Question 1: Summarise the events (in the mergers and acquisition

landscape in the US mining industry) leading up to the November 2006

announcement by Freeport-McMoRan that it will acquire Phelps Dodge.
(1.5 marks)
These two merger candidates came together only after a tumultuous series of
events in the merger and acquisition (M&A) landscape within the mining industry.
Just month earlier in June 2006, Phelps Dodge announced a three way merger
between itself and two Canadian mining companies, Inco and Falconbridge, for
56 billion. At the time this would have created the world largest Nickel producer
and largest publicly traded copper producer. J. Steven Whisler, CEO of P.D made
the following proclamation at the time of the announced merger:
This transaction represents a unique opportunity in a rapidly consolidating
industry to create a global leader based in North America - home of the world's
deepest and most liquid capital markets. The combined company has one of the
industry most exciting portfolio of development project, and the scale and
management expertise to pursuit development successfully. The creation of
this new company give us the scale and diversification to manage cyclicality,
stabilise earning and increase shareholder returns. At the same time we are
committed to maintaining and investment graded credit rating throughout the
business cycle.
The PD announcement came months into F implementation of a poison pill
defence in an ongoing attempt to protect itself for a takeover by Swiss mining
giant X, which had accumulated more than 20% of F stock. Eventually the
attempted combination between PD, I, F fell apart after X upped its bid for F,
causing F board of directors to accept this high bid and reject PD and I.
As the event with X unfolded, (CVRD are a Brazilian mining company made an
unsolicited all-cash offer for I of C$86 per share; PD on the other hand had made
a partial- equity bid of C$86.89. In spite of the lower price, analysts prophetically
suggested that investors would favour the all-cash bids of CVRD at the time. By
early Sep PD and I had decided to go their separate way, and CVRD soon claimed
victory in acquiring I. Having been left at the altar twice now, analysts predicted
the PD could soon find itself transform from a bidder to a target in the dealmaking that has engulfed the global mining industry.
Whisler attempted to reassure his investor base when his company announced
that it was terminating its combination agreement with I:
We are very confident about the prospect of PD. The market fundamentals for
copper and molybdenum are excellent. And at current price we are generating
significant amount of cash. Throughout the past several months, management
and the board had focused on our fundamental responsibility to build long-term
value for all our shareholders while managing our balance sheet prudently and
maintaining investment rate credit in this cyclical industry. While we regret the
propose three way combination could not be completed on acceptable term, the
future of PD remains very bright.

Assess Phelps Dodges operating and financial performance in 2006 by

reference to relevant financial ratios and performance indicators that
you have calculated*. Suggest some reasons (economic rationale) why
Phelps Dodge was an attractive target for acquisition by other players
(FreeportMcMoRan for example) at that time.
Q2. [4 marks] Identify JPMorgans and Merrill Lynchs involvement in
the merger transaction prior to the announcement. (1 mark)
An initial step in this financing was the joint commitment by JP and ML to a
combined $6 bil dollars bridge loan prior to approval of the merger.
JP and ML jointly underwrote the note offering and term loan and led the credit
facility.
FCX's two equity-related transaction (common stock and mandatory convertibles
preferred) was led by JM and ML as joint book runners. The two firms equally
share fee and league table credit for the transaction. Each
Inside the wall
Prior to the public announcement of the transaction surrounding the merger, the
investment banking coverage team at JP AND ML was actively coordinating the
entire process, from the acquisition to all aspect of the capital raising. The metals
and mining industry coverage team at each bank was primarily responsible for
knowing FCX's general need and priority. For there, each bank's M&A group was
responsible for advising the company on merger valuation, mix of cash and
stock, timing and likely shareholder reaction. The leverage finance group at each
bank was responsible for the analysis behinds making the bridge financing
commitment to the company ( which was never drawn down because the bank'
successfully placed high-yield notes with intuitional investor). The bridge loan
was particularly important to enable FCX to show committed financing to PD.
The equity capital market group at JP and ML were responsible for all aspect of
the equity offering: advising the company regarding the optimal structure, size,
pricing and timing of the financing, as well as working with colleagues in their
firm institutional equity sale area to determine potential investor interest.
Identify the tasks that the two investments undertook to do following
the announcement to guide the acquisition to a successful conclusion.
(1 mark)
Describe (giving details) any significant risks in their undertaking for
the investment banks. (2 marks)
The two main forms of risk that an investment bank faces with acquisition and
underwriting transactions are Capital risk and Reputation risk. Capital risk is the
financial risk associated with a banks financing commitment in relation to an
acquisition. This risk becomes considerable if the investment bank commits to

providing loan; therefore 90% of these loans are syndicated to a wider group of
banks and money managers to mitigate this risk.
However, due to the severe dislocation in the mortgage back securities market in
mid 2007, a significant degree of credit risk was reported as syndicating loans
became difficult. Thus, banks set aside capital, such as cash investing in risk free
securities with the risk they undertake in underwriting and lending commitments.
Reputation risk is the risk that comes from associating the investment banking
firm with the company for which it is raising capital. Any problems or damages
involving to the company will cause negative effects on the investment banks
reputation. When a firm sets aside capital it invest moneys in risk-free securities
based on the amount of risk they are assuming with their underwriting activities.
Q3. [4 marks] Why do you think JPMorgan and Merrill Lynch were
selected to perform the tasks identified in Q2 instead of sharing the
tasks with other investment banks? (2 marks)
Companies usually choose investment bank (or banks) for underwriting because
of different reasons such as execution capability, independent research function
and league table ranking. However, over the time, existing relationships become
the main focus in addition to these reasons and that was why Freeman-McMoran
Copper and Gold (FCX) chose JP Morgan and Merrill Lynch. FCXhad wellestablished ties to both investment banks. Also, there would not be any doubts
about reputation of these 2 investment banks and their positions in the league
tables. JPMorgan was number one for both the issuance of common stock and
convertible stocks with 23.9% market share and nearly $6 billion in proceeds
from convertible issuance while Merrill Lynch was ranked third in U.S convertible
at the end of 1Q07 with nearly $4 billion, a 15.8% market share. Beside this, FCX
has received financing commitments from JPMorgan and Merrill Lynch to fund the
cash required to complete the transaction. JP Morgan and Merrill Lynch
committed to funding the transaction, so should they fall short in the market the
banks were willing to make up the difference to ensure the required amount of
capital was obtained
What was the role of the leveraged finance group at JPMorgan and why
was its involvement important to the acquisition? (1 mark)
There was a $6-billion bridge loan prior to approval of the merger. Financing of
$17.5 billion in Debt financing on March 15, including $6 billion in high-yield
senior notes offered in the public debt market (the bridge loan would be drawn
down only if this public offering failed) The leveraged group at JPMorgan has its
responsibility for the analysis behind making the bridge financing commitment to
the company (which was never drawn down because the banks successfully
placed high-yield notes with institutional investors). Its involvement was
important to the acquisition because the bridge loan was essential to enable FCX
to show committed financing to Phelps Dodge.

Explain what it means for a firm to set aside capital when it completes
underwriting transactions. (1 mark)
Banks set aside capital (usually cash invested in risk-free securities)
commensurate with the risk they undertake in their underwriting and lending
commitment. Reputation risk is less tangible but no less important. This is the
risk that come from associating the investment banking firm with the company
for which it is raising capital. Serious problems experienced by the company may
have a residual effect on the investment bank reputation.
Q4. [4 marks] Which group within an investment bank has the primary
responsibility to work with companies regarding rating agency
considerations? How important are the credit rating agencies in the
Freeport-McMoRan transaction? (2 marks)
Rating advisory professionals who were part of the debt capital market group at
JP advised the company on the credit rating process and the expected rating
outcomes based on the selected capital structure.
Credit rating agencies assessed the risk of lending to Freeport-McMoRan. In
theory they are an independent entity that considers all the factors relating to
Freeport-McMoRans credit risk and then give them a rating based on their own
scales. The importance of credit rating agencies is that many investors use their
ratings to determine a business risk level, and set their required rates of return
accordingly. A higher credit rating should reduce the return demanded by a
potential investor. The group within an investment bank whose primary
responsibility is working with companies regarding their credit rating is the Debt
Capital Markets group.
Describe the role of an Equity Capital Markets Syndicate group. How
has the role of equity research changed since 2003? (1 mark)
Investopedia

A market that exists between companies and financial institutions that is used to raise
equity capital for the companies. Some activities that companies operate in the equity
capital markets include: overall marketing, distribution and allocation of new issues; initial
public offerings, special warrants, and private placements. Along with stocks, the equity
capital markets deal with derivative instruments such as futures, options and swaps.

INVESTOPEDIA EXPLAINS 'EQUITY CAPITAL MARKET - ECM'

Equity capital markets are very dependent on the information provided by companies
regarding their current financial situations and estimates of future performance. Equity
capital market teams from different investments banks are responsible for helping
companies execute primary market transactions by managing the structure, syndication,
marketing and distribution.

...
ECM was responsible for all aspects of the equity offering: advising the company
regarding the optimal structure, size, pricing and timing of the financing as well
as with working with colleagues in their firm institutional equity sale area to
determine potential investor interest.
2002 saw the enactment of the Sarbanes-Oxley Act (SOX) in the wake of high
profile conflict-of-interest breaches. Information barriers, a.k.a. Chinese Walls,
were more rigorously enforced. By 2003 most major financial institutions had
implemented SOX compliance. As JPMorgan was involved as an advisor to FCX on
the acquisition (i.e. inside the Wall) the company was prohibited from providing
investment opinion on the shares (p. 487), which would normally be Equity
Researchs prime function and a function that should be outside the Wall to avoid
allegations of insider trading. Equity research analysts in banks facing this
potential conflict of interest could also be used as a resource to provide technical
information on financial instruments, i.e. overviews on how the instruments work
and how they can be used in capital raising, without supplying an opinion on the
offerings of individual clients. This way they could still use a part of their
expertise to add value to the bank without breaching regulations
What is meant by a limit order, and what is its impact on the sales
function? (1 mark)
A limit order is an order to buy a security at no more than a specific price, or to
sell a security at no less than a specific price. This gives the trader (customer)
control over the price at which the trade is executed. However, the order may
never be executed. Limit orders are used when the trader wishes to control price
rather than certainty of execution. A buy limit order can only be executed at
the limit price or lower. By entering a limit order rather than a market order, the
investor will not buy the stock at a higher price, but, may get fewer shares than
he wants or not get the stock at all.
Q5. [4 marks] Assess Freeport-McMorans operating and financial
performance prior to, and following the merger, by reference to
relevant financial ratios and performance indicators that you have
calculated**. (2 marks)