J.P. Morgan took center stage Wednesday when it agreed to be acquired by Chase Manhattan. The news has ignited a bevy of questions regarding the actions, if any, to be taken by Foolish Four investors who hold J.P. Morgan in their portfolios. Mechanical investors should stick to the rules for when to buy and sell.
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In defiance of the ho-hum environment surrounding the Foolish Four's traditionally stodgy stocks, J.P. Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> took center stage Wednesday, as the 162-year-old American financial institution agreed to be acquired by Chase Manhattan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CMB)") else Response.Write("(NYSE: CMB)") end if %>.
The all-stock deal will reward J.P. Morgan shareholders with 3.7 shares of Chase for every share of J.P. Morgan they own. The combined company will be called J.P. Morgan Chase, and will have approximately $675 billion in assets once the merger is complete.
Good old J.P. Morgan has been sitting in our portfolio for the past two years. During that time, we've witnessed the stock swerve in and out of the daily Foolish Four. After originally purchasing it on December 24, 1998 at a price of $105.51 (including prorated commission) per share, we watched it soar to $146.75 five months later, only to crash back down to $105.69 and wind up, once again, as a Foolish Four pick when we rolled over our portfolio on December 27, 1999. It's been a wild ride for sure, but one with an apparently happy ending.
The news has ignited a bevy of questions regarding the actions, if any, to be taken by Foolish Four investors who hold J.P. Morgan as part of their portfolios. Here are the answers to those questions most frequently asked.
"I began my Foolish Four portfolio in December 1999. Should I sell my JPM now and take the profits or wait until my anniversary date?"
The Foolish Four is a mechanical approach. IF you are following this method, you should stick to the rules for when to buy and sell. If you bought J.P. Morgan as part of a Foolish Four portfolio in December 1998 or 1999, you should hold it until it's time to rebalance in December 2000. Think of it as an anniversary gift.
"Is fast action on our part required here?"
Fast action is the bane of the Foolish investor. Hasty actions often wind up as mistakes. As long-term investors, Fools plan to hold, well... long-term. We avoid sudden, impulsive decisions, despite unexpected positive or negative news. An investor needs time to contemplate any information a company releases. Sometimes, a profit warning, for example, may only be for one quarter and may have no implications regarding the long-term potential of the company.
"What do you think the price range of J.P. Morgan will be for the remainder of the year?"
Egad, Fool, let me check my crystal ball!
I can see only two things for certain -- death and taxes. Everything else is unpredictable.
There's one element of this merger, however, that is somewhat predictable. It's most likely that the shares of Chase and J.P. Morgan will trade in lockstep at 3.7 to 1 until the deal is completed. Any discrepancy in this ratio would be a reflection of the market's uncertainty that the deal will actually go through.
"Why did J.P. Morgan's price drop right after the news? I thought the acquirer was supposed to go down, while the acquiree would go up?"
Good question. Next question.
It may simply be a matter of "buy on the rumor, sell on the news." Once the news was confirmed, folks who bought on speculation (or just those who were happy to see the price pop up) sold. More sellers than buyers equals lower price.
The most important thing to remember is that the day-to-day movements in price have very little to do with the underlying fundamentals of a company. It's even less of a factor for mechanically selected Foolish Four stocks. Decisions about when and what to buy are made without regard to the recent news about an individual company -- even one that is being acquired.
"What will the new ticker symbol be for J.P. Morgan/Chase? Will it still be included on the Dow?"
According to the investor relations gang at Chase, the new symbol has yet to be decided. We don't know how the Dow chaps will react, but there's a good chance it will remain in the Dow 30. After all, it's not like J.P. Morgan is selling its soul and marching into oblivion. The wholesale business of the new entity will be know globally as J.P. Morgan, while the retail business will be known as Chase.
Foolish Four investors, stick to your mechanics as the events of this business drama unfold. Enjoy being the audience applauding the actions on the investing stage.
And thank you, J.P. Morgan, for making the lives of Foolish Four investors a little cheerier.