425 1 y40364ce425.txt THE CHASE MANHATTAN CORPORATION 1 Filed by The Chase Manhattan Corporation Pursuant to Rule 425 under the Securities Act of 1933 and deemed filed pursuant to Rule 14a-12 under the Securities Exchange Act of 1934 Subject Company: J.P. Morgan & Co. Incorporated Commission File No. 1-5885 Date: September 13, 2000 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. 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 in J.P. Morgan's proxy statements 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 2 On September 13, 2000, Chase and J.P. Morgan held a meeting for the investment community to discuss the merger of Chase and J.P. Morgan. A copy of the transcript of the simultaneous webcast of the meeting follows. J.P. MORGAN CHASE & CO. PRESS CONFERENCE SEPTEMBER 13, 2000 THE EQUITABLE CENTER 787 SEVENTH AVENUE NEW YORK, NEW YORK 3 2 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 4 3 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 5 4 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 6 5 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 7 6 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 8 7 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. ADVOCATE REPORTING SERVICES, A LegaLink Company 9 8 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 10 9 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 11 10 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 products and client strengths, and leadership positions, leadership position and capital. All surrounded by what I think is a very, very talented group of professionals at ADVOCATE REPORTING SERVICES, A LegaLink Company 12 11 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 shareholders, 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. ADVOCATE REPORTING SERVICES, A LegaLink Company 13 12 In terms of the financial benefit, this is a situation I am convinced where one plus one will significantly exceed 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 14 13 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, a 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 15 14 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 16 15 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 17 16 important thing it does is it enable 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 18 17 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 systems issues in all of those, it gets complicated, this is really wholesale asset management and 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 end game ADVOCATE REPORTING SERVICES, A LegaLink Company 19 18 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 20 19 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 21 20 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 22 21 institutions, we often approach them from different angles. Morgan has a great advisory business with financial institutions. We have a great operating services 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 23 22 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 strengths, 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 attract 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 24 23 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 league 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. ADVOCATE REPORTING SERVICES, A LegaLink Company 25 24 The first is M&A. By league 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 26 25 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 27 26 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 28 27 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 29 28 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 30 29 700 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 31 30 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. We 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 32 31 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 a 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 33 32 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 expense. But we have included ADVOCATE REPORTING SERVICES, A LegaLink Company 34 33 money in that to vigorously protect the people that we need to protect in 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 35 34 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 36 35 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. ADVOCATE REPORTING SERVICES, A LegaLink Company 37 36 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. ADVOCATE REPORTING SERVICES, A LegaLink Company 38 37 It's a new competitive model with one of the largest client bases in the world across the 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 I'll 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 has been ADVOCATE REPORTING SERVICES, A LegaLink Company 39 38 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 40 39 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 41 40 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 42 41 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 1.5 ADVOCATE REPORTING SERVICES, A LegaLink Company 43 42 billion, 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 1.5 billion 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 old ADVOCATE REPORTING SERVICES, A LegaLink Company 44 43 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 45 44 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. ADVOCATE REPORTING SERVICES, A LegaLink Company 46 45 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 47 46 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 48 47 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 49 48 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 50 49 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 51 50 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 52 51 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 53 52 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 54 53 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 55 54 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. ADVOCATE REPORTING SERVICES, A LegaLink Company 56 55 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 Salomon 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 57 56 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 have two outstanding people, Don Wilson from the Chase side and Bill Winters from the J.P. Morgan side. We have already structured that arrangement, they will co-head fixed income with their primary responsibilities. When you ADVOCATE REPORTING SERVICES, A LegaLink Company 58 57 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 59 58 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 60 59 we could have yesterday. QUESTIONER: Thank you. QUESTIONER: Question for Mr. Shapiro. Have you discussed how you are going to be allocating the premium over book value 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 61 60 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 62 61 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 63 62 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 an 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 64 63 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 ADVOCATE REPORTING SERVICES, A LegaLink Company 65 64 management team in place talking about the vision 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, ADVOCATE REPORTING SERVICES, A LegaLink Company 66 65 this is a very exciting story. Thanks for being with us. (Applause.) ADVOCATE REPORTING SERVICES, A LegaLink Company 67 66 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