JPMorgan to Spin Off Buyout Unit to Avoid Conflicts

March 1 (Bloomberg) -- JPMorgan Chase & Co., the second- biggest U.S. bank, plans to spin off its main buyout business next year after clients complained that the company was putting its interests ahead of theirs.

JPMorgan will separate JPMorgan Partners LLC, which has about $13 billion of assets, after the firm invests all of its current fund, the bank said in a statement today. Jeffrey Walker, 49, who helped start JPMorgan Partners in 1984, will remain as head of the company's 120 investment executives.

The New York-based bank, which has a market value that's about half as large as Citigroup Inc.'s, is reorganizing four weeks after Bill Price, co-founder of U.S. buyout firm Texas Pacific Group, said competition from JPMorgan may force him to steer advisory and financing work away from the firm. JPMorgan competitors, including Credit Suisse First Boston and Deutsche Bank AG, already have taken steps to divest their buyout units.

"The decision doesn't surprise me because tensions in the industry have been talked about for some time," said Mark Pacitti, a partner at Deloitte & Touche LLP in London. "Buyout firms are the source of substantial fees for banks."

JPMorgan, which invested about $4.2 billion in JPMorgan Partners's current $6.5 billion fund, plans to invest no more than $1 billion in JPMorgan Partners's next fund. Stephen Murray, head of JPMorgan Partners's buyout group, and Chief Investment Officer Arnold Chavkin will stay in their positions after the separation, JPMorgan spokeswoman Brooke Harlow said.

Banking Fees

"We have determined that they can best achieve their desired scale independent of JPMorgan," said David Coulter, JPMorgan's vice chairman, in the statement. Shares of JPMorgan rose 65 cents, or 1.8 percent, to $37.19 at 12:27 p.m. in New York Stock Exchange composite trading.

JPMorgan will retain One Equity Partners LLC, a smaller buyout business with $2 billion assets that was acquired in last year's takeover of Chicago-based Bank One Corp. Earlier today, the Wall Street Journal reported that JPMorgan Partners will be separated from the parent company.

Bank One Chief Executive James Dimon is now president of JPMOrgan.

Buyout firms, which typically use loans and bonds to fund two-thirds of each takeover, boosted their acquisitions by 45 percent last year to a record $180 billion, making the firms important sources of Wall Street profits, according to data compiled by Bloomberg. New York-based Blackstone Group LP, manager of the world's biggest buyout fund, has said it alone paid $1.4 billion to investment banks in the past two years.

Goldman's Stance

Goldman Sachs Group Inc. is pursuing a strategy of investing alongside buyout firms rather than competing against them for stakes in closely held companies. This tactic has helped Goldman gain market share in advising and arranging financing for buyouts.

New York-based Goldman was the world's top adviser of leveraged buyouts in 2004, with a 27 percent share, up from 22 percent in 2003, Bloomberg data show.

JPMorgan Partners has invested more than $15 billion during its 21-year history. That included $2 billion of investments last year in companies such as IMO CarWash Group Ltd., a developer of automated car washes in the U.K. It also owns stakes in PQ Corp., a Valley Forge, Pennsylvania-based maker of chemical and glass materials, and ABB Ltd.'s oil, gas and petrochemicals business.

The buyout business had gains of $1.43 billion in 2004.

Cutting Capital

In December 2002, JPMorgan cut to 10 percent from 20 percent the share of the bank's capital it committed to the buyout unit, after a spate of investment losses hurt earnings. The unit had a gain of $27 million in 2003, compared with a $733 million loss in 2002.

"This is in line with what they've been preaching and in line with what Jamie Dimon has done in the past: A commitment to strong, steady growth, and taking out volatility," said Hilary Hayes, who helps manage $4 billion, including JPMorgan shares, at Victory SBSF Capital Management in New York. "Things don't stay sexy forever; 2001 and 2002 were fairly painful in this line of business."

Texas Pacific, whose takeovers include the Burger King fast- food chain, last year lost out to JPMorgan in the purchase of U.K. drugmaker Warner Chilcott Plc.

JPMorgan teamed with New York-based Credit Suisse First Boston in October to outbid Texas Pacific, Blackstone Group LP and Kohlberg Kravis Roberts & Co. for Warner Chilcott. The winning bid was 1.62 billion pounds ($3.1 billion), trumping the losers' 1.56 billion-pound offer.

"It's clearly the case they had ambitions to build a very large private equity firm," said Chris Davison, a buyout industry analyst at Almeida Capital Ltd. in London. "It appears to have come to the point where it was impossible to achieve" that within JP Morgan.

CSFB's Exit

Credit Suisse Group, CSFB's Zurich-based parent, announced plans in December to spin off its buyout unit. "We don't want to compete with our clients," said Brady Dougan, 45, CSFB's chief executive, in an interview in January.

Texas Pacific's Price said in an interview in Davos, Switzerland, on Jan. 27 that he planned to give more work to CSFB because of the bank's decision.

JPMorgan's Harlow said as recently as January that the bank was "committed to this business."

Morgan Stanley, the world's second-largest securities firm, and Deutsche Bank, Europe's No. 3 bank, split off their buyout units during the past two years. UBS AG, Europe's largest bank, stopped making buyouts.