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Market Update

Morgan Rumors Were More Than Talk

Fund manager thinks venerable bank had little choice but to sell.

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Merger rumors and takeover talk have swirled around J.P. Morgan (JPM) for weeks, including speculation that the venerable U.S. bank was about to sell out to Germany's Deutsche Bank (DTBKY).

But the latest reports, which have Morgan heading to the altar with financial conglomerate Chase Manhattan (CMB), seem the most plausible scenario so far to a mutual-fund manager who has more than 5% of his assets invested in Morgan.

Indeed, Charles Carlson, whose Strong Dow 30 fund (SDOWX) is the third-largest holder of Morgan by percent of net assets, said the company may have little choice at this point. With the stock trading at about 185 in after-hours trading Tuesday, "You're in play whether you like it or not now," Carlson said.

Failing to consummate the deal could disappoint shareholders and send the stock into a tailspin, possibly all the way down to 150, he said. "The only way out may be to get the right price and to sell out at this point," Carlson said.

Chase seems like a better match than Deutsche Bank because it would have been difficult for the tradition-bound bank of Wall Street legend J. Pierpont Morgan to sell to a foreign firm, Carlson said. In Chase, Morgan will have a partner whose roots go bank 200 years and touch American business icons such as former Chase chairman and chief executive David Rockefeller. "That may be more palatable," Carlson said.

A merger with Chase could give Morgan the size and capital that critics have said it lacks to grab a bigger share of the investment-banking business. But the deal also will bolster Chase's budding securities and money-management efforts, which include the recently acquired Hambrecht & Quist. "It may not necessarily be only about what Chase brings to Morgan," said Carlson, who thinks Morgan could sell for more than $210 per share.

Funds that own Morgan would benefit the most in the short-term if a deal were announced. Many of the funds that devote the biggest portions of their portfolios to the stock are offerings that buy the highest-yielding stocks in the Dow Jones Industrial Average (the so-called Dogs of the Dow strategy), and other value-oriented funds that buy stocks that look cheap relative to their fundamentals such as price/earnings ratios.

Large holders earlier this summer included bargain hunters Robert Torray and Douglas Eby at Torray fund (TORYX), which had nearly 5% of its assets in Morgan.

 Top Holders of J.P. Morgan by Percent of Net Assets

% of Fund

Date of
Hennessy Leveraged Dogs (HDOGX) 7.70 6-30-2000
Hennessy Balanced (HBFBX) 5.24 6-30-2000
Strong Dow 30 Value (SDOWX) 5.16 6-30-2000
Payden & Rygel Growth & Income R (PDOGX) 4.91 6-30-2000
Torray (TORYX) 4.71 6-30-2000
Willamette Value (WILVX) 4.60 6-30-2000
Orbitex Focus 30 D (OFTDX) 4.46 6-30-2000
Century Shares (CENSX) 3.84 6-30-2000
SunAmerica Dogs of Wall Street A (SDWAX) 3.82 7-31-2000
Edgar Lomax Value (LOMAX) 3.81 6-30-2000
New York Equity (NYSAX) 3.54 7-31-2000
Aetna Value Opportunity A (AVOAX) 3.41 7-31-2000
Rydex Banking Adv (RYKAX) 3.41 3-31-2000
Transamerica Premier Balanced Inv (TBAIX) 3.09 6-30-2000
Credit Suisse Instl U.S. Core Equity (BUCEX) 2.99 7-31-2000

Dan Culloton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.