How J.P. Morgan Does 'Merger in Reverse'
Fast Work to Absorb
Bear Stearns Comes
After Hurried Deal
By ROBIN SIDEL
May 24, 2008; Page B1
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.
What's Up: J.P. Morgan is racing to integrate Wall Street firm
How: Hundreds of J.P. Morgan bankers are poring through Bear's
At Stake Is... : J.P. Morgan CEO James Dimon's reputation for
a laser-like focus on the bottom line.
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
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
"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.
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
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
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
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