FREEPORT 1. Why do you think JPMorgan and Merrill Lynch were selected to underwrite and book-run all $23.

3 billion in financings (all debt, common stock, and convertible), instead of sharing the underwriting with additional firms? JPMorgan and Merrill Lynch were selected to underwrite and book-run all of the financings because together they committed $6 billion in bridge loans and to underwrite the entire $17.5 billion in debt financing, plus $1.5 billion in credit lines. This created significant risk by aligning the interests of FCX and the two firms in terms of placing the debt and credit with other banks and institutional investors. Because this commitment was critical in facilitating the M&A transaction, FCX gave all of the book-running and M&A business to these two firms. JPMorgan and Merrill Lynch had guided FCX through the M&A pre-deal conception and the activity targeting Phelps Dodge. In addition, both firms held high positions in league tables for financings and M&A and had existing long-term relationships with FCXs management. But the key to their fee bonanza was the risky commitment to provide bridge loans if placement was not possible in the capital markets. 2. What was the role of the leveraged finance group at JPMorgan and why was its involvement important to the acquisition? The leveraged finance group was responsible for making the bridge financing commitment on behalf of JPMorgan that allowed FCX to make a firm bid for Phelps Dodge. To ensure that the M&A transaction could be completed, it was essential to line up the acquisition financing. This leveraged financing was particularly important because FCX was taking on so much new debt and was acquiring a company larger than itself. The leveraged finance group had to analyze the new capital structure, the impact on credit ratings, and the ability to resell the debt to other investors and banks. The group also had to lead the effort to secure internal firm commitments and gain acceptance for associated capital charges. The groups understanding of the market was crucial to the success of the acquisition. 3. Describe the forms of risk that an investment bank must consider in relation to acquisition and underwriting transactions. Describe what it means for a firm to set aside capital when it completes underwriting transactions. The financing risk associated with an investment banks underwriting commitment in relation to financing an acquisition is called capital risk. Each time a bank agrees to fund an acquisition through an underwriting financing, it is responsible for arranging road shows between potential investors and the management of the issuing company and then for persuading investors to subscribe to the offering. A firm sets aside capital when it takes on an underwriting risk position. If the firm bears market risk (which means that it will buy securities at the offered price if investors will not), the capital set aside could be significant. If the issuer bears market risk, the firm still has a small amount of risk, for which it must set aside a small amount of capital. Setting aside capital means placing cash in a risk-free security such as a treasury bond; this provides a return below shareholders equity return requirements, so it is considered an opportunity cost. The risk that comes from associating the investment banking firm with the company for which it is raising capital or completing an M&A transaction is called reputation risk. Before an investment bank brings security investment ideas to investors or attempts to complete an M&Atransaction, it is important that the bank consider the quality of the companies it represents. If a company has had or is expected to have serious problems, an investment banks brand can be negatively affected, making reputation risk an important consideration. 4. Describe the role and importance of credit rating agencies in the Freeport-McMoRan transaction. Which group within an investment bank has the primary responsibility to work with companies regarding rating agency considerations?

Credit rating agencies were critically important to the transaction because they determined the credit rating associated with the post-acquisition capital structure of FCX. The higher the credit rating, the lower the cost of debt capital. This, in turn, could affect valuation of the companys stock and return on equity. A ratings agency group within the debt capital markets group has the responsibility of advising corporate clients regarding the probable rating decision resulting from alternative financing structures. This group works closely with both the high-grade and leverage-loan teams within debt capital markets. With regard to the FCX acquisition of Phelps Dodge, the credit ratings on different debt portions improved due to the significant increase in cash flow and because Phelps Dodge had a higher credit rating than FCX. 5. Describe the role of equity research at JPMorgan in the transaction. How has the role of equity research changed since 2003? Michael Gambardella, the metals and mining industry analyst in JPMorgans equity research team, was restricted from providing an investment opinion on shares of FCX because JPMorgan had acted as an advisor on the M&A transaction and therefore had inside information. Gambardella was able to meet with JPMorgans institutional sales force to provide an overview of the equity and convertible offerings and answer questions. He was not, however, allowed to express an opinion on the pricing for these offerings. Gambardella also wrote research on competitor companies, which was used by FCX in the analysis of both the M&A transaction and the equity-related offerings.Since 2003, the role of equity research has changed dramatically. Before then, equityresearchers frequently joined investment bankers in soliciting mandates, and they committed to writing research if an equity transaction was book-run by their firm. The research opinion was often favorable, which aided in marketing the deal. Following an April 2003 SEC enforcement action against major investment banks, equity researchers have been completely walled off from investment bankers. Bankers cannot pay research professionals any compensation. Researchers cannot join bankers in pitches to clients or even talk with bankers without a referee present. Furthermore, they are not allowed to write research or suggest what their research opinion may be with regard to a specific company that is under an investment-banking mandate.

Who are the clients of the institutional sales team at JPMorgan? What is meant by a limit order, and what is its impact on the sales function? Describe the role of an Equity Capital Markets Syndicate group. Clients include mutual funds, hedge funds, pension funds, insurance companies, and other large institutional investors. A limit order is created when a buyer places a limit, or ceiling, on the maximum price the buyer will pay for a given number of securities. This makes the sales process more difficult because the sales team is asked to sell securities at the highest possible price. If especially large purchase orders include limits, the pricing for the offering willsometimes have to be lowered to accommodate the large orders. Limit orders often come from buyers, such as Fidelity, that the issuing company wants as long-term investors. An inherent trade-off exists, as the sales team must determine the correct balance between allocating shares to large, desirable investors with orders that may include limits and smaller, lower-priority investors that do not require limits. The Equity Capital Markets Syndicate group coordinates with sales force management to decide among investors when demand exceeds supply, and when limit orders are provided by large potential investors. Ultimately, this group decides the price range at which the security is offered and the final price at which the security will be sold. The group keeps close contact with the markets, especially with regard to comparable offerings, in order to gauge the current appetite of investors for specific structures, deals, and industries.