Exhibit 99.3
JPMORGAN CHASE & CO./THE BEAR STEARNS COMPANIES INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information and
explanatory notes present how the combined financial statements of JPMorgan
Chase and Bear Stearns may have appeared had the companies actually been
combined as of the date indicated. The unaudited pro forma combined statement
of income for the year ended December 31, 2007 gives effect to the merger as if
the merger had been completed on January 1, 2007. The unaudited pro forma
combined balance sheet at December 31, 2007 assumes the merger was completed on
that date. The unaudited pro forma combined financial information shows the
impact of the merger on JPMorgan Chase's and Bear Stearns' combined financial
position and results of operations under the purchase method of accounting with
JPMorgan Chase treated as the acquirer. Under this method of accounting,
JPMorgan Chase will record the assets and liabilities of Bear Stearns at their
estimated fair values as of the date the merger is completed.
The unaudited pro forma combined financial information has been derived from
and should be read in conjunction with the historical consolidated financial
statements and the related notes of both JPMorgan Chase and Bear Stearns.
The unaudited pro forma combined financial information is presented for
illustrative purposes only and does not indicate the financial results of the
combined company had the companies actually been combined at the beginning of
the period presented. In addition, as explained in more detail in the
accompanying notes to unaudited pro forma combined financial information, the
resulting extraordinary gain reflected in the unaudited pro forma combined
financial information is subject to adjustment. Bear Stearns is a
broker-dealer, and many of the assets and liabilities on its consolidated
balance sheet are financial assets carried at fair value, or are short-term in
nature. For those that are short-term in nature, the carrying value
approximates fair value. For purposes of these unaudited pro forma combined
financial statements no valuation adjustments were applied to Bear Stearns'
assets and liabilities carried at fair value or those which are short-term in
nature, except for adjustments to reflect JPMorgan Chase credit spreads on
trading liabilities and long-term debt. The adjustments included in these
unaudited pro forma combined financial statements are preliminary and may be
revised. The fair value of Bear Stearns' pro forma net assets at November 30,
2007 is estimated to be $10.3 billion, which exceeds the estimated $1.4 billion
purchase price. This results in negative goodwill. In accordance with U.S.
GAAP, nonfinancial assets that are not held for sale, such as Bear Stearns'
premises and equipment and other intangibles, were written down against the
negative goodwill. Upon consummation of the merger, any negative goodwill
remaining after writing down nonfinancial assets will be recognized as an
extraordinary gain. For further information, see Note 3 to these unaudited pro
forma combined financial statements. After completing a fair value analysis of
Bear Stearns' assets and liabilities as of the closing date, the final
allocation of negative goodwill to nonfinancial assets and then the
extraordinary gain will be determined. This unaudited pro forma financial
information represents management's current estimate of the combined financial
information based on available financial information of JPMorgan Chase and Bear
Stearns as of year end 2007. The final purchase accounting adjustments may be
materially different from the unaudited pro forma adjustments presented in this
document.
1
JPMORGAN CHASE & CO./THE BEAR STEARNS COMPANIES INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 2007 and November 30, 2007
In millions (except per share data)
JPMorgan Bear
Chase Stearns
Year Year
ended ended Pro Pro
December November Reporting forma forma
31, 2007 30, 2007 reclassifications adjustments combined
-------- -------- ----------------- ----------- --------
Revenue
Investment banking fees $ 6,635 $ 1,380 $ (286)/(1)/ $ -- $ 7,706
(23)/(2)/
Principal transactions 9,015 1,323 23/(2)/ -- 10,231
(130)/(3)/ --
Lending & deposit-related fees 3,938 -- -- -- 3,938
Asset management, administration and commissions 14,356 -- (2,702)/(4)/ -- 12,251
597/(5)/
Asset management and other income -- 623 (623)/(5,6)/ -- --
Commissions -- 1,269 (1,269)/(7)/ -- --
Brokerage commissions -- -- 3,971/(4,7)/ -- 3,971
Securities gains (losses) 164 -- -- -- 164
Mortgage fees and related income 2,118 -- 416/(1,3)/ -- 2,534
Credit card income 6,911 -- -- -- 6,911
Other income 1,829 -- 26/(6)/ -- 1,855
------- ------- ------- ----- -------
Noninterest revenue 44,966 4,595 -- -- 49,561
------- ------- ------- ----- -------
Interest income 71,387 11,556 -- -- 82,943
Interest expense 44,981 10,206 -- 186/(A)/ 55,373
------- ------- ------- ----- -------
Net interest income 26,406 1,350 -- (186) 27,570
------- ------- ------- ----- -------
Total net revenue 71,372 5,945 -- (186) 77,131
------- ------- ------- ----- -------
Provision for credit losses 6,864 -- -- -- 6,864
Noninterest expense
Compensation expense 22,689 3,425 -- -- 26,114
Occupancy expense 2,608 264 -- (23)/(B)/ 2,849
Technology, communications and equipment expense 3,779 578 (85)/(8)/ (131)/(B)/ 4,141
Professional & outside services 5,140 362 (929)/(8,9)/ -- 4,573
Floor brokerage, exchange and clearance expense -- 279 1,014/(9)/ -- 1,293
Marketing 2,070 179 -- -- 2,249
Other expense 3,814 438 221/(10,11)/ (227)/(C)/ 4,267
21/(D)/
Impairment of goodwill and specialist rights -- 227 (227)/(10)/ --
Amortization of intangibles 1,394 -- 6/(11)/ -- 1,400
Merger costs 209 -- -- -- 209
------- ------- ------- ----- -------
Total noninterest expense 41,703 5,752 -- (360) 47,095
------- ------- ------- ----- -------
Income from continuing operations before income tax expense 22,805 193 -- 174 23,172
Income tax expense 7,440 (40) -- 61/(E)/ 7,461
------- ------- ------- ----- -------
Income from continuing operations $15,365 $ 233 $ -- $ 113 $15,711
======= ======= ======= ===== =======
Per common share information
Income from continuing operations:
Basic earnings per share $ 4.51 $ 1.68 $ 4.58
Diluted earnings per share 4.38 1.52 4.43
Average common shares outstanding 3,404 130 (102)/(F)/ 3,432
Average diluted common shares outstanding 3,508 146 (107)/(F)/ 3,547
------- ------- ----- -------
2
JPMORGAN CHASE & CO./THE BEAR STEARNS COMPANIES INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
December 31, 2007 and November 30, 2007
In millions (except per share data)
JPMorgan Bear
Chase Stearns Pro Pro
December November Reporting forma forma
31, 2007 30, 2007 reclassifications adjustments combined
---------- -------- ----------------- ----------- ----------
Assets
Cash and due from banks $ 40,144 $ 21,406 $ 9,010/(1)/ $ (1,179)/(G)/ $ 98,181
(200)/(2)/ 29,000/(H)/
Deposits with banks 11,466 -- -- -- 11,466
Cash and securities deposited
with clearing organizations
or segregated in compliance
with federal regulations -- 12,890 (9,010)/(1)/ -- --
(3,880)/(3)/
Federal funds sold and
securities purchased under
resale agreements 170,897 -- 27,878/(4)/ -- 198,775
Collateralized agreements:
Securities purchased under
agreements to resell -- 27,878 (27,878)/(4)/ -- --
Securities borrowed 84,184 82,245 -- -- 166,429
Securities received as
collateral -- 15,599 -- -- 15,599
Trading assets 491,409 -- 170,705/(5,6,14)/ (981)/(I)/ 631,996
(137)/(2)/ (29,000)/(H)/
Financial instruments owned,
at fair value -- 122,518 (122,518)/(5)/ -- --
Financial instruments owned
and pledged as collateral,
at fair value -- 15,724 (15,724)/(6)/ -- --
Securities 85,450 -- -- -- 85,450
Loans 519,374 -- -- -- 519,374
Allowance for loan losses (9,234) -- -- -- (9,234)
---------- -------- --------- -------- ----------
Loans, net of Allowance for
loan losses 510,140 -- -- -- 510,140
Accrued interest and accounts
receivable 24,823 -- 41,900/(7)/ -- 67,365
642/(8)/
Receivables:
Customers -- 41,115 (41,115)/(7)/ -- --
Brokers, dealers and others -- 11,622 (11,622)/(9)/ -- --
Interest and dividends -- 785 (785)/(7)/ -- --
Brokerage receivables -- -- 11,622/(9)/ (5,788)/(J)/ 15,398
9,564/(10)/
Premises and equipment 9,319 605 -- (605)/(K)/ 9,319
Goodwill 45,270 -- 82/(11)/ (82)/(L)/ 45,270
Other intangible assets:
Mortgage servicing rights 8,632 -- 833/(12)/ -- 9,465
Purchased credit card
relationships 2,303 -- -- -- 2,303
All other intangibles 3,796 -- 7/(13)/ (7)/(L)/ 3,796
Other assets 74,314 9,422 (6,158)/(3,8,10,11,12,13,15)/ 24 /(M)/ 76,748
306/(2)/ (1,160)/(N)/
Assets of variable interest
entities and mortgage loan
special purpose entities -- 33,553 (32,463)/(14)/ -- --
(1,090)/(15)/
---------- -------- --------- -------- ----------
Total assets $1,562,147 $395,362 $ (31) $ (9,778) $1,947,700
========== ======== ========= ======== ==========
3
JPMORGAN CHASE & CO./THE BEAR STEARNS COMPANIES INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET (Continued)
December 31, 2007 and November 30, 2007
In millions (except per share data)
JPMorgan Chase Bear Stearns Reporting Pro forma Pro forma
December 31, 2007 November 30, 2007 reclassifications adjustments combined
----------------- ----------------- ----------------- ----------- --------
Liabilities
Deposits $ 740,728 $ -- $ -- $(1,179)/(G)/ $ 739,549
Federal funds purchased and
securities sold under
repurchase agreements 154,398 -- 102,373/(16)/ -- 245,849
(10,922)/(17)/
Collateralized financings:
Securities sold under
agreements to repurchase -- 102,373 (102,373)/(16)/ -- --
Securities loaned -- 3,935 (3,935)/(18)/ -- --
Other secured borrowings -- 12,361 (12,361)/(19)/ -- --
Securities loaned -- -- 14,857/(17,18)/ -- 14,857
Commercial paper 49,596 -- 3,901/(20)/ -- 53,497
Unsecured short-term borrowings -- 11,643 (3,901)/(20)/ -- --
(7,742)/(21)/
Obligation to return securities
received as collateral -- 15,599 -- -- 15,599
Other borrowed funds 28,835 -- 20,103/(19,21)/ -- 48,938
Trading liabilities 157,867 -- 43,807/(22)/ 307/(O)/ 200,969
(31)/(2)/ (981)/(I)/
Financial instruments sold, but
not yet purchased, at fair
value -- 43,807 (43,807)/(22)/ -- --
Accounts payable, accrued
expense and other liabilities 94,476 -- 75,995/(23,25,26,27)/ 352/(D)/ 170,823
Payables:
Customers -- 83,204 (83,204)/(23)/ -- --
Brokers, dealers and others -- 4,101 (4,101)/(24)/ -- --
Interest and dividends -- 1,301 (1,301)/(23)/ -- --
Brokerage payables -- -- 4,101 /(24)/ (5,788)/(J)/ 12,925
14,612/(25)/
Accrued employee compensation
and benefits -- 1,651 (1,651)/(26)/ -- --
Other liabilities and accrued
expenses -- 4,451 (4,451)/(27)/ -- --
Beneficial interests issued by
consolidated variable
interest entities 14,016 -- 30,605/(28)/ -- 44,621
Liabilities of variable
interest entities and
mortgage loan special purpose
entities -- 30,605 (30,605)/(28)/ -- --
Long-term debt 183,862 68,538 (263)/(29)/ 399/(O)/ 251,702
(834)/(A)/
Junior subordinated deferrable
interest debentures held by
trusts that issued guaranteed
capital debt securities 15,148 -- 263/(29)/ -- 15,411
---------- -------- --------- ------- ----------
Total liabilities 1,438,926 383,569 (31) (7,724) 1,814,740
---------- -------- --------- ------- ----------
Stockholders' equity
Preferred stock -- 352 (352)/(D)/ --
Common stock 3,658 185 25/(P)/ 3,683
(185)/(P)/
Capital surplus 78,597 -- 1,348/(P)/ 79,945
Paid-in capital -- 4,986 (4,986)/(P)/ --
Employee stock compensation
plans -- 2,478 (2,478)/(P)/ --
Retained earnings 54,715 9,441 8,366/(Q)/ 63,081
(9,441)/(P)/
Accumulated other comprehensive
income (loss) (917) (8) 8/(P)/ (917)
Treasury stock, at cost (12,832) (5,641) 5,641/(P)/ (12,832)
---------- -------- --------- ------- ----------
Total stockholders' equity 123,221 11,793 (2,054) 132,960
---------- -------- --------- ------- ----------
Total liabilities and
stockholders' equity $1,562,147 $395,362 $ (31) $(9,778) $1,947,700
========== ======== ========= ======= ==========
4
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Note 1--Basis of Pro Forma Presentation
The unaudited pro forma combined financial information relating to the
merger of JPMorgan Chase with Bear Stearns is presented as of and for the year
ended December 31, 2007 for JPMorgan Chase and as of and for the year ended
November 30, 2007 for Bear Stearns.
The reporting reclassifications column represents the change in presentation
of the historical consolidated financial statements of Bear Stearns and
JPMorgan Chase to conform to the preliminary presentation of such information
for the combined entity as discussed in Note 2. For purposes of identifying the
reclassification between line items on the financial statements, numerical
references are provided to reflect where balances have been reclassified.
JPMorgan Chase and Bear Stearns are in the process of reviewing their
accounting and reporting policies and, as a result of this review, it may be
necessary to adjust either JPMorgan Chase's or Bear Stearns' financial
statements to conform to those accounting policies that are determined by the
combined company to be most appropriate. While some reclassifications have been
included in the unaudited pro forma combined financial information included in
this document, further reclassifications may be necessary upon the completion
of this review. Final determination of financial statement presentation will be
completed upon consummation of the merger.
Material intercompany transactions have been eliminated from the
accompanying unaudited pro forma combined financial information. However the
information does not reflect the elimination of hedge accounting results.
Management believes this presentation is more reflective of the pro forma
results of the combined entity, as derivatives that have qualified for hedge
accounting in the periods presented will continue to qualify as hedges until
the date the merger is completed; and it is management's intent to replace
derivatives currently used for hedging purposes which will become intercompany,
with new third-party derivative contracts.
The pro forma adjustments reflect the conversion of 112,998,620 shares
(shares issued of 184,805,847, less treasury shares of 71,807,227) of Bear
Stearns common stock outstanding at November 30, 2007, into JPMorgan Chase
common stock using an exchange ratio of 0.21753 multiplied by the JPMorgan
Chase average share price of $45.26. The average share price was computed using
the closing prices of the four trading days during the period March 19, 2008
through March 25, 2008. Also included in the purchase price of the merger is
the estimated fair value of the Bear Stearns employee stock awards that are
expected to be vested for accounting purposes following consummation of the
merger and that will be converted into JPMorgan Chase employee stock awards.
The estimated fair value of these awards is $261 million. The total estimated
purchase price of the merger for purposes of this pro forma financial
information is $1.4 billion.
The merger will be accounted for using the purchase method of accounting,
which requires that the assets and liabilities of Bear Stearns be recorded at
their estimated fair value as of the date of acquisition.
The unaudited pro forma combined financial information is presented for
illustrative purposes only and does not indicate the financial results of the
combined company had the companies actually been combined at the beginning of
the period presented, nor is it indicative of the results of operations in
future periods or the future financial position of the combined company. In
addition, as explained in more detail in the accompanying notes to unaudited
pro forma combined financial information, the resulting extraordinary gain
reflected in the unaudited pro forma combined financial information is subject
to adjustment. Bear Stearns is a broker-dealer, and many of the assets and
liabilities on its consolidated balance sheet are financial assets carried at
fair value, or are short-term in nature. For those that are short term in
nature, the carrying value approximates fair value. For purposes of these
unaudited pro forma combined financial statements no valuation adjustments were
applied to Bear Stearns' assets and liabilities carried at fair value or those
which are short-term in nature, except for
5
adjustments to reflect JPMorgan Chase credit spreads on trading liabilities and
long-term debt. The adjustments included in these unaudited pro forma combined
financial statements are preliminary and may be revised. The fair value of Bear
Stearns' pro forma net assets at November 30, 2007 is estimated to be $10.3
billion, which exceeds the estimated $1.4 billion purchase price. This results
in negative goodwill. In accordance with U.S. GAAP, nonfinancial assets that
are not held for sale, such as Bear Stearns' premises and equipment, and other
intangibles, were written down against the negative goodwill. Upon consummation
of the merger, any negative goodwill remaining after writing down nonfinancial
assets will be recognized as an extraordinary gain. For further information,
see Note 3 to these unaudited pro forma combined financial statements. After
completing a fair value analysis of Bear Stearns' assets and liabilities as of
the closing date, the final allocation of negative goodwill to nonfinancial
assets and the amount of the extraordinary gain will be determined. The final
purchase accounting adjustments may be materially different from the unaudited
pro forma adjustments presented in this document.
Note 2--Reporting Reclassifications
Income Statement
1 - Adjustment to reclassify Bear Stearns' mortgage servicing fees and
advances from investment banking fees into mortgage fees and related
income to conform to JPMorgan Chase's classification.
2 - Adjustment to reclassify Bear Stearns' merchant banking revenue from
investment banking fees into principal transactions revenue to conform
to JPMorgan Chase's classification.
3 - Adjustment to reclassify Bear Stearns' changes in the fair value of
mortgage servicing rights from principal transactions revenue into
mortgage fees and related income to conform to JPMorgan Chase's
classification.
4 - Adjustment to reclassify JPMorgan Chase's brokerage commissions from
asset management, administration and commissions into brokerage
commissions to conform to the combined JPMorgan Chase classification.
5 - Adjustment to reclassify Bear Stearns' asset management income from
asset management and other income into asset management, administration
and commissions to conform to JPMorgan Chase's classification.
6 - Adjustment to reclassify Bear Stearns' other income from asset
management and other income into other income to conform to JPMorgan
Chase's classification.
7 - Adjustment to reclassify Bear Stearns' commissions income into brokerage
commissions income to conform to the combined JPMorgan Chase
classification.
8 - Adjustment to reclassify Bear Stearns' information technology consultant
expense from technology, communications and equipment expense into
professional & outside services to conform to JPMorgan Chase's
classification.
9 - Adjustment to reclassify JPMorgan Chase's brokerage commission expense
from professional & outside services into floor brokerage, exchange and
clearance expense to conform to the combined JPMorgan Chase
classification.
10 - Adjustment to reclassify Bear Stearns' impairment of goodwill and
specialist rights into other expense to conform to JPMorgan Chase's
classification.
11 - Adjustment to reclassify Bear Stearns' amortization of intangibles from
other expense into amortization of intangibles to conform to JPMorgan
Chase's classification.
Balance Sheet
1 - Adjustment to reclassify Bear Stearns' cash segregated in compliance
with federal regulations from cash and securities deposited with
clearing organizations or segregated in compliance with federal
regulations into cash and due from banks to conform to JPMorgan Chase's
classification.
6
2 - Adjustment for the timing difference between Bear Stearns' intercompany
balances as of November 30, 2007 and JPMorgan Chase intercompany
balances as of December 31, 2007.
3 - Adjustment to reclassify Bear Stearns' cash and securities deposited
with clearing organizations from cash and securities deposited with
clearing organizations or segregated in compliance with federal
regulations into other assets to conform to JPMorgan Chase's
classification.
4 - Adjustment to reclassify Bear Stearns' collateralized agreements:
securities purchased under agreements to resell into federal funds sold
and securities purchased under resale agreements to conform to JPMorgan
Chase's classification.
5 - Adjustment to reclassify Bear Stearns' financial instruments owned, at
fair value into trading assets to conform to JPMorgan Chase's
classification.
6 - Adjustment to reclassify Bear Stearns' financial instruments owned and
pledged as collateral, at fair value into trading assets to conform to
JPMorgan Chase's classification.
7 - Adjustment to reclassify Bear Stearns' receivables: customers, and
interest and dividends into accrued interest and accounts receivable to
conform to JPMorgan Chase's classification.
8 - Adjustment to reclassify Bear Stearns' accounts receivable and fees
receivable from other assets into accrued interest and accounts
receivable to conform to JPMorgan Chase's classification.
9 - Adjustment to reclassify Bear Stearns' receivables: brokers, dealers and
others into brokerage receivables to conform to the combined JPMorgan
Chase classification.
10 - Adjustment to reclassify JPMorgan Chase's brokerage-related receivables
from other assets into brokerage receivables to conform to the combined
JPMorgan Chase classification.
11 - Adjustment to reclassify Bear Stearns' goodwill from other assets into
goodwill to conform to JPMorgan Chase's classification.
12 - Adjustment to reclassify Bear Stearns' mortgage servicing rights from
other assets into mortgage servicing rights to conform to JPMorgan
Chase's classification.
13 - Adjustment to reclassify Bear Stearns' intangibles from other assets
into all other intangibles to conform to JPMorgan Chase's classification.
14 - Adjustment to reclassify Bear Stearns' assets of variable interest
entities and mortgage loan special purpose entities: mortgage
securitization; and collateralized debt and loan obligations into
trading assets to conform to JPMorgan Chase's classification.
15 - Adjustment to reclassify Bear Stearns' assets of variable interest
entities and mortgage loan special purpose entities: employee funds; and
energy investments into other assets to conform to JPMorgan Chase's
classification.
16 - Adjustment to reclassify Bear Stearns' collateralized financings:
securities sold under agreements to repurchase into federal funds
purchased and securities sold under repurchase agreements to conform to
JPMorgan Chase's classification.
17 - Adjustment to reclassify JPMorgan Chase's securities loaned from federal
funds purchased and securities sold under repurchase agreements into
securities loaned to conform to the combined JPMorgan Chase
classification.
18 - Adjustment to reclassify Bear Stearns' collateralized financings:
securities loaned into securities loaned to conform to the combined
JPMorgan Chase classification.
19 - Adjustment to reclassify Bear Stearns' collateralized financings: other
secured borrowings into other borrowed funds to conform to JPMorgan
Chase's classification.
20 - Adjustment to reclassify Bear Stearns' unsecured borrowings: commercial
paper from unsecured short-term borrowings into commercial paper to
conform to JPMorgan Chase's classification.
21 - Adjustment to reclassify Bear Stearns' unsecured borrowings: bank loans;
medium term notes; and other unsecured borrowings from unsecured
short-term borrowings into other borrowed funds to conform to JPMorgan
Chase's classification.
7
22 - Adjustment to reclassify Bear Stearns' financial instruments sold, but
not yet purchased, at fair value into trading liabilities to conform to
JPMorgan Chase's classification.
23 - Adjustment to reclassify Bear Stearns' payables: customers, and interest
and dividends into accounts payable, accrued expense and other
liabilities to conform to JPMorgan Chase's classification.
24 - Adjustment to reclassify Bear Stearns' payables: brokers, dealers and
others into brokerage payables to conform to the combined JPMorgan Chase
classification.
25 - Adjustment to reclassify JPMorgan Chase's brokerage-related payables
from accounts payable, accrued expense and other liabilities into
brokerage payables to conform to the combined JPMorgan Chase
classification.
26 - Adjustment to reclassify Bear Stearns' accrued employee compensation and
benefits into accounts payable, accrued expense and other liabilities to
conform to JPMorgan Chase's classification.
27 - Adjustment to reclassify Bear Stearns' other liabilities and accrued
expenses into accounts payable, accrued expense and other liabilities to
conform to JPMorgan Chase's classification.
28 - Adjustment to reclassify Bear Stearns' liabilities of variable interest
entities and mortgage loan special purpose entities into beneficial
interests issued by consolidated variable interest entities to conform
to JPMorgan Chase's classification.
29 - Adjustment to reclassify Bear Stearns' junior subordinated deferrable
interest debentures from long-term debt into junior subordinated
deferrable interest debentures held by trusts that issued guaranteed
capital debt securities to conform to JPMorgan Chase's classification.
Note 3--Unaudited Pro Forma Adjustments
The unaudited pro forma combined financial information reflects (1) the
issuance of 24,581,000 shares of JPMorgan Chase common stock with an aggregate
value of $1.1 billion and (2) the conversion of approximately 27,213,792 of
Bear Stearns employee stock awards, other than stock options, expected to be
vested for accounting purposes into JPMorgan Chase employee stock awards
following the merger consummation date with an estimated fair value of $261
million at November 30, 2007. Bear Stearns vested employee stock options had no
impact on the purchase price, as the exercise price of these options
significantly exceeds the closing price of the Bear Stearns common stock on
March 28, 2008, and since completion of the merger will not constitute a change
in control under the provisions of the stock option plan.
In connection with the amendment to the merger agreement, JPMorgan Chase
entered into a share exchange agreement under which JPMorgan Chase will acquire
95 million newly issued shares of the Bear Stearns common stock, or 39.5% of
the outstanding common stock after giving effect to the issuance, at the same
price as provided in the merger agreement.
(in thousands) Bear Stearns
- -------------- --------------------------------
Issued Treasury Net Outstanding
------- -------- ---------------
Shares issued and outstanding prior to the
merger 184,806 (71,807) 112,999
Shares exchanged per the Share Exchange
Agreement/(1)/ 95,000 -- 95,000
------- ------- -------
Shares issued after the share exchange 279,806 (71,807) 207,999
Retirement of shares issued to JPMorgan
Chase in connection with the share exchange (95,000) (95,000)
Treasury shares cancelled in connection with
the merger (71,807) 71,807 --
------- ------- -------
Shares converted into JPMorgan Chase shares
based on the exchange ratio of 0.21753/(2)/ 112,999 -- 112,999
------- ------- -------
- --------
(1)Represents JPMorgan Chase's acquisition of a 39.5% interest by the exchange
of 95 million Bear Stearns common shares for approximately 21 million
JPMorgan Chase common shares under the Share Exchange Agreement.
(2)Represents JPMorgan Chase's acquisition of 100% of Bear Stearns' shares by
the conversion of all outstanding shares into shares of JPMorgan Chase under
the merger agreement.
(in millions, except per share amounts) December 31, 2007
- --------------------------------------- ----------------
Purchase price
Bear Stearns common stock exchanged as of November 30, 2007
(in thousands) 112,999
Exchange ratio 0.21753
--------
JPMorgan Chase common stock to be issued (in thousands) 24,581
Average purchase price per JPMorgan Chase common share/(1)/ $ 45.26
--------
$1,112
Fair value of employee stock awards 261
------
Total purchase price 1,373
Net assets to be acquired
Bear Stearns common stockholders' equity $ 11,441
Bear Stearns goodwill and other intangible assets (89)
Adjustments to reflect assets to be acquired at fair value
8
Other assets (1,136)
Amounts to reflect liabilities assumed at fair value:
Trading liabilities (307)
Long-term debt 435
------
10,344
Negative goodwill resulting from the merger (8,971)
Negative goodwill allocated to nonfinancial assets/(2)/ 605
-------
$(8,366)/(3)/
=======
- --------
(1)The value of JPMorgan Chase common stock was determined by averaging the
closing prices of JPMorgan Chase common stock for four trading days during
the period March 19, 2008 through March 25, 2008.
(2)Reflects the allocation of excess fair value of net assets acquired over the
purchase price which is first used to reduce nonfinancial assets as required
by SFAS 141.
(3)JPMorgan Chase and Bear Stearns entered into an agreement to merge on
March 16, 2008 and amended the agreement on March 24, 2008. Pursuant to the
amended merger agreement each share of Bear Stearns common stock outstanding
immediately prior to the merger will be exchanged for 0.21753 shares of
JPMorgan Chase common stock. The consummation of the merger is subject to
satisfaction of certain closing conditions including the approval of the
merger agreement by the majority of Bear Stearns' stockholders.
The purchase price allocation presented in the table above reflects valuations
as of November 30, 2007 (Bear Stearns' fiscal year-end). Such allocation does
not reflect the effect on inventory valuations of market disruptions and the
liquidity crisis encountered by Bear Stearns subsequent to February 29, 2008,
merger integration costs and restructuring actions that may be necessary as a
result of the merger, or costs likely to be incurred by Bear Stearns to delever
its balance sheet prior to the closing of the merger. JPMorgan Chase expects
that these items will significantly reduce the negative goodwill to be
recognized at the merger date and the combined stockholders' equity of the two
firms. JPMorgan Chase currently estimates the range of adjustments not
reflected in the purchase price allocation presented above to be approximately
$3 billion to $5 billion after-tax. The amounts realized at the merger date
could differ materially from this estimate depending on market conditions.
9
The pro forma adjustments included in the unaudited pro forma combined
financial information for JPMorgan Chase and Bear Stearns as of and for the
year ended December 31, 2007, and November 30, 2007, respectively, are as
follows:
(A) Adjustment to decrease the fair-value of Bear Stearns' long-term debt.
The adjustment will be recognized over the weighted average remaining life of
the long-term debt instruments of 4.49 years. The impact of the adjustment was
an increase in pro forma pretax interest expense of $186 million for 2007.
(B) Adjustment to reduce occupancy expense and technology, communications
and equipment expense for depreciation related to nonfinancial assets written
down by the allocation of negative goodwill.
(C) Adjustment to reverse Bear Stearns' impairment charge related to
goodwill and specialist rights.
(D) Assumes that Bear Stearns preferred stock will become preferred stock of
a subsidiary of the combined Firm, and shown in other liabilities as minority
interest. The related dividends on the preferred stock is recorded in other
expense.
(E) Adjustment of $61 million to record the tax effect of the pro forma
combined adjustments using a federal tax rate of 35%.
(F) Average shares were calculated using the historical weighted average
shares outstanding of JPMorgan Chase and Bear Stearns for the year ended
December 31, 2007 and November 30, 2007, respectively, adjusted using the
exchange ratio. Earnings per share data have been computed based on the
combined historical income of JPMorgan Chase and Bear Stearns, and the impact
of purchase accounting adjustments.
(G) Adjustment to eliminate intercompany deposits.
(H) Concurrent with the closing of the merger, the New York Fed will take,
through a limited liability company formed for this purpose, control of a
portfolio of $30 billion in assets of Bear Stearns, based on the value of the
portfolio as of March 14, 2008. The assets will be funded by a $29 billion,
10-year term loan from the New York Fed, and a $1 billion, 10-year subordinated
note from JPMorgan Chase. The JPMorgan Chase note is subordinated to the New
York Fed loan and will bear the first $1 billion of losses associated with the
assets. Any funds remaining after payment of the New York Fed loan, the
JPMorgan Chase note and other expenses of the Limited Liability Company, will
be paid to the New York Fed.
(I) Adjustment to eliminate intercompany derivatives used for trading
purposes.
(J) Adjustment to net JPMorgan Chase trade date payables with net Bear
Stearns trade date receivables.
(K) Adjustment to write off Bear Stearns nonfinancial assets in accordance
with SFAS 141-"Business Combinations" as a result of allocating negative
goodwill.
(L) Adjustment to write off historical Bear Stearns goodwill and intangible
assets.
(M) Adjustment to fair value Bear Stearns stock exchange memberships and
seats.
(N) Adjustment to other assets represents a reduced net deferred tax asset
of $304 million resulting from the pro forma adjustments. Deferred taxes were
recorded using a federal tax rate of 35%.
(O) Adjustment to reflect the difference in the observable credit spread
related to JPMorgan Chase and Bear Stearns. The observable credit spread is an
indicator of the respective firm's credit quality. This debit valuation
adjustment ("DVA") modification reflects the enhancement in credit quality
resulting from applying the JPMorgan Chase's credit spread to the Bear Stearns
liabilities.
(P) Adjustment to eliminate Bear Stearns' historical stockholders' equity.
The adjustment also reflects JPMorgan Chase common stock to be issued to Bear
Stearns stockholders and the exchange of Bear Stearns vested stock options,
vested restricted stock units and Cap units for corresponding JPMorgan Chase
awards.
(Q) Adjustment to record the extraordinary gain resulting from the merger.
The extraordinary gain does not reflect the effect on inventory valuations of
market disruptions and the liquidity crisis encountered by Bear Stearns
subsequent to February 29, 2008, merger integration costs and restructuring
actions that may be necessary as a result of the merger, or costs likely to be
incurred by Bear Stearns to delever its balance sheet prior to the closing of
the merger. JPMorgan Chase expects that these items will significantly reduce
the negative goodwill to be recognized at the merger date and the combined
stockholders' equity of the two firms. JPMorgan Chase currently estimates the
range of adjustments not reflected in the purchase price allocation presented
above to be approximately $3 billion to $5 billion after-tax. The amounts
realized at the merger date could differ materially from this estimate
depending on market conditions.
10