Question 1

Financing an acquisition is a very tricky exercise since there is a obligation of the merging companies to secure the interests of shareholders. The 6acquisition of Phelps dodge by Freeport-McMoRan is recorded as one of the most significant acquisition in the history of copper industry. The acquisition of the company was advised and stipulated by JPMorgan and Merrill Lynch which resulted in one of the most successful acquisitions.

The acquisition process involved both debt financing and equity from shareholders. JPMorgan and Merrill Lynch arranged for $17.5 billion in debt financing and also advised for credit facilities amounting to $1.5 billion. The two firms also simultaneously arranged to underwrite $5 billion in equity capital which was enabled through offering of the company’s common shares and mandatory convertible preferred shares. The total acquisition was estimated to be around $23.5 billion and this was to be handled with great care.

The selection of JPMorgan and Merrill Lynch to underwrite and book the acquisition process was a strategic decision. The choice was intended to create an optimal financial structure that would ensure that the company has strong credit ratings. The acquisition process required utmost guidance and advice that would ensure utmost safeguard of shareholders’ interests(Ray, 2011). Sharing of underwriting exercise with other firms would increase the costs of acquisition. The underwriting process spearheaded by dual advisor-underwriter are in most cases completed faster and are likely to have more positive effects on the acquisition process. Dealing with lesser firms rather than sharing the underwriting process with other firms would eliminate the caution to risk offered by JPMorgan and Merrill Lynch. This is because both JPMorgan and Merrill Lynch had committed $6 billion in bridge loans. This would ensure successful and risk free completion of the acquisition process.

Question 2

JPMorgan has been actively involved in major mergers and acquisitions where they have played significant roles in providing leverage. The company has for a long time offered corporations with an avenue to leveraged acquisitions. JPMorgan has also been greatly involved in provision of liability management and financial restructuring through advising corporate clients and private portfolio companies.

JPMorgan played a significant role in the acquisition of the Phelps Dodge. The leveraged finance group carried the responsibility o making the bridge financing commitment which was valued at $ 6 billion. The leverage was on behalf of JPMorgan and this allowed FCX to make a firm bid in the acquisition process. For a smooth acquisition process, It was paramount for the principal company (FCX) to have an adequate acquisition financing. This was particularly vital because the principal company was taking too much debt and in addition to that it was acquiring a company which was larger than itself(Stowell, 2012).

Leverage finance group had very serious undertakings in ensuring smooth acquisition process. For instance, leveragefinance group had the obligation of analyzing the new capital structure, the nature and impact on credit ratings as well as the ability of factoring the debt to other financial providers and investors. Leverage finance group had also the obligation of leading efforts to secure internal commitment of the FCX firm. It was also the responsibility of the group to ensure that the acquisition achieved the desired gains associated with capital charges. Leverage finance group associated with JPMorgan had a better understanding in the financial market which had a significant role in making the acquisition a success.

Question 3

The underwriting process involves buying bonds from the issuer with an anticipation of reselling them to other banks or potential investors. Once the underwriter is involved in this business, there is an outright risk whereby the underwriter can lose his/her investment just in case the economic conditions are unfavorable. In order to prevent this, it is critical for the involved persons to lay down measures to mitigate the unlikely events. This is achieved through pursuing specific risk management process that includes identifying, analyzing and implementation of the migrating plan.

In an underwriting process, the investment bank is faced with a capital risk. After agreeing to fund an acquisition through underwriting, the bank has the responsibility of arranging intensive advertisement and promotion to the investors and management of the issuing company and persuades potential investors to subscribe to the offer. An underwriting firm must set aside capital to subvert the risky position that is inherent.

Market risk is a significant risk associated with underwriting process. This is an implication that the underwriting company will buy the securities at the offered price just in case the investors fail to buy them. Under such circumstances, the capital set aside could be substantial. Market risks forces the issuer to set aside small amount of capital. This setting aside of capital entails storing some cash in risk-free securities such as treasury bonds. This is a critical measure as since the returns provided are below the shareholders’ equity return requirement thus the issuer benefits from opportunity cost.

Reputation risk is another risk that should be considered by investment bank in an underwriting process. This is the kind of risk that comes as a result of association between investment banking firm and the company for which it is raising funds for potential mergers and acquisitions. This risk can be effectively mitigated through proper analysis of the quality of the principal company. If the merger will tarnish the brand of the investment bank, such companies should be avoided for underwriting purposes. Reputation risk should be greatly considered since it plays a significant role in the overall profitability of the firm.

Question 4

Credit rating is an important aspect in any acquisition process and the Freeport -McMoRan is not an exception. Credit rating in most cases is ascertained by credit rating agencies that play a very significant role. In the case of Freeport-McMoRan transaction, the credit rating agencies were very essential as they played a key role in determining the post-acquisition capital structure of FCX. The lower the credit rating, the higher the cost of debt capital and vice versa is true. This could have significant effects on the valuation of the company’s common stock and return on equity(Speechley&Speechley, 2008).

Credit rating agencies have an obligation of providing advice to corporate clients regarding probable rating decisions as a result of different financing structures. This is more significant under the debt capital markets which should work closely with both high end and leverage-loan teams. In the case of Freeport-McMoRan transaction, credit ratings on the different financing options improved significantly as a result of increase in cash flow. Moreover, target company had a higher credit rating than FCX which resulted to a significant increase in the ratings of the new firm.

Question 5

An acquisition process must be carefully thought after to ensure that the process is not followed by dire consequences. To avoid such consequences, it is important to carry out intensive research to ensure that the future of the new formed organization is bright and the shareholders will not regret their choices.  The research process in an acquisition entails three main roles which include; identifying areas of opportunities, screening potential acquisitions and critical analysis of the possible acquisitions(Stowell, 2010).

In the case of the Freeport-McMoRan transaction, JPMorgan had a set up a research team to ensure that the exercise was a success. Michael Gambardella, who was an analyst in the mining industry, played a very serious role in the acquisition process. However, he was restrictedfrom providing an investment opinion on shares of FCX. The restrictions were as a result of JPMorgan being an advisor on the Freeport-McMoRan transaction and thus had access to critical inside information of the companies.

JPMorgan’s equity research team was able to meet with the organization’s sales force in order to provide an overview of equity and the convertible offerings.   Gambardella also had the chance to answer several questions but was not however allowed to express any opinion on the pricing for the offerings. Equity research team at JPMorgan also wrote a research on competitors companies which played a key role in the FCX analysis on the acquisition and on equity related offerings.

The role of equity research has changed significantly since 2003. This is because prior to this year, equity researchers frequently joined investment bankers in soliciting mandates. They also committed themselves in writing research especially in cases of book run equity transactions. The research process always provided critical information which was in most times favorable and aided in marketing an acquisition deal. Equity researchers have since been walled off from investment bankers especially after the April 2003 SEC enforcement action against major investment banks. This action provided several restrictions on equity researchers. For instance, bankers are not restricted not to pay research professionals any compensation nor should they join bankers in pitches unless in the presence of a referee. Moreover, the researchers are not allowed to write a research nor make suggestions on what they research on specific companies that are under investment banking mandate. These changes have had significant impacts in the acquisition process.

Question 6

Understanding clients in investment banking plays a major role in ensuring successful acquisition process. Clients include hedge funds, mutual funds, pension funds, insurance companies just to name but a few. Limit order is a common phenomenon in an acquisition process. It is created as a result of a buyer placing limit or a ceiling on the maximum price that the buyer is willing to pay for certain securities. In other words, limit order occurs when the buyers off securities have a pre-determined price for the securities offered. This is detrimental to the sales process since the sales team will be asked to sell the securities at the highest price possible. In case of presence of huge limit orders, the sales team will be forced to set their prices a bit lower to accommodate the larger limit orders. This will have significant effects on the overall gains derived from the securities(DePamphilis, 2010).

Limit orders in most cases come from buyers, such as fidelity, that the issuing company would prefer as the long term investors. The sales team must design a scheme that will strike a balance in allocation of shares to large, desirable investors with orders that may include limits and smaller, lower-priority investors that do not require limits.

Equity capital markets are very critical aspects in mergers and acquisition. Equity Capital Markets Syndicate group is an essential component of the capital markets. It has the obligation of coordinating with sales force management to decide investors when demand exceeds supply and when limit orders are provided by large potential investors. The group also has the responsibility of determining the price range within which the securities will be offered. All these obligations will only be possibleof the group maintains close contact with the markets especially with regard to comparable offerings that enables assessing the current appetite for investors in terms of price and industries they are willing to invest in. the group is also critical in determining presence of limit orders.

Question 7

Total acquisition         =                                                                                      $23.3 billion

Debt acquisition          =                                                                                      $17.5 billion

Equity and convertible=   (25,000,000*100) + (28750000*100) =              $ 5.3   billion

Costing

Total transaction value                                         0.5/100*23.3=       $   0.1165 billion

Debt and loan financing                                      0.75/100*17.5=       $     0.1325 billion

Equity and convertible financing                        3/100*5.3        =      $    0.159    billion

Total fees                                                                                                  $   0.4080 billions

References

DePamphilis, D. M., 2010. Mergers, acquisitions, and other restructuring activities an integrated approach to process, tools, cases, and solutions (5th ed.). London: Academic.

Ray, K. G., 2011. Mergers and acquisitions: strategy, valuation and integration. New Delhi: PHI Learning Private Limited.

Speechley, T., &Speechley, T., 2008.Acquisition finance.Haywards Heath [England: Tottel.

Stowell, D., 2010. Investment Banks, Hedge Funds, and Private Equity. Burlington: Elsevier.

Stowell, D., 2012. Investment banks, hedge funds, and private equity (2nd ed.). S.l.: Academic Press.

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