JP Morgan's acquisition of Bear Stearns for $10 a share in May 2008 produced an added bonus for the bank in the shape of the energy trading business Bear Energy.
The merger of JP Morgan and Bear Stearns was concluded on May 30, 2008, by which time the integration of Bear Energy and JP Morgan's commodities business was well under way. Formed in 2006, Bear Energy was an intermediary for natural gas producers, power generation companies, private equity and hedge funds, and other merchants. In November 2007, Bear Energy purchased the power assets of Williams Power Company. As part of the $496m deal, Bear acquired a portfolio of power and natural gas contracts, chief among them being six tolling agreements covering 17 power plants and comprising 7,443 mega watts (MW) of generation portfolio and five full requirements power contracts totaling 1,800MW.
As such, Bear Energy represented a significant addition to JP Morgan's commodity business. "At the start of this year, one of the stated objectives that we had from a strategic perspective at JP Morgan was to acquire a physical power and gas shop," explains Catherine Flax, co-head of JP Morgan's global energy business.
"We had actually previously looked very hard at Bear Energy from a distance, but Bear Stearns, rightly so, viewed it as a jewel in its crown and wasn't very interested in parting with it. So, this was really the fulfillment of an ambition that fell into our laps in a way that was very surprising to us at that point," says Flax.
In the first few weeks after the merger, the JP Morgan global commodities team worked to identify key leadership positions, communicate the details of the merger to all clients and integrate the two companies' systems and processes.
Paul Posoli, the other co-head of JP Morgan's global energy business and formerly president of Bear Energy, says: "From an integration standpoint, the biggest challenge was legal entity merger. You can imagine the number of groups involved in that process: from commercial, making sure our clients were aware of the objective to move to the JP Morgan name; and then operationally in terms of having two systems and needing to migrate to one.
"We targeted September 1, 2008 to finish this process and we made that goal. So it was definitely a success."
The combined entity now has consolidated legal documents, shared trading books, a common client list and is using JP Morgan's risk management procedures.
Posoli adds that the next big step will be moving on to one IT system, since two different technology platforms are currently in operation. This is due to be completed in mid-2009.
According to Flax, two main elements contributed to the success of the merger. Firstly, JP Morgan's experience in terms of the logistics of integration allowed for a framework to be put in place very quickly that brought all the individual pieces of the merger together. She continues: "Having that structure around us allowed Paul and I to focus on the other very important piece of this integration: the people, their roles and how to quickly integrate the cultures so people understand the mission of this now much larger organisation."
As a result of the merger, JP Morgan has added a significant physical platform to its financial presence in the energy sector. "At the time of the merger, Bear Energy was managing over 9,000MW of generation, we had 2 billion cubic feet (bcf) a day of gas purchases and sales, we had 1bcf of transportation capacity and a very established national presence," says Posoli. "JP Morgan had a very strong market-making presence in financial and derivative products with tremendous client reach. In combining these two entities, there actually wasn't too much duplication."
Under federal legislation, commercial banks have traditionally been restricted from owning and operating power industry assets, however JP Morgan has been granted a five-year exemption to this and a fully permanent solution is expected.
"The areas of focus were different coming in, but the cultures were very similar," Posoli says. "And probably the most important thing is that we both had the same goal of being the leading intermediary in the commodity space. Now we are in a situation where that is being achieved."