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Stock Analyst Update

Chase, J.P. Morgan Union a Marriage of Necessity

The firms should be stronger together, but integration risk is high.

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After years of waiting for the bank to put a big merger together, longtime Chase shareholders are probably relieved by Chase Manhattan's (CMB) $36 billion deal for J.P. Morgan (JPM). But integration risk with this deal is high, and prospective investors may be wise to hold off on buying Chase shares for now.

Under the terms of the deal, Chase has agreed to exchange 3.7 shares of its stock for each outstanding share of J.P. Morgan. Based on Chase's closing stock price yesterday, the deal is worth $207 per share. The deal price--about 17 times earnings--is in line with what other acquirers have been paying for large investment banks, including last month's Credit Suisse  (CSGKY) combination with Donaldson, Lufkin & Jenrette (DLJ). Chase is paying a slight premium, however, presumably for J.P. Morgan's powerful brand name, which it plans to keep. The combined company will be called J.P. Morgan Chase & Co., with the firm using the J.P. Morgan name for its institutional business, and Chase for its retail efforts.

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