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Finance and Investment Organization

Finance and Investment Organization. Meeting #6 November 2, 2000. Agenda. Markets Review Club Portfolio Review Stock Analysis Mergers and Acquisitions Diversification. Agenda. Markets Review Club Portfolio Review Stock Analysis Mergers and Acquisitions Diversification.

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Finance and Investment Organization

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  1. Finance and Investment Organization Meeting #6 November 2, 2000

  2. Agenda • Markets Review • Club Portfolio Review • Stock Analysis • Mergers and Acquisitions • Diversification

  3. Agenda • Markets Review • Club Portfolio Review • Stock Analysis • Mergers and Acquisitions • Diversification

  4. Dow Jones Industrial Up 8%

  5. NASDAQ Flat

  6. S&P500 Index Up 3.3%

  7. Market Movers – The Bad • More earnings warnings – Nortel Networks, UPS, Gap, Daimler Chrysler • Continued Euro weakness. Hit low of 1 Euro = $0.81. Now approx $0.84 • Continued concerns about energy prices. • OPEC to increase oil production by 500,000 bbl/day • Uncertainty about election

  8. Market Movers - The Good • Economy slowing - 2.7% growth in Q3 vs 5.6% in Q2. • Low underlying inflation 0.4% in Sept. but 0.2 excluding energy. • Consumer spending still strong. Up 0.8% in Sept. while incomes up 1.1%. • Productivity up 3.8% in Q3 while unit labor costs up only 2.5%

  9. Agenda • Markets Review • Club Portfolio Review • Stock Analysis • Mergers and Acquisitions • Diversification

  10. Club Portfolio Voting Results • Between 10/19/ and 10/22, 135 shares voted (90%) • 96.3% approval for AMD. 1.76 average ranking. • 77.8% approval for INTC. 2.37 average ranking. • 68.5% approval for COST. 2.72 average ranking. • 50.0% approval for EBAY. 3.87 average ranking. • 75% of shares needed for a quorum • 2/3 share majority needed for decision.

  11. Club Portfolio Purchases • At 10 AM on 10/23, we bought: • 32 shares of AMD at $22 5/8 + $12 commission for a total of $736.00 • 17 shares of INTC at $43 7/8 + $12 commission for a total of $757.88 • Leaving $6.12 in our money market account • On 10/31, we received $1.98 in interest on our money market holdings. New money market balance is $8.10

  12. Portfolio Performance • FIO Actual - Up 6.1% • FIO Adjusted (w/o Commissions) – Up 7.7% • DJIA – Up 6.4% (Underperform by 0.3%) • S&P 500 – Up 2.2% (Outperform by 3.9%) • Nasdaq – Down 1.6% (Outperform by 7.7%) $25 $26.53 $50 $53.06 $100 $106.11 $200 $212.22

  13. Agenda • Markets Review • Club Portfolio Review • Stock Analysis • Mergers and Acquisitions • Diversification

  14. Investing Defensive Strategies • Time vs. Risk • The longer you invest, the greater your chance of profits • Diversification • Protects you from a meltdown in one stock or one industry. • http://university.smartmoney.com/departments/investing101/riskvsreward/index.cfm?story=defense • Purchase either a variety of stocks or use mutual funds for diversification

  15. More Defensive Strategies • Asset Allocation • While stocks provide the highest returns they also provide the highest risk of losses. • Bonds and money market funds provide greater stability but a lower risk. • In general, long term investors should have most of their investments in diversified stocks but shift towards bonds and money market funds as they approach retirement. • One rule often used is that the percentage of your savings in stocks should be 100 – your age.

  16. Diversification • Major Industry Groups • Technology e.g. software, hardware, internet, networking, semiconductors, peripherals, • Healthcare e.g. pharmaceuticals, biotechs, HMO’s • Financials e.g. banks, brokers, insurance • Energy e.g. oil drillers, refiners, utilities • Capital goods e.g. military, aerospace, machinery, manufacturing

  17. Diversification • Transporation e.g. airlines, railroads, truckers, couriers • Consumer Staples e.g. tobacco, food, beverages, personal care, household products • Consumer Cyclicals e.g. recreation, automakers, retailers (dept stores, specialty, etc) broadcasting, gambling, restaurants, publishing • Communications e.g. equipment, long distance, local carriers, wireless

  18. Stock Analysis The Chase Manhattan Corporation J.P. Morgan & Co. Incorporated + J.P. Morgan Chase & Co.

  19. Merger • The formation of one company from two or more previously existing companies through the pooling of common stock, cash payment, or a combination of both. • Mergers where common stock is exchanged for common stock are non taxable and are called tax-free mergers. e.g. JPM/CMB

  20. Types of Mergers/Acquisitions • All cash exchange – usually associated with acquisitions where acquired company is significantly smaller. Not preferred since cash is valuable and forces stockholders of smaller company to take an immediate tax hit. • All stock exchange – more common today in both mergers and acquisitions especially with high stock valuations/currency. Essentially costs “nothing” since except dilution of stock.

  21. Why merge/acquire? • To quickly expand into new geographical or product markets • To purchase a valuable brand/identity • To gain economies of scale

  22. Goodwill • Goodwill is the value in excess of the acquired company’s liquidation value. • Needed to satisfy stockholders and board of acquired company • Intangible asset that must be written off (paid for) over a period of time.

  23. Amortization • Amortization is the process of writing off goodwill over a max period of 40 years. • Similar to depreciation which is a non cash charge that represents the reduction in value of an asset due to wear, age, or obsolescence. • Both amortization and depreciation reduce net income

  24. EBITDA • EBITDA = Earnings Before Interest Taxes Depreciation and Amortization • aka operating cash flow. How much money (cash) is the company actually making/losing before all these unusual items?

  25. Pooling of Interests vs. Purchase Accounting • Pooling is the preferred way of accounting for mergers. • FASB proposing to eliminate pooling. • Major differences. • combination of assets and liabilities at book value rather than market value • no goodwill recorded • future income unaffected by amortization and depreciation • hides the true cost of acquisitions

  26. Merger Details • September 13, Chase Manhattan Bank (CMB) and JP Morgan (JPM) announced that they would merge in a $36 billion deal. • Combined assets of $660 billion • Proforma 1999 Net income of $7.5 billion on $31 billion in revenues. 2nd only to Citigroup • 3.7 shares of CMB stock will be exchanged for each share of JPM. Based on closing price on announcement day, JPM was priced at $207/share

  27. JPM Stock Charts Merger Announced

  28. J P MORGAN & CO (NYSE:JPM) - More Info: News , Msgs , Profile , Research , Insider , Options Last Trade10:53AM · 167 3/8 Change+2 7/16 (+1.48%) Prev Cls164 15/16 Volume533,000 Div DateOct 13 Day's Range166 - 168 7/8 BidN/A AskN/A Open166 Avg Vol2,122,954 Ex-DivSep 21 52-week Range104 7/8 - 187 5/8 Earn/Shr11.68 P/E14.12 Mkt Cap26.742B Div/Shr4.00 Yield2.43 JPM Stock Quote

  29. CMB Stock Chart Merger Announced

  30. N Sync

  31. Arbitrage • At yesterday’s close, • JPM = $ 164 15/16 • CMB = $ 44 7/8 • Merger exchanges 3.7 shares CMB per 1 JPM • JPM = 3.7 x $ 44 7/8 = $166 • 1% premium • Difference is the discounted risk based on how likely the merger is to be approved.

  32. Other deals • JDSU – $ 78 9/16 • SDLI – $ 246 17/64 • 3.8 shares of JDSU per SDLI • 3.8 x $ 78 9/16 = $ 298 ½ • 21% premium • AOL – $ 52 • TWX – $ 77.31 • 1.5 shares of AOL per TWX • 1.5 x $52 = $78 • 1% premium

  33. CHASE MANHATTAN (NYSE:CMB) - More Info: News , Msgs , Profile , Research , Insider , Options Last Trade11:02AM · 45 15/16 Change+1/4 (+0.55%) Prev Cls45 11/16 Volume2,230,000 Div DateOct 31 Day's Range45 5/8 - 46 1/2 BidN/A AskN/A Open45 11/16 Avg Vol9,514,818 Ex-DivOct 4 52-week Range32 3/8 - 67 1/8 Earn/Shr3.89 P/E11.74 Mkt Cap57.085B Div/Shr1.28 Yield2.80 CMB Stock Quote

  34. JP Morgan Chase • Brands will be preserved but operations will be combined. • Wholesale Business (JP Morgan) • investment banking (including strategic advisory, equity and debt capital raising, credit, and global trading and market-making activities), operating services, wealth management, institutional asset management and private equity • Retail Business (Chase) • credit cards, regional consumer banking in the New York tri-state area and Texas, mortgage banking, diversified consumer lending, insurance and middle-market banking

  35. Details of the Merger • Synergies of $1.9 billion/year • cost savings of $1.5 billion • incremental net revenues of $400 million • expected to be achieved within 2 years of the merger • Merger costs of $2.8 billion to be recognized as a one time charge when deal completed in Q1 2001.

  36. Benefits of the Merger • Adds diversity to Chase’s earnings Earnings by Line of Business, pro forma, first half 2000 % of total Investment Banking 55% National Consumer Services 18% Private Equity 12% Wealth Management 9% Operating Services 6% 100% • Improves their asset management, investment banking, equities and bond underwriting/trading.

  37. LeapfroggingSolid gains for combined firm in worldwide M&A Company 2000 Ranking Worldwide M&A advisory Deal value ($billions) Market share (percent) Goldman Sachs 1 1,601 43 Morgan Stanley Dean Witter 2 1,343 36.1 Merrill Lynch 3 1,072 28.8 Chase-J.P. Morgan* 4 884 23.6 Salomon Smith Barney 5 663 17.8 UBS Warburg 6 627 16.8 J.P. Morgan** 7 556 14.9 Chase** 9 328 8.8 *If combined. **Alone, excluding effects of merger. Source: Thomson Financial Securities Data, through Sept. 12, 2000. Mergers and Acquisitions

  38. Market Leadership Position Pro Forma Pro Forma Full Year 1999 First Half 2000 Strategic Advisory (M&A) Global Completed Transactions 5 4 European Completed Transactions 3 4 Capital Raising Global Syndicated Loans 1 1 Global Investment Grade Debt 3 3 Global Common Stock 8 7 High Yield Global Offerings 3 5 #3 with $720 billion of assets under management

  39. Consolidation in Industry • Needed for CMB to remain competitive. Other recent deals include: • Associates First Capital by Citigroup Donaldson Lufkin Jenrette by Credit Suisse First Boston • Paine Webber by UBS AG • Continues Chase’s investment banking acquisition spree which has included Beacon Group ($500 million), Hambricht & Quist ($1.35 billion), Fleming’s ($7.7 billion)

  40. Downsides • Will be earnings dilutive next year by about 7% due to cost of deal and premium for JPM. • To make deal break even, Chase will need to find $800 million in cost savings at JPM or 11% of its total expenses. • All past deals by CMB have been successfully integrated although none have been on the same scale. • Culture clash between JPM and CMB

  41. Comparison (First 9 months)

  42. Management Efficiency

  43. Valuation Ratios

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