WALL STREET GIBBERISH, 2004 FOURTH QUARTER NEWSLETTER

This feature has been on hiatus for a few issues because I had not found what I considered to be an outrageous enough example. However, an article in the December 29 Wall Street Journal, on the front page no less, certainly fits the category. When J.P. Morgan Chase wanted to acquire Bank One Corp. last January it needed to assure its stockholders that it was paying a fair price that was not too high. In the proxy document it filed with the SEC, the company said it had obtained an opinion in that regard from one of "the top five financial advisors in the world." (The article reports that quote as being from the proxy.) It turns out that was from J.P. Morgan’s own in-house bankers who endorsed the proposed purchase price as "fair."

Maybe that is not out and out deceptive since they did not say the opinion was from an independent source. The potential conflict of interest is unmistakable. If I owned stock in JPM, I would certainly wonder about the proposed purchase price even if there was not much that I could do about it.

There was good reason for the skepticism as the head of Bank One during negotiations suggested a sales price of billions less than the 56.9 billion proposed provided that he became the head of the merged firm along with some other conditions. One can’t help but wondering if Morgan’s in-house analysts endorsed the higher price so that their CEO could stay in power. Some shareholders have brought suit in this regard.

Even in cases where the “fairness” opinion is provided by an outside banking firm, potential conflicts of interest are not unusual. In some cases the bank providing the opinion will receive substantially higher fees if the deal goes through, and the fee may be tied to the purchase price. In many other cases, the bank asked to write the opinion has a longstanding business arrangement that it wants to see continue. Banks that suggest mergers and acquisitions commonly end up as advisors to one of the parties in the deal.

Unfortunately, the regulatory agencies have not really done much to prevent these types of conflicts of interest or at least require full disclosure of the financial incentives of those providing the fairness opinions. That may change since the National Association of Securities Dealers (NASD), a so-called “self regulatory organization,” is looking into this issue.

Note: J.P. Morgan is a component of the Dow Jones Industrial Average, so it is possible that it might be owned in some client or personal accounts. However, no account I control has ever owned JPM or had an options position in the stock.

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