In the business world, mergers and acquisition refers to the corporate plan, corporate finance and management. This may involve two companies or more.
The operations under mergers and acquisition may involve buying, selling and combining different companies that can aid each other to have a better performance on the given industry. Many companies merge their companies with other companies so that to have stable position on their sector like higher revenues and to help grow the merger company (Robbins, 2007).Though merger and acquisition are often used to refer the corporate plan and strategy, the terms have also difference when it comes to the meaning. Merger, specifically, it is a corporate plan of the company that intends to combine with other companies so that to expand their operation of the former company.
Also, companies that want to merge with other companies aims to increase their profit as well the long term profitability. When a given company wants to merge to other companies, mutual understanding may occur. This is also known as mutual consent or agreement (“Merger & Acquisition Services,” 2007). The merger company sets a mutual agreement to other companies in such a way that the two or more company will have benefits when merging occurs like increasing the profit of the two parties.
Merging rules and regulation varies from country to country.The second tool that can be used by traders is acquisition which refers to the purchasing of one company to other company. This may means purchasing the share of the purchased company and thus taking over it. There are two classification of acquisition, the friendly and hostile acquisition (“Merger & Acquisition Services,” 2007).
In the first classification, the company who wants to purchase another company works and cooperate together to have a common goal while in the second classification, the purchasing company takes over another company. In the latter case, the company that is being purchased may sometimes do not want acquisition and are force by the purchasing company. Acquisition is usually done by larger companies over smaller companies. There are also times when the target company has no idea that the said company is being purchased.
But there are also some cases where the taking over of the larger companies shares some benefits to smaller companies that are being purchased. This special case is called reverse takeover.SEC and filing proceduresBut before companies try to have mergers and acquisition to other companies, certain rules and regulation must be first made before doing the said corporate plan or strategy. The commission of the government that takes in charge on the regulation such as filing rules and regulation is the Commission of Securities and Exchange, SEC (McDavid, 2004).
When filing for merger and acquisitions of a given company, certain guidelines is being provided by SEC (“Merger & Acquisition Services,” 2007). The next discussion will show the general procedures to be done when a company wishes to merge or have an acquisition to other companies. First is the statement of scope and purpose of the merger company. In this part, the scope and limitation of the contract must be stated so that there is a boundary that must be met when merger and acquisition occurs.
This is one of the most important procedures to be done because it sets the limit of the transaction. In this way, the company being purchased may somewhat be protected from the intention of bigger companies. Part of this stage is the statement of the purpose of the business transaction. Most common purpose of companies is to aid the finance or help the growing company to have longer profitability without having creating another business unit (Kleipass, 2007).
The next part of the procedure is the creation of general policy statement for merger. SEC includes this part because the commission wants to ensure that the merger will follow a ethical and professional procedures (Kleipass, 2007).The third part is the statement of the type of transactions. The company that wants to merge or to have an acquisition must state which one from the two business transaction will be part of the corporate strategy.
This will state whether the company will merge or takeover other companies (Kleipass, 2007).In the definition part, all terms that are relevant in the business transaction must be defined carefully so that to minimized misunderstanding between the two parties. In this part may include the definition of the two parties, their business criteria, and the merger and the company being purchased. In this part also, it limits both parties because the two parties must follow the definitions they set (Kleipass, 2007).
The procedures part is the most important part of the filing procedures of SEC in mergers and acquisition. In this part, the terms and conditions are being stated. These are the conditions that must be met by both parties. In this part also the events and actions are being stated as well the method of implementation and the duration.
Payment terms are being discussed in this part (Kleipass, 2007).Next to the procedures part is the supporting information. In this part, the existing and relevant information of both parties is being stated. Some kind of supporting information includes the existing market and financial status of both parties and the condition of business transaction of the two corporations (Kleipass, 2007).
This follows the analysis of the supporting information. In this part is where justification on the payment terms occurs. This is to ensure that no party is being tortured on the merge and acquisition procedures. The market analyses will determine the right amount or proper payment terms.
In this stage also the operational data and financial information stages takes place (Kleipass, 2007).The service assurance plans procedure of SEC ensures that both parties will adhere on all the conditions set by both parties. Anyone who violates on the conditions of the transaction, penalties may implement and the business transaction may lead to non validation (Kleipass, 2007).JPMorgan Chase and CoThe next part of the paper will try to analyze the corporate strategy which is the emerging of Chase Manhattan and JP Morgan &Corp.
When the two companies in 2000 decided to merge their shares to form bigger and stronger corporation, the new name of the corporation was JPMorgan Chase and Co. Today, the said corporation is one of the leading corporations in the banking sector. The new company does not only provide financial service in the country but around the world. The company is located in New York City.
An estimated of $1.4 trillion total assets is now being enjoyed by the new company. This is the reason why JPMorgan Chase and Co ranks third when it comes to assets among banking institution in the country (Barr, 2007).The business – economic settingThe today’s trend in the banking and finance industry is the utilization of credit cards in many business transactions.
That is why, JPMorgan Chase and Co. focus their attention in providing financial assistance to their clients. Their clients whom the company serves are the individual person, other private companies or the government. The company provides financial services like loans and insurance plans.
The trends in the economy as well in the banking and finance industry are the checking accounts, credit cards, saving accounts, online banking and bill pay, home equity, mortgages, auto or vehicle loans, student loans, business and commercial banking, investment and retirement planning. As one of the largest banking institution in the country, JPMorgan Chase and Co is used as the brand for the bank’s investment banks, treasury services, worldwide securities services, private Bank, asset Management, and private client services (Learning, 2000).But before the two companies where integrated, Chase Manhattan ranks second from the top performing fiancA(c) institution while JP Morgan &Corp ranks fifth around the country. Also, each of the two companies has different service offered.
The two companies have different form of specialization when it comes in providing financial services in the country.The Chase Manhattan Corp. offers commercial, consumer and investment banking services to clients through offices in some 50 countries worldwide. In the United States,, the bank is one of the largest mortgage loan originators and the fourth-largest issuer of credit cards.
Despite its size, Chase’s network of banks is highly concentrated in Texas and the Northeast (Learning, 2000).The company offers commercial banking and investment services, including investment banking. brokerage services. asset management for institutions, corporations and the wealthy.
and proprietary investing, including direct equity investments in companies. The bank has also launched an e-finance unit, LabMorgan. Nearly 50 percent of the firm’s sales originate outside the United States (Learning, 2000).The terms of the transactionWhen Chase Manhattan and JP Morgan &Corp decided to merge together, mutual agreement was done to ensure that both parties will have benefits on the integration of the two companies.
In this mutual agreement, the payment terms are being analyzed and stated so that both parties will know if they will gain benefits (McDavid, 2004).In the payment terms, it will include how much the purchasing companies will pay the target company. When Chase Manhattan tries to buy JP Morgan &Corp, the first amount that was suggested by Chase Manhattan was 1.71times the revenue of Chase Manhattan which is equal to $30.
9 billion stock deal. The purpose of Chase Manhattan was to have integration to JP Morgan &Corp to become one of the most dominant banking and finance corporation in the country. The combination of the personnel of the two company will work together to attain their sole purpose.In the country, the rules and regulation on merger and acquisition varies among the states of the country.
The New York State approved the merger and acquisition of Chase Manhattan to JP Morgan &Corp. the previous amount of acquisition was decreased to $29 billion (Learning, 2001).In a merger and acquisition business transactions, there is a need to valuate the market value of the existing financial assets and liabilities. This is because, the valuation procedure will guide or somewhat dictate the value that a business will be sold.
The method that will be used to valuate the market value of the existing financial assets and liabilities is the discounted cash flow, DCF. DCF shows the present worth value of a given assets given the duration of the project or business (StreetAuthority, 2007). The formuala to be used to calculate DCF isDCF = CF1/(1+r) 1 + CF2/(1+r) 2 + CF3/(1+r) 3 ..
.+ CFn/(1+r) nWhere: CF1 = cash flow in period 1 CF2 = cash flow in period 2 CF3 = cash flow in period 3 CFn = cash flow in period n r = discount rate (also referred to as the required rate of return )We will assume that the discount rate or the required rate of return will be 20%. This means that the 20% of the present cash flow will be returned to the funds of the company. The data to be used in this analysis part is the data shown in figure 1.
Also, we will assume that the three period years which are year 2004, 2005, and 2006 will be represented by year 2008, 2009, and 2010 just to follow the guidelines in making a DCF analysis. The duration period will be three years.Using the formula above, the present value of the assets if the assumptions were followed would be $35914 + $37870 + $35553 = $109337. This means that if the cash flow for the year 2008, 2009, and 2010 will be that of figure 1, then the discounted assets value of the company is $109337.
In performing DCF analysis to valuate the asset or market value of a company, certain precautions must be considered like the choice on the duration. It is more applicable to choose a duration time of less than 10 years because more than 10 years of duration time will produce not reliable result. This can be explained that the longer the duration, the higher is the variation of the predicted values for a given year to the true value.Setting for the analysisIn selection for the analysis, the discussion will fall on the reasons why Chase Manhattan decided to have a joint partner with JP Morgan &Corp.
this is because, Chase Manhattan which is one of the leading company in the banking and finance industry wants to further increase its profit by integrating to other related companies. The question is, from the numerous choices of Chase Manhattan, why is it they choose JP Morgan &Corp. One of the reasons is that, the JP Morgan &Corp shows some characteristics that lead it to have more benefits than others. The JP Morgan &Corp has higher quality of materials and methods used to increase the quality the service they offer.
Example of this is the e-finance system that utilizes the power of technology through the use of super computers and internet to provide their services more efficiently. Also, JP Morgan &Corp does not only give financial service in the country but also to other countries outside United States. Thus, the higher the number of the clients, the higher will be its revenue. As aimed by Chase Manhattan, the new company that was a product of the combination of the two companies will take lead into the world of business and finance all over the world.
Chase Manhattan wants to be the most prominent corporate firm with the aid of JP Morgan &Corp.Evaluation and prognosisIn the analysis of the current condition of the new company, the most important in this part is to determine whether the merger and acquisition was effective in obtaining its purpose which is to increase the profit and the business life of the company. In figure 1. It can be seen that the revenue had an increasing trend.
This indicates that the company performs well when profitability is the measure. Likewise, the net results also increase. The employment rate of JPMorgan Chase and Co was also increasing. Given all the parameters in the table, it can be seen that JPMorgan Chase and Co shows developments because the trends of the parameters where increasing and increasing trend of the below parameters means that the company performs well in providing financial service not just only in the country but also outside the United States.
Figure 1. net revenue, EBITIDA, net results and staff of JPMorgan Chase and Co for the year 2004, 2005, and 2006.Another survey said that JPMorgan Chase and Co was the US hedge-fund firm with a total of $34 billion. This made JPMorgan Chase and Co as one of the top performing financial institution of the country.
The figure below shows the tabulated companies that are considered top ten hedge-fund firms in the country. The accounting parameter that was analyzed was the company’s assets. This data were gathered and were assumed that the condition of the assets is applicable only for the year 2007 (Barr, 2007).