The Acquisition of Bank One
Signs of a weakening economy were beginning to surface after the JPMorgan and Chase merger. A merger would only distract and deter the management’s attention from other strategic priorities when encountering such an environment. The economy of the United States was experiencing a downturn after the dotcom bubble burst in March 2000. During the mid-1990s, telecom companies in the United States had borrowed huge monetary amounts to finance their expansion plans; with expectations of rapid growth in the industry.
Companies had overbuilt telecom infrastructure and by early 2001, the telecommunications bubble had burst. JPMorgan Chase had financed a number of telecom companies, which went bankrupt during this time. One example is Global Crossing, which JPMorgan had financed US $100 million while Chase had exposure of US$ 20 million. The company filed for bankruptcy on January 28, 2002. Another major telecom company which was severely affected was Lucent Technologies. JPMorgan and Chase had given a combined credit of US $942. 5 million for Lucent Technologies.
JPMorgan Chase had also lent money to United States energy firm Enron to the tune of US $2. 6 billion, and which US$ 1. 75 billion was unsecured credit. Aside from these, it had also financed K-Mart where it lost $117 million. Another major problem for JPMorgan Chase was its use exposure to derivatives. As of December 31, 2001, the exposure of JPMorgan and Chase in derivatives contracts was worth US$ 23. 5 trillion. It is considered the highest of all the US banks against assets worth US $615 billion. The United States derivative market is worth US $45.
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4 trillion; JPMorgan Chase’s share was the highest at more than 50%, followed by Bank of America whose share was 20%. Its derivatives contracts exposure was worth US $9 trillion against assets worth US $537 billion. In the third quarter of 2001, JPMorgan and Chase lost US $95 million in credit derivatives as insured borrowers did not pay the money. The derivatives business accounted for 15-20% of JPMorgan Chase’s earnings in 2001. In 2001, corporate lending suffered with the US economy slowing down and hampered by a bearish stock market.
JPMorgan and Chase’s revenues were affected as well by the decrease in mergers and acquisitions and IPO’s in 2001. Furthermore, its private equity unit named JPMorgan Partners registered losses of US$ 1. 2 billion as well. The unit reported losses in five of its last six quarters in the financial years 2000 and 2001. The financial year 2002 was equally unfavorable for JPMorgan Chase. JPMorgan Partners reported US $954 million losses for the financial year of 2002; while the company’s overall revenues increased by a mere US $270 million.
The company’s revenues from businesses including underwriting securities, merger and acquisition advisory services, and investment management declined as the United States economy continued to slump, and stock prices fell for the third consecutive year. However, the company saw growth in credit cards, home and auto finance, and treasury and securities services businesses. On the effect of the downturn of the economy, JPMorgan Chase’s annual report had this comment:
“Transition from the 1990s boom to post-2000 bust in equity markets has created significant challenges for all participants in the investment banking and investment management businesses. As stock prices fell for the third consecutive year in 2002, business volumes – in activities ranging from underwriting securities to advising on mergers and acquisitions to managing investment portfolios – remained in a depressed sate or declined even further. No one can predict when a recovery may occur in global capital markets, and we are not holding our breath until that happens.
On several fronts, we have taken steps to raise our profitability, regardless of external conditions” Analysts proposed that the investments of JPMorgan and Chase had been more risky compared to its competitors, and that the bank was paying for it. The CEO of a competitor bank commented on the JPMorgan and Chase merger saying, “It was a bit like stacking doughnuts. The hoes are all in the same place. ” They said that the management should take complete responsibility for the poor finance performance of JPMorgan and Chase. The CEO even suggested a change in management as a possible solution.
Another problem was the magnitude of the clashing of both cultures along with different business approaches of the two firms. There were co-heads within the different groups, leading to clashes before effective decisions could ever be made. Internal reports in the industry indicate that the major problem with JPMorgan and Chase was a discrepancy over dramatically opposed views on risk management. While Chase regarded their approach as lax in terms of whom they would extend credit to; JPMorgan had developed a very precise scientific plan for who would receive their credit.
Industry pundits predicted that such discrepancies generated within would result in a departure of the firm’s best minds which was proven true. High profile defections would not be a surprise resulted to 7 of the top 10 global credit risk managers from JPMorgan leaving the company, which contributed to the initial lack of productivity. Furthermore, the environment was one in which top producing employees would look out for there own interests and move elsewhere if they saw a better opportunity.
It has become a norm that in this industry change generates uncertainty and uncertainty lowers performance. JPMorgan acknowledged that it needed to utilize both the investment bank and commercial bank in order to grow and capture market share. However, up to this point they had not been able to do so. Many previous JPMorgan employees fell that the personal, intimate way – “JPMorgan way of doing business” has been jeopardized by the presence of the introduction of the so-called “Chase bureaucracy”.
While the popular public image of JPMorgan was that of a starched-shirt, mahogany-paneled firm cloistered in 19th century beliefs and manners, the company was known on the street as being rather progressive. Prior to the JPMorgan-Chase merger, Chase was in a constant state of flux. Although the bank had a reputation among its consumer banking customers as being focused on customer service, it has been in search of a corporate identity, as it sought to combine previous mergers into a cohesive unit. While they have the tools, roadblocks have continuously surfaced, which deterred the initiation of the company’s goals.