Forum Home Page

Bear Stearns Forum Home Page

Program Reference

How J.P. Morgan Does 'Merger in Reverse'

NEW YORK -- A few days after J.P. Morgan Chase & Co. agreed to buy Bear Stearns Cos. in a frantic deal that saved the 85-year-old investment bank from bankruptcy, J.P. Morgan executives began scrambling to figure out exactly what they were getting.

One of the first items on the to-do list: Spurred into action by a phone call from Frank Bisignano, J.P. Morgan's chief administrative officer, workers ran fiber-optic cables under the streets of Manhattan, connecting the computer systems at Bear's headquarters on Madison Avenue with J.P. Morgan's on Park Avenue a few blocks away.

That gave J.P. Morgan access to everything from Bear's employee directory to its massive mortgage portfolio.

It took just two days in mid-March for the second-largest U.S. bank in stock-market value (behind Bank of America Corp.) to hammer out a takeover agreement for Bear Stearns. Now J.P. Morgan is moving with similar speed to complete the deal and absorb Bear.

The gargantuan effort involves hundreds of J.P. Morgan executives and bankers but is tricky because Bear's sudden collapse left almost no time for J.P. Morgan to perform due diligence, which takes weeks or months under normal circumstances.

"It's hard to do a merger in reverse," said Bill Winters, co-head of J.P. Morgan's investment bank, into which Bear is being integrated.

Because of Bear's shaky financial condition, J.P. Morgan can dive more deeply into the investment bank's operations than regulators usually allow before an acquisition is completed. With the fiber-optic cables installed, J.P. Morgan executives got unfettered access to Bear's profit-and-loss statements at the end of each day, although Bear employees can't peer into J.P. Morgan's books.

J.P. Morgan isn't allowed yet to make trading decisions for Bear because the two firms remain separate legal entities. But Bear's sales force already is distributing research from J.P. Morgan's stock analysts to Bear clients.

J.P. Morgan

Steve Black & Bill Winters, co-heads of J.P. Morgan's investment bank

The bank also is being permitted to unload some of the risk taken on by Bear's trading businesses. Bank officials are aggressively unwinding some of those positions and expect to reduce the amount of Bear's risk-weighted assets to $150 billion by the end of June from $225 billion in March. Much of that is from Bear's mortgage-trading business, where risk-weighted assets will be slashed from $73 billion to $20 billion.

"We would not have done [the deal] if we didn't think it made sense, but we are bearing an awful lot of risk," J.P. Morgan Chairman and Chief Executive Officer James Dimon said this month. J.P. Morgan essentially assumed responsibility for Bear's operations when the acquisition agreement was struck, with the Federal Reserve backstopping the deal by funding a maximum of $29 billion in potential Bear losses on various types of securities.

The initial integration push is likely to be done within the next week, when the $1.5 billion takeover is due to close. But the meetings, paperwork and long nights will drag on for months as J.P. Morgan tries to make the most out of the businesses and employees at Bear that it wants to keep.

So far, J.P. Morgan estimates it will cost $9 billion to cover items such as severance, litigation, restructuring and losses sustained by Bear since mid-March.

J.P. Morgan has come a long way from the culture clash and paralyzed decision-making that plagued Chase Manhattan Corp.'s purchase of J.P. Morgan & Co. in 2000. The bank now is known for its laser-like focus on making its acquisitions pay off. Mr. Dimon and a team of longtime lieutenants have relentlessly slashed costs and combined disparate technology systems since the 2004 takeover of Bank One Corp. for $58 billion. That deal brought Mr. Dimon to J.P. Morgan.

While the purchase price this time is small, with Bear costing the equivalent of roughly one month of 2007 earnings at J.P. Morgan, there is little margin for error. Integration stumbles may trigger more defections by Bear customers, worsen the morale of Bear employees still reeling from the firm's abrupt demise and hurt Mr. Dimon's reputation as the rescuer of Wall Street.

Much of the integration is being led by Mr. Winters and Steve Black, the other investment bank co-head at J.P. Morgan. By the time the process is done, about half of Bear's nearly 14,000 employees may be laid off, people familiar with the situation say. So far, J.P. Morgan has offered jobs to 6,500 Bear employees.

J.P. Morgan executives refer to about 3,500 of those employees as "drag and drop," meaning they are part of Bear's prime brokerage and clearing businesses that J.P. Morgan intends to absorb in full. J.P. Morgan is eager to incorporate these businesses because it doesn't have them on its own.

The fate of another several hundred Bear workers, most in technology and operations, hasn't been decided yet. About 2,000 of the 180,000 employees at J.P. Morgan are likely to lose their jobs as part of the Bear purchase, because of overlap.

Among the few members of Bear's upper echelon expected to join J.P. Morgan is Alan "Ace" Greenberg, the firm's 80-year-old former chairman and still an active broker. Alan Schwartz, one of Wall Street's top media bankers and now Bear's CEO, may also wind up joining J.P. Morgan as a top rainmaker, or deal generator, people familiar with the situation say.

On a recent Wednesday at 5 p.m., about three dozen people streamed into a J.P. Morgan conference room for a weekly firmwide update on the integration. Thick packets detailed the status of every business, from interest-rate trading to emerging markets to investment banking. Color-coded boxes on each page indicated the progress so far: red for critical issues, amber for caution or green for smooth sailing. Most of the boxes were green.

"Our challenge is the spaghetti of systems. There is a lot of stuff still to be done for Day 1," said Carlos Hernandez, J.P. Morgan's head of global equities. Another executive noted that his unit wouldn't be hiring many Bear employees but had helped some of them get jobs with J.P. Morgan clients. The group also got an update on a bent pipe that was causing flooding at Bear's headquarters.

Write to Robin Sidel at robin.sidel@wsj.com¹

This Forum program is open, free of charge, to all shareholders of The Bear Stearns Companies, Inc. ("BSC") and to any fiduciaries or professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives, addressing issues described in the Forum Summary.

As stated in the posted Conditions of Participation, all Forum participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

Inquiries and requests to be included in the Forum's distribution list may be addressed to bsc@shareholderforum.com.