JP Morgan Chase 2008 Annual Report Download - page 139

JPMorgan Chase & Co./ 2008 Annual Report 137
Merger with The Bear Stearns Companies Inc.
Effective May 30, 2008, BSC Merger Corporation, a wholly owned
subsidiary of JPMorgan Chase, merged with The Bear Stearns
Companies Inc. (“Bear Stearns”) pursuant to the Agreement and
Plan of Merger, dated as of March 16, 2008, as amended March 24,
2008, and Bear Stearns became a wholly owned subsidiary of
JPMorgan Chase. The merger provided the Firm with a leading global
prime brokerage platform; strengthened the Firm’s equities and asset
management businesses; enhanced capabilities in mortgage origina-
tion, securitization and servicing; and expanded the platform of the
Firm’s energy business. The merger is being accounted for under the
purchase method of accounting, which requires that the assets and
liabilities of Bear Stearns be fair valued. The total purchase price to
complete the merger was $1.5 billion.
The merger with Bear Stearns was accomplished through a series of
transactions that were reflected as step acquisitions in accordance
with SFAS 141. On April 8, 2008, pursuant to the share exchange
agreement, JPMorgan Chase acquired 95 million newly issued shares
of Bear Stearns common stock (or 39.5% of Bear Stearns common
stock after giving effect to the issuance) for 21 million shares of
JPMorgan Chase common stock. Further, between March 24, 2008,
and May 12, 2008, JPMorgan Chase acquired approximately 24 mil-
lion shares of Bear Stearns common stock in the open market at an
average purchase price of $12.37 per share. The share exchange and
cash purchase transactions resulted in JPMorgan Chase owning
approximately 49.4% of Bear Stearns common stock immediately
prior to consummation of the merger. Finally, on May 30, 2008,
JPMorgan Chase completed the merger. As a result of the merger,
each outstanding share of Bear Stearns common stock (other than
shares then held by JPMorgan Chase) was converted into the right to
receive 0.21753 shares of common stock of JPMorgan Chase. Also,
on May 30, 2008, the shares of common stock that JPMorgan Chase
and Bear Stearns acquired from each other in the share exchange
transaction were cancelled. From April 8, 2008, through May 30,
2008, JPMorgan Chase accounted for the investment in Bear Stearns
under the equity method of accounting in accordance with APB 18.
During this period, JPMorgan Chase recorded reductions to its invest-
ment in Bear Stearns representing its share of Bear Stearns net loss-
es, which was recorded in other income and accumulated other com-
prehensive income.
In conjunction with the Bear Stearns merger, in June 2008, the
Federal Reserve Bank of New York (the “FRBNY”) took control,
through a limited liability company (“LLC”) formed for this purpose,
of a portfolio of $30 billion in assets acquired from Bear Stearns,
based on the value of the portfolio as of March 14, 2008. The assets
of the LLC were funded by a $28.85 billion term loan from the
FRBNY, and a $1.15 billion subordinated loan from JPMorgan Chase.
The JPMorgan Chase note is subordinated to the FRBNY loan and
will bear the first $1.15 billion of any losses of the portfolio. Any
remaining assets in the portfolio after repayment of the FRBNY loan,
the JPMorgan Chase note and the expense of the LLC will be for the
account of the FRBNY.