The $7 Billion Ego

Did J.P. Morgan Chase waste billions so its CEO could keep his job?

How much is a CEO worth? According to Business Week’s2003 executive pay survey, CEOs took home an average of $8.1 million last year, up 9.1 percent from the year before. Shareholders at J.P. Morgan Chase wish they were only paying for CEO William B. Harrison’s $1 million salary. Now it looks like they’re also paying $7 billion so he can keep his job for another two years.

The story of the $7 billion man is about what happens when two big business egos clash. On July 1, Chase completed its $58 billion acquisition of Bank One. The move was hailed as the final masterstroke in Harrison’s long but uneven career. The son and grandson of North Carolina bankers, the 60-year-old Harrison has been Chase CEO since 1999 and made a series of expensive bets with his shareholders’ money, all as part of an effort to keep up with longtime rival Citigroup. Under his leadership, Chase plunged into private equity and dot-com investing, lent heavily to the telecom and energy sectors, and spent loads of money on acquisitions such as J.P. Morgan. But frequently the dice came up snake eyes. By late 2002, things were going badly, as the stock fell from the low $50s in early 2001 to about $15 in October 2002.

Harrison’s grip at the helm was growing tenuous. But he saw salvation in yet another deal. Chicago-based Bank One, run by the charismatic Citigroup exile Jamie Dimon, seemed like a natural acquisition. Dimon had pulled off an impressive turnaround at Bank One. With his operational expertise and cadre of loyal bankers, Dimon could help improve morale and performance at Chase and eventually succeed Harrison.

In a New York Times article published on June 27, Landon Thomas Jr. reported that Harrison and Dimon had first discussed a simple merger of equals. In other words, Chase and Bank One would simply pool their assets. But there was a catch, as Thomas reported: “Mr. Dimon, always the tough deal maker, offered to do the deal for no premium if he could become chief executive immediately, according to two people close to the deal.” But stepping down as CEO was a nonstarter for Harrison.

Dimon, the ambitious, lionized CEO of a large banking firm, was itching to get back to New York but not as a second fiddle. So he exploited Harrison’s concern for his status and legacy. Harrison wanted desperately to oversee the successful integration of a major acquisition and retire on his own terms. Dimon essentially told Harrison that he could remain CEO for two years, but that it would cost him. “When Mr. Harrison resisted, Mr. Dimon insisted on a premium, which Mr. Harrison was able to push down to 14 percent,” Thomas reported.

In other words, instead of simply swapping shares, J.P. Morgan Chase shareholders agreed to give Bank One stockholders 1.32 shares of J.P. Morgan Chase for each share of Bank One. Given the differences in the prices of the two stocks, that amounted to a $7 billion sweetener for Bank One shareholders. Harrison gets to remain chairman and chief executive officer, while Dimon settled for president and chief operating officer. Harrison is to stay boss for two years, then the job will pass to Dimon.

A lawsuit filed by plaintiffs’ firm Milberg Weiss Bershad & Schulman last week in Delaware charged that Harrison and the J.P. Morgan Chase & Co. board should have informed shareholders that the deal could have been executed as a merger if Dimon was given the top job. By putting his own interests ahead of Chase shareholders’, the lawsuit alleges, Harrison spent $7 billion in shareholders’ money so he could retain his post for another 24 months.

There is no telling if the lawsuit is meritorious or likely to win. Delaware courts give management wide latitude when it comes to making decisions about mergers and acquisitions. The deal could have hinged on a dozen other issues—aside from who would be CEO and for how long.

And the language surrounding the deal—whether it was a merger of equals or an acquisition—is essentially irrelevant now. The new company will be known as J.P. Morgan Chase & Co., but the board of directors is divided equally between the two companies.Dimon is not merely the heir apparent; employees and investors are already looking to him to make the changes necessary to revivify Chase.

But shareholders are paying an extra $3.5 billion a year for the next two years to have Harrison hang around in the top job. Management may be able to make the case that the extra cash made good economic sense. If Harrison had simply allowed Dimon to walk away from the deal, J.P. Morgan Chase shareholders would probably have been worse off in the long run. In theory, Harrison could have stuck around Chase for another five years, which could have easily cost shareholders $7 billion if the stock continued to sag. And if, come 2006, Dimon can do for Chase what he did for Bank One, shareholders will surely see the value of their holdings rise by more than $7 billion. That $7 billion could turn out to be money well spent, no matter how preposterous it seems today.