While the attempt by J.P. Morgan (NYSE:JPM) to acquire RBS Sempra in order to move itself up the ladder as one of the premiere commodity and/or derivative players in the world looks good on paper, in truth the timing is poor in light of the war on Wall Street by the populist-leaning Obama.
There is also the inclusion of Blythe Masters in the deal for J.P. Morgan, who is famous, or infamous, depending on how you look at it, for being credited among those who created the credit default swaps financial instruments which are considered by some as financial weapons of mass destruction, and they have lived up to that description.
The deal has emerged from the requirement of the European Union to have the Royal Bank of Scotland divest itself of RBS Sempra Commodities in order to receive government handouts. The Royal Bank of Scotland, controlled by the British government, is seemingly more than happy to comply in order to gain access to taxpayers’ dollars.
It also includes one of the top base metals brokerages in the world, once known as Metallgesellschaft.
A unit which trades in physical oil and diesel are also very attractive to J.P. Morgan, which is looking to expand in that sector, as they’ve just started to invest in it.
There is no doubt commodities are going to continue on in their bull market, and obviously J.P. Morgan and Masters are attempting to position themselves for that highly lucrative revenue and sector, as their key competitors Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) have dominated for some time.
Assuming the deal does go through, which may have to be renegotiated after Obama’s recent announcement on banking and proprietary trading, it would add more than 1,000 personnel to the commodity unit of J.P. Morgan.
With about $4 trillion at stake in the energy derivative and commodity trading market, it’s a no-brainer to see why this is such a potential good deal for J.P. Morgan, and while the timing and climate it’s being negotiated in could be better, in the long haul it’s sure to add incredible value to J.P. Morgan via revenue and profits.
As far as RBS Sempra Commodities itself, it has a great trading history and record, but its management has been more suspect. The question seems to be whether the company has been built in a way it can absorb the losses of a number of its traders while remaining profitable and able to operate successfully without overly relying on traders.
The question of integrating RBS Sempra with J.P. Morgan is another major challenge, at the current culture at the company has been largely free-wheeling and successful, as they experienced profits for 32 quarters in a row at one time, starting in 1997.
Of course that’s always a challenge for any mature company taking on a company like RBS Sempra, and so in that regard isn’t unprecedented, and has a history that can be tapped into and learned from. Even so, integration isn’t always successful, and it’s not a for sure thing.
Still, I like the possibilities for J.P. Morgan with RBS Sempra, and it’s highly unlikely they’ll screw it up if the deal does go through. It would definitely make them a more valuable company in my opinion; especially over the next 7-10 years, when commodities will assuredly continue to rise in value.
