Finance and Investment Organization
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Transcript of Finance and Investment Organization
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Finance and Investment Organization
Meeting #6November 2, 2000
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Agenda
• Markets Review
• Club Portfolio Review
• Stock Analysis– Mergers and Acquisitions– Diversification
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Agenda
• Markets Review
• Club Portfolio Review
• Stock Analysis– Mergers and Acquisitions– Diversification
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Dow Jones Industrial
Up 8%
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NASDAQ
Flat
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S&P500 Index
Up 3.3%
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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
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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%
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Agenda
• Markets Review
• Club Portfolio Review
• Stock Analysis– Mergers and Acquisitions– Diversification
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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.
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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
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Share Value History
$8.80
$9.00
$9.20
$9.40
$9.60
$9.80
$10.00
$10.20
$10.40
$10.60
$10.80
$11.00
10/22/00 10/23/00 10/24/00 10/25/00 10/26/00 10/27/00 10/28/00 10/29/00 10/30/00 10/31/00 11/1/00 11/2/00
Date
Shar
e Va
lue
FIO ACTUAL
FIO ADJUSTED
DJIA
NASDAQ
S&P500
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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
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Agenda
• Markets Review
• Club Portfolio Review
• Stock Analysis– Mergers and Acquisitions– Diversification
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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
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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.
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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
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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
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Stock Analysis
The Chase ManhattanCorporation
J.P. Morgan & Co.Incorporated
+
J.P. Morgan Chase & Co.
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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
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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.
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Why merge/acquire?
• To quickly expand into new geographical or product markets
• To purchase a valuable brand/identity
• To gain economies of scale
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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.
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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
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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?
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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
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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
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JPM Stock Charts
MergerAnnounced
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JPM Stock Quote
J P MORGAN & CO (NYSE:JPM) - More Info: News , Msgs , Profile , Research , Insider , Options
Last Trade
10:53AM · 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
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CMB Stock Chart
MergerAnnounced
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N Sync
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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.
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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
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CMB Stock Quote
CHASE MANHATTAN (NYSE:CMB) - More Info: News , Msgs , Profile , Research , Insider , Options
Last Trade
11:02AM · 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
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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
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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 $2.8 billion to be recognized as a one time charge when deal completed in Q1 2001.
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Benefits of the Merger
• Adds diversity to Chase’s earningsEarnings by Line of Business,pro forma, first half 2000 % of
totalInvestment Banking 55%National Consumer Services 18%Private Equity 12%Wealth Management 9%Operating Services 6%
100%
• Improves their asset management, investment banking, equities and bond underwriting/trading.
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Mergers and Acquisitions
LeapfroggingSolid gains for combined firm in worldwide M&A
Company 2000 Ranking
Worldwide M&A advisory
Deal value ($billions)
Market share (percent)
Goldman Sachs 1 1,601 43Morgan 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.
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Market Leadership Position
Pro Forma Pro Forma
Full Year 1999 First Half 2000Strategic Advisory (M&A) Global Completed Transactions 5 4 European Completed Transactions 3 4Capital Raising Global Syndicated Loans 1 1Global Investment Grade Debt 3 3Global Common Stock 8 7High Yield Global Offerings 3 5
#3 with $720 billion of assets under management
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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)
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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
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Comparison (First 9 months)
JPM CMB JPM/
CMB
C
Revenues $7.637 billion
$17.568 billion
$25.205 billion
$50.642 billion
Operating Income
$2.513 billion
$3.480 billion
$5.993 billion
$15.152 billion
Net Income $1.684 billion
$3.335 billion
$5.019 billion
$9.683 billion
Market Cap. $26.3 billion
$56.9 billion
$83.3 billion
$234.9 billion
Assets $373 billion
$426 billion
$799 billion
$1.9 trillion
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Management Efficiency
JPM CMB JPM/ CMB
C
Gross Margins
32.9% 19.8% 23.8% 29.9%
Net Margins 22.1% 19.0% 19.9% 19.1%
Return on Assets
0.81% 1.26% N/A 1.70%
Return on Equity
19.58% 20.72% N/A 25.72%
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Valuation Ratios
JPM CMB C
Share Price 164 15/16 45 11/16 51 11/16
EPS $9.64 $2.57 $2.10
Dividends $3.00 $0.96 $0.42
Yield 2.43% 2.80% 1.09%
Book Value $62.31 $21.84 $9.85
P/E 14.13 11.71 19.43
Price/Sales 2.48 2.60 4.81
Price/Book 2.34 2.02 4.66