JP Morgan Chase 2006 Annual Report Download - page 26

MANAGEMENT’S DISCUSSION AND ANALYSIS
JPMorgan Chase & Co.
24 JPMorgan Chase & Co. / 2006 Annual Report
Asset Management
With assets under supervision of $1.3 trillion, Asset Management (“AM”) is a
global leader in investment and wealth management. AM clients include institu-
tions, retail investors and high-net-worth individuals in every major market
throughout the world. AM offers global investment management in equities,
fixed income, real estate, hedge funds, private equity and liquidity, including
both money market instruments and bank deposits. AM also provides trust and
estate and banking services to high-net-worth clients, and retirement services
for corporations and individuals. The majority of AM’s client assets are in actively
managed portfolios.
Merger with Bank One Corporation
Effective July 1, 2004, Bank One Corporation (“Bank One”) merged with and
into JPMorgan Chase & Co. (the “Merger”). As a result of the Merger, each
outstanding share of common stock of Bank One was converted in a stock-
for-stock exchange into 1.32 shares of common stock of JPMorgan Chase &
Co. The Merger was accounted for using the purchase method of accounting.
Accordingly, the Firm’s results of operations for 2004 include six months of
heritage JPMorgan Chase results and six months of the combined Firm’s
results. For additional information regarding the Merger, see Note 2 on pages
95–96 of this Annual Report.
2006 Business events
Acquisition of the consumer, business banking and middle-market
banking businesses of The Bank of New York in exchange for
selected corporate trust businesses, including trustee, paying
agent, loan agency and document management services
On October 1, 2006, JPMorgan Chase completed the acquisition of The Bank
of New York Company, Inc.’s (“The Bank of New York”) consumer, business
banking and middle-market banking businesses in exchange for selected cor-
porate trust businesses plus a cash payment of $150 million. This acquisition
added 339 branches and more than 400 ATMs, and it significantly strengthens
RFS’s distribution network in the New York Tri-state area. The Bank of New
York businesses acquired were valued at a premium of $2.3 billion; the Firm’s
corporate trust businesses that were transferred (i.e., trustee, paying agent,
loan agency and document management services) were valued at a premium
of $2.2 billion. The Firm also may make a future payment to The Bank of New
York of up to $50 million depending on certain new account openings. This
transaction included the acquisition of approximately $7.7 billion in loans and
$12.9 billion in deposits from The Bank of New York. The Firm also recog-
nized core deposit intangibles of $485 million which will be amortized using
an accelerated method over a 10 year period. JPMorgan Chase recorded an
after-tax gain of $622 million related to this transaction in the fourth quarter
of 2006.
JPMorgan Partners management
On August 1, 2006, the buyout and growth equity professionals of JPMorgan
Partners (“JPMP”) formed an independent firm, CCMP Capital, LLC (“CCMP”),
and the venture professionals separately formed an independent firm,
Panorama Capital, LLC (“Panorama”). The investment professionals of CCMP
and Panorama continue to manage the former JPMP investments pursuant to a
management agreement with the Firm.
Sale of insurance underwriting business
On July 1, 2006, JPMorgan Chase completed the sale of its life insurance and
annuity underwriting businesses to Protective Life Corporation for cash pro-
ceeds of approximately $1.2 billion, consisting of $900 million of cash
received from Protective Life Corporation and approximately $300 million of
preclosing dividends received from the entities sold. The after-tax impact of
this transaction was negligible. The sale included both the heritage Chase
insurance business and the insurance business that Bank One had bought
from Zurich Insurance in 2003.
Acquisition of private-label credit card portfolio from Kohl’s Corporation
On April 21, 2006, JPMorgan Chase completed the acquisition of $1.6 billion
of private-label credit card receivables and approximately 21 million accounts
from Kohl’s Corporation (“Kohl’s”). JPMorgan Chase and Kohl’s have also
entered into an agreement under which JPMorgan Chase will offer private-
label credit cards to both new and existing Kohl’s customers.
Collegiate Funding Services
On March 1, 2006, JPMorgan Chase acquired, for approximately $663 mil-
lion, Collegiate Funding Services, a leader in education loan servicing and
consolidation. This acquisition included $6 billion of education loans and will
enable the Firm to create a comprehensive education finance business.
Acquisition of certain operations from Paloma Partners
On March 1, 2006, JPMorgan Chase acquired the middle and back office
operations of Paloma Partners Management Company (“Paloma”), which was
part of a privately owned investment fund management group. The parties
also entered into a multiyear contract under which JPMorgan Chase will pro-
vide daily operational services to Paloma. The acquired operations have been
combined with JPMorgan Chase’s current hedge fund administration unit,
JPMorgan Tranaut.
JPMorgan and Fidelity Brokerage Company
On February 28, 2006, the Firm announced a strategic alliance with Fidelity
Brokerage to become the exclusive provider of new issue equity securities and
the primary provider of fixed income products to Fidelity’s brokerage clients
and retail customers, effectively expanding the Firm’s existing distribution
platform.