Freeport-McMoRan:

Financing an Acquisition
Group Member
Ling Kuang FIN1709249
Lin Xiyu FIN1709243
Eugene Lee FIN1704079
Chen Weicheng FIN1709063
Guo Lingkai FIN1709116
 PART 01
Introduction
PART 02
Question 1 -7
PART 03
Conclusion
Introduction
Introduction

1. Freeport-McMoRan’s acquisition of Phelps Dodge created the world’s

largest publicly traded copper company.

2. JPMorgan and Merrill Lynch advised the acquirer and arranged $17.5 billion
in debt financing and $1.5 billion in credit facilities.

3. Two firms underwrote $5 billion in equity capital through simultaneous

offerings of Freeport-McMoRan common shares and mandatory convertible
preferred shares.
QUESTION 1&2
Question 1

Why do you think JPMorgan and Merrill Lynch were selected to underwrite and
book-run all $23.3 billion in financings (all debt, common stock, and convertible),
instead of sharing the underwriting with additional firms?

• Due to JPMorgan and Merrill Lynch had positive reputations after they both
ranked highly in convertibles and common stock underwriting. Therefore, they
have well-established ties to FCX.

• Also, these two firms agreed to issue a bridge loan to FCX prior to the
acquisition.
Question 2

What was the role of the leveraged finance group at JPMorgan and why was its
involvement important to the acquisition?

• The leveraged finance group was responsible for the analysis behind making the
bridge financing commitment to FCX.

• It was important to the acquisition because the bridge loan enabled FCX to show
Phelps Dodge that they were committed to financing them.
Describe the forms of risk that an investment
bank must consider in relation to acquisition and
underwriting transactions. Describe what it
means for a firm to set aside capital when it
completes underwriting transactions.
FORMS OF RISK
Reputation Risk
It is important that the bank consider the
quality of the companies it represents. If a
company has had or is expected to have
serious problems, an investment bank’s
Capital Risk “brand” can be negatively affected, making
reputation risk an important consideration.

Each time a bank agrees to fund an acquisition

through an underwriting financing, it is responsible
for arranging road shows and then for persuading
investors to
subscribe to the offering. When the process does
not go well and can not attract investors, the bank
will face the capital risk.
SET ASIDE CAPITAL

A firm sets aside capital when it takes on an underwriting risk

position. Setting aside capital means placing cash in a risk-free
security
• If the firm bears market risk , the capital set aside could be significant.

• If the issuer bears market risk, the firm still bears a small amount of risk,
for which it must set aside a small amount of capital
Describe the role and importance of credit rating
agencies in the Freeport-McMoRan transaction.
Which group within an investment bank has the
primary responsibility to work with companies
regarding rating agency considerations?
THE ROLE AND IMPORTANCE

• Determining the credit rating associated with the post-acquisition

capital structure of FCX

• Affecting valuation of the company’s stock and return on equity

RATING AGENCY GROUP

• Advising corporate clients regarding the probable rating decision

resulting from alternative financing structures.

• Working closely with both the high-grade and leverage-loan teams

within debt capital markets.
Describe the role of equity research at JPMorgan in the
transaction.
How has the role of equity research changed since 2003?
The Role of
equity research at JPMorgan in the transaction

Michael Gambardella, the metals and mining industry analyst in JPMorgan‘s equity research team,
was ”RESTRICTED“ from providing an investment opinion on shares of FCX because JPMorgan had
acted as an advisor on the M&A transaction and therefore had inside information.

Gambardella was able to meet with JPMorgan's institutional sales force to provide an overview of the
equity and convertible offerings and answer questions. He was NOT, however, allowed to express an
opinion on the pricing for these offerings.
Since 2003
Opinion was Following an April 2003 SEC enforcement action
against major investment banks, equity researchers have been
completely walled off from investment bankers. Bankers
CANNOT pay research professionals any compensation.
Researchers CANNOT join bankers in pitches to clients or Even
talk with bankers without a "referee" present.
Further, they are NOT allowed to write research or suggest
what their research opinion may be with regard to a specific
company that is under an investment-banking mandate.

Before 2003, equity researchers frequently joined investment

bankers in soliciting mandates, and they committed to writing
research if an equity transaction was book-run by their firm.
Who are the clients of the institutional sales team at JPMorgan?
What is meant by a “limit order,” and what is its impact on the sales
function?
Describe the role of an Equity Capital Markets Syndicate group.
Clients
of JPMorgan

Mutual Funds Hedge Funds Pension Funds Insurance

companies

Other Large
institutional
investors
Limit Order
Definition

A limit order is the use of a pre-specified price to

buy or sell a security.
Limit Order
Impact

Sales Process
More Difficult
the Role of
an Equity Capital Markets Syndicate Group

An equity syndicate refers to a group of

investors who come together to determine
the price and sell new IPOs to the public.

the Role of an ECMS Group

The Equity Capital Markets Syndicate group
coordinates with sales force management to
decide among investors when demand exceeds
supply, and when limit orders are provided by
large potential investors. Ultimately, this group
decides the price range at which the security is
offered and the final price at which the security
will be sold.
Assume the following fees were paid:
Merger and Acquisition fee 0.5% of the transaction values.
Debt fees of 0.753% on all debt and loan financing.
Equity fees of 3% on all equity and convertible financing.
Calculate the estimated total fees for both JPMorgan and Merill Lynch.
Indicate whether you think these fees were justifies and support your
views.
Question 7
Our group think all of these fees were were represent paying for risk
and commissions, and it were justifies and fair.

1.Because there was a extensive amount of risk, both banks

completed successfully.
2. It is a long process of acquiring another business and what goes
into these process, to ensure it is accomplish without error. And the
process of executing an acquisition is complex and cumbersome.

M&A fee = 0.005＊(25.9B total price of

acquisition) = 129.5M (M=Million, B=Billion)
Debt fee = 0.0075＊(23.3B underwriting) =
174.75M
Equity fee = 0.03＊(2.9B + 2.9B equity earned
from stocks by March 22) = 174M
Total fees = 129.5M + 174.75M + 174M =
478.25M
Conclusio
n During the 1990s and 2000s the price of copper was low and thus keeping a
low price was a priority for Freeport-McMoRan.

But with the sudden increase in the price of copper around 2006, they decided
that they needed a performance management system to make mine copper
more efficiently during this period.

Then they created an easy to use web-based performance management

system that the employees could use from home.

This system turned out to work very well and was recognized by Newsweek
and the earnings surprised even Wall Street analysts. It helped the company
organize themselves and keep their goals relevant to their employees.
 THANK
GUIDANCE