In the area of
efficiencies, could you elaborate on that a
little bit to the extent and what we would be
looking at in terms of staff reductions,
divestitures, maybe your thoughts about
spin-offs?
MR. HARRISON: Let me just take a
crack at that.
The cost saves we have is a
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billion 5, which I think Marc mentioned. If we
look at past experience, it generally breaks
down a third systems, a third real estate, a
third people. We haven't gone exactly through
that analysis, but it will probably come out
something like that. That while the billion 5
is a big number in the context of our past
deals, it is very reasonable. We will get that.
But this is not about just cost saves, this is a
revenue story.
We don't anticipate any major
divestitures. But we have a management team
that will look hard at strategic positioning,
and if some business is not meeting its
strategic fit or returns, we will be very
disciplined about it.
QUESTIONER: Given that the
consumer businesses at the combined companies
are now such a smaller percentage of the
overall, how strategic do you now view those
businesses?
MR. HARRISON: You've heard Bill
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Chase talk about our consumer businesses. We
like the financial characteristics of them. If
you look back at the last three or four years,
they have been good. We have some good
leadership positions in those businesses. We
like also the diversity of earnings that the
consumer businesses give this new broad based
platform.
But we will also continue to look
at all of our strategic options in all of our
businesses and try to be strategic and smart
about how we manage it. But today we are happy
with our consumer business.
MR. WARNER: Let me add one thing
to that, because it's part of the synergy.
We have an initiative called
Morgan Online, which is web-based advice using
technology. The challenge for us, we have
content, we have a product, we have a
magnificent offering, is how to touch clients.
And we have been advertising, we have had
letters and cards from many of you about the
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quality of it. And we've been working pretty
hard.
I think Chase touches, in retail,
not all of the candidates for Morgan Online, but
30 million people in one way or another. And if
we can find base to drive the content of some of
the things that we have been doing in private,
mass customize it, segment it into that kind of
population, this is very, very interesting
indeed. I don't want to suggest 30 million plus
in any way, anyhow, what we target. But in that
population there is sure an awful lot of
segments that we would target.
MR. HARRISON: And also let me
just quickly relate that comment on consumer to
the depth of management talent we have in this
organization today. David Coulter will be
working on that, and David is a very strategic,
analytical, thoughtful kind of person, has no
bias about the consumer business one way or the
other. And I think we will do some interesting
things, as Sandy said.
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MR. SHAPIRO: Bill, why don't we
take some questions from the phone before we go
back to the audience.
MR. HARRISON: Question on line?
MODERATOR: Question coming from
Mike Mayo of Credit Suisse First Boston.
MR. HARRISON: Question, Mike?
Next question on line.
MODERATOR: We will move to the
next question. The next question is coming from
Henry McVeigh of Morgan Stanley.
MR. HARRISON: Henry, are you on?
QUESTIONER: Two questions.
One, can you just talk about the American
Century piece. And two, can you be a little
more specific on the revenue growth and the
equity in the M&A. It sounds like you are
saying that you've already got critical mass
there, but I would like to get greater clarity
on how you grow this, what are your specific
targets.
MR. WARNER: I will do as I
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suggested and turn over to Ramon de Oliveira the
American Century question.
We own 45 percent of it, have an
option to increase that ownership. It has
worked exceedingly well. We have created great
opportunities and fine contribution between us.
The investment has performed well. And I see
every reason that this will continue.
But Ramon, you want to comment?
MR. de OLIVEIRA: Not
particularly, Sandy.
MR. WARNER: It's a great fit.
It's a great fit here.
MR. de OLIVEIRA: What we have
with American Century here building into the
themes that have been described this morning is
the ability to put the 401(k) platform that has
been developed in the last two years into a much
broader corporate segment which has more
profitable characteristic than the large segment
that we have been attacking in the last two and
a half years. So that's a very important point
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and a very important synergy for us.
Secondly, we have a decision to
make on our 5 percent in the next few weeks, the
next couple of months, and we will make that
decision. And other than that, it's business as
usual.
MR. HARRISON: On the M&A and
equities question, just quickly, M&A, Marc gave
you some numbers. I think they sort of speak
for themselves. That doesn't mean that's where
we stop. But it clearly signals I think to the
marketplace that we have a leader in the M&A
practice with huge upside, because of skill set
that we have and the client base we have.
On the public equities side,
again, Marc went through that, but it's the
leverage of the client base that we additionally
bring to the J.P. Morgan private equity -- I
mean public equity platform. But also combine
with Chase H&Q, which is very additive to the
equity platform, as well as Flemings. Flemings
Asia was all about a broad based public equities
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platform. And Sandy, you got some calls this
morning from Asia, they are very excited out
there, and our people are too about what that
combination does on the public equities side,
and the whole complete platform in a very fast
growing area like Asia.
MR. WARNER: We had absolutely no
public equity outside of Japan in Asia. This is
pure additive, and very exciting for our
investment banking and other populations there.
QUESTIONER: European M&A,
neither one is in the top ten. I guess I'm
trying to get some clarity on that area, which
is a fast growing area of the business.
MR. HARRISON: Walter Gubert, can
you comment on European M&A?
MR. GUBERT: I would say that
first of all we are very optimistic that the M&A
market in Europe will continue to be very
active. We have a leading position there today.
And if anything, to be able to concentrate more
of our effort on that region, which we will now
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be able to do, is going to help us enormously.
There is no question in my mind that we have
been, in the last few years, in a leading
position in that market. And if anything, the
strengthening that this gives us will accelerate
our pace and strengthen our position in that
market even further.
MR. HARRISON: I would like to
add, Walter Gubert, who is chairman of our
investment banking business, will reside as a
senior executive in Europe. And Walter has been
really been the heart and soul of J.P. Morgan's
M&A practice. So I think it's very exciting as
a talent matter what that could mean.
Question in the back?
QUESTIONER: A couple of
questions. One, you talked a lot about the
increase in your client base. If you would give
us some scope to that, both on the corporate
side and on the private bank.
And also, what's going to be the
role of Chase Capital Partners and how will it
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fold in or how will it work with the Morgan
portfolio?
MR. HARRISON: Chase Capital
Partners, let me take that one first, is -- was
already, probably the largest private equity
firm in the financial services sector. And J.P.
Morgan also had a very good business. We will
fold those two together, and again, continue to
have a world class capability there.
In terms of defining clients, I
can't define exactly today what the client base
is. But I think if you look at the client
base -- I mean, the Chase client base just in
the United States, I think we had significant
relationships with 80 percent of the Fortune
1,000. And J.P. Morgan's got extraordinary
client relationships around the world. We will
get some more numbers for you at some point.
But I think you will see that when you add those
two together, I don't think any firm will have a
broader, deeper client relationship than this
new firm will. And that is very leverageable
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from a revenue perspective.
MR. WARNER: It's almost as
simple as taking our content and capabilities
and bolting it on to the very comparable and
compatible, not overlapping, content and
capabilities of Chase and driving it through
Chase's much larger product platform. And the
results, as Bill suggests, are much more than
one plus one equalling two.
MR. HARRISON: Yes, sir?
QUESTIONER: Thank you.
Congratulations to all of you.
Both firms have done a lot of
work in recent years in building management
information systems to support your risk
management and the creation of shareholder
value. Could you address the issue of
integrating those systems, how long it's likely
to take, and have you figured out how you are
going to go about this, put one firm on the
other's systems or build a new one?
MR. HARRISON: The technology
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goes under Mr. Shapiro. Let him answer that
question.
MR. SHAPIRO: Well, the good news
here is that both firms have a great reputations
in risk management and strong systems. What
normally happens in a situation like that is
that each firm has different strengths. In
other words, we may have a particularly good
system for FX and FX derivatives, and they may
have a particularly good system for credit
derivatives. And what you do is you simply pick
the best system, and then try to feed all those
into a central client system so you can
understand your exposures. I think we are both
totally in sympathy in terms of what we want out
of the systems, and it's simply a question of
trying to pick the best.
There is a large cost avoidance
problem here, either in trying to build
capabilities separately that we can now do
jointly, or in trying to fix some of the major
system deficiencies that we had that we are
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finding out that they have very, the other side
has very good systems in.
So it's a review that will take
about six weeks to two months to decide what to
do, and then it's simply a question of once
you've decided that, then you have to build the
conversion capability to go to the new systems.
QUESTIONER: Are you far enough
along yet to know what the sort of time frame
you will have for the total process?
MR. SHAPIRO: No. Based on our
previous experience, though, on the wholesale
side, my guess is it will be a little more than
a year, somewhere between a year and 18 months
after closing to be totally complete on it. In
the interim, of course, no question we will have
the risk controls, because we both have strong
risk control systems.
MR. HARRISON: Question in the
front?
QUESTIONER: Have you worked
through how you are going to integrate your
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trading operations, and in particular should we
just add the two values at risk of the two
independent companies and assume that's the kind
of risk parameters you are going to have going
forward?
MR. HARRISON: Everybody jump in.
That's an important question from
both a risk and a revenue opportunity
perspective. But as a revenue matter, what we
like, as we've gotten more into it, is how
complementary most of our trading activities are
with each other. Marc got into that a little
bit. So we have sorted out the management of
that, which is very, very important. And we
think that one and one here could -- is going to
be greater than two. We don't think we will
lose revenue, we think it will be very
significant.
MR. SHAPIRO: Don Layton is here.
Don, I wonder if you would comment on how the
combined value at risk versus revenue will shake
out.
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MR. LAYTON: To keep the base of
the operations going as they are, it should be
fairly easy to have a modest reduction of the
combination of the risk. Almost mathematically
in combining the flows, you will have one plus
one is less than two on the risk side. Then
it's a judgment call given our capital growth
and such how much we do or do not wish to take
the risk up from there to expand the business.
But per dollar of revenue, the risk should go
down because we will have more scale and
diversification.
MR. HARRISON: Maybe an on line
question. Anybody on line would like to ask a
question?
MODERATOR: Our next question is
coming from Gary Mondowski of Solomon Smith
Barney.
QUESTIONER: Good morning.
Can you determine a little bit
more fully on overlap in the fixed income arena
where at least at first glance one would expect
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that there would be a substantial amount and
that there might be some cost cutting there?
And if you could also comment a
little bit on how you plan to go about
integrating Flemings and H&Q with the investment
banking and equity platforms of J.P. Morgan?
And also a little bit more about
how you could -- whether you are considering
moving to more of a mass affluent and online
business in asset management and whether you
could take that to Europe?
MR. HARRISON: Any more questions
you want to add to that?
QUESTIONER: That will do it,
thanks.
MR. HARRISON: Let me take a
quick shot at how we are going to organize fixed
income. We two outstanding people, Don Wilson
from the Chase side and Bill Winters from the
J.P. Morgan side. We have already structured
that arrangement, the will co-head fixed income
with their primary responsibilities. When you
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look at the components of that whole fixed
income group they will run, on the derivatives
side, J.P. Morgan, is very strong in structured,
exotic, creative derivatives. We had more of a
plain vanilla derivative business. Both high
margin businesses and growth businesses the way
we run them. So we don't see a lot of overlap
there in any material way.
High yield, not an awful lot of
overlap.
In terms of U.S. investment grade
and investment grade fixed income, Chase tended
to be a little bit bigger in the United States,
J.P. Morgan was bigger in Europe. That makes --
that's very complementary. So again, we don't
see, there will be some cost synergies there,
but we see that as a revenue line in a very
positive way.
Then we will have loan
syndications also under that group. And again,
everybody knows Chase's position in that. J.P.
Morgan was also not insignificant in that. So I
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think that looks quite good.
MR. WARNER: Hambrecht & Quist
and Flemings.
MR. HARRISON: We've sort of
already talked about that, but H&Q is very
complementary, both as a banking matter and as a
client matter and as a public equity matter, as
I've already commented. It's hugely
complementary to what J.P. Morgan was doing. As
is Flemings Asia, both have an asset management
perspective and a public equity perspective. We
are just very excited about that. That's one of
the reasons Sandy said earlier that that changed
the way he was looking at us versus a year or so
ago.
MR. WARNER: To answer the
question of the affluent markets, and the
expansion of the online, yes, yes and yes.
QUESTIONER: How quickly do you
think you could begin to roll that out in
Europe?
MR. WARNER: A lot quicker than
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we could have yesterday.
QUESTIONER: Thank you.
QUESTIONER: Question for
Mr. Shapiro. Have you discussed how you are
going to be allocated the premium over book that
for J.P. Morgan within the organization after
the deal is closed, and specifically what would
the impact with on SVA moving forward, I assume
they would be depressed in the short term?
MR. HARRISON: The impact on SVA
is negative in the short run, of course, because
if you look at the simple math, 35 billion times
13 percent requires more earnings than we are
going to generate in the first year. On the
other hand, it is very clear to us from running
discounted projected models, that it is SVA
positive over a relatively short period of time.
We haven't gotten to the exact
allocation of the capital that's associated with
that, but of course we know where the main
synergies are, which are in asset management and
investment banking and trading. And clearly we
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believe that in terms of the utilization of our
capital, this is the best possible transaction
we could have made, looking at the alternative
being investments that we would have had to make
on our own to build up the revenue streams that
we think are now available to us. So we are
very comfortable with the return on capital,
although it is not a -- not positive in the very
short run.
QUESTIONER: Could you, if you
could, elaborate on the revenue synergies, a
billion before associated with expenses, it's a
big round number. How confident are you in that
or how much detailed work has gone into that?
Can you build up from where you expect to get
those kinds of additional revenues?
MR. HARRISON: We spent a fair
amount of time on this. It's an art, not a
science, again. But I don't know, Marc, if you
have anything to add to that.
MR. SHAPIRO: I think primarily
it's equities, and equity derivatives. The
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second area would be M&A. The third area would
be asset management, taking the best funds and
taking advantage of the distribution patterns
that each of us have. The capacity to
distribute the Fleming funds more broadly in the
U.S., the capability to distribute our U.S.
funds from both sides more broadly in Europe and
Asia. I think those are the three big players.
We did not assume any gain or
loss in the primary trading businesses,
nonequity trading businesses, although our
experience has been in every other merger that
it was strongly positive.
MR. HARRISON: We probably have
time for one or two other questions.
One on line question?
MODERATOR: Our next question is
coming from Jeff Feinberg of JLS asset
management.
MR. HARRISON: Hello, Jeff.
QUESTIONER: I was wondering if
you guys could talk about potential of bringing
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in the processing of JPM's mutual fund and
institutional business, how could Global
Services do it, and the potential costs of doing
that?
MR. SHAPIRO: We've looked at the
fact that J.P. Morgan is a significant
outsourcer, and in some ways existing customer
of Chase. But in some ways a lot of that
business has been directed elsewhere. We will
have an opportunity to bring that in-house, it
will create some synergies. It wasn't a big
factor in the transaction. But this is probably
not the best day for those competitors who were
deriving revenue from that source of business.
MR. HARRISON: One more question
here. Yes?
QUESTIONER: Good afternoon.
I was wondering, you kind of
alluded in the charge that there was going to be
money set aside for key personnel. I was
wondering if maybe you could kind of tell us a
little bit about the retention pool that's going
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to be set up and the structure of it.
And maybe a second question,
given the differences in how the derivative
businesses are set up, both operationally and
products, what you think the time frame is going
to be for you being able to sell those higher
valued, higher structured products to the Chase
customer base.
MR. HARRISON: Let me comment on
the first part of the question. Which was,
excuse me?
MR. WARNER: Retention.
MR. HARRISON: The retention
issue is a very, very important one in this
marketplace. And in the 2.8 billion costs that
we have associated with this, in that number we
have ample money set aside, we think, to protect
aggressively our best people, and we plan to do
that. But we will not announce a detailed
retention program that you would see. But we
plan to aggressively defend our people. We, as
I said earlier, will start today with the top
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management team in place talking about division
and what this can do for our clients and our
employees.
And I think it will be a
wonderful place to not only retain our key
people, but to attract the best and brightest in
the world in the future. So we will attack this
aggressively and smartly from a financial
perspective, and I think we can do it.
MR. SHAPIRO: With regard to how
fast the equity derivative revenue could be
driven up, I would be shocked if there were not
some equity derivative trader in Morgan today
who hadn't already called to find out what
clients he could have access to.
MR. HARRISON: Let me just say on
behalf of Sandy and Marc and all the management
team here, how excited we are, again, about the
potential growth story. We appreciate you
coming. And I think if you will spend the time
with us to understand the content of this, give
us credit for being good merger integrators,
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this is a very exciting story.
Thanks for being with us.
(Applause.)
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C E R T I F I C A T E
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
I, ERIC J. FINZ, a Shorthand
Reporter and Notary Public within and for the
State of New York, do hereby certify that the
foregoing proceedings were taken before me on
September 13, 2000;
That the within transcript is a true
record of said proceedings;
That I am not connected by blood or
marriage with any of the parties herein nor
interested directly or indirectly in the matter
in controversy, nor am I in the employ of the
counsel.
IN WITNESS WHEREOF, I have hereunto
set my hand this ____ day of ____________, 2000.
--------------------------
ERIC J. FINZ
ADVOCATE REPORTING SERVICES, A LegaLink Company
