ore than $2!!!
Bear shareholders may try to get higher offer
Stock price suggests J.P. Morgan bid may be put off until market calms down
By Alistair Barr, MarketWatch
Last update: 6:23 p.m. EDT March 17, 2008
SAN FRANCISCO (MarketWatch) -- During a conference call held by J.P. Morgan Chase & Co. Sunday to discuss its offer to buy Bear Stearns Cos., an individual investor in the beleaguered brokerage firm announced that he would vote against the fire-sale deal.
The comment by a person identifying himself as Brian Firestone was followed by a brief silence. Then J.P. Morgan (JPM 42.66, +2.35, +5.8%) executives moved on to the next question.
But the prospect that Bear Stearns investors may reject the bank's offer of $2 a share -- at least for a few months -- is now being priced into the market, analysts said Monday.
J.P. Morgan's offer is worth more than $2 a share because the bank's stock (the currency it's using to try to purchase Bear) climbed 10% on Monday. Bear shares closed at $4.81 -- roughly double the value of the bid.
Indeed, Joseph Lewis, one of Bear Stearns' largest shareholders, told CNBC on Monday that J.P. Morgan's offer was "derisory." The currency-trading billionaire owns almost 10% of the brokerage firm, having built a stake since September when the shares were trading at more than $100.
"People are speculating that shareholders aren't going to approve the deal for a while," said Ryan Lentell, an equity analyst at Morningstar, in an interview. "If market conditions improve, they may be able to negotiate for a higher price or another bidder may come to the table."
As part of the deal, J.P. Morgan immediately guaranteed all of Bear Stearns' (BSC) trading obligations to try to encourage counterparties and clients to keep trading with the firm.
That guarantee remains in place until the acquisition closes and Bear is subsumed into J.P. Morgan's operations. However, if Bear shareholders reject the deal, they have to vote on it several more times over the next 12 months. During that time, the guarantee from J.P. Morgan remains in place, executives from the bank indicated Sunday.
"The guarantee applies to all transactions on the books today and any transactions that are entered into while that guarantee is in place," Bill Winters, co-chief executive of J.P. Morgan's investment bank, said during the Sunday conference call.
"We all firmly believe that the shareholders at Bear Stearns will approve the transaction," added Steve Black, who runs J.P. Morgan's investment bank with Winters. "If they were to choose not to approve it, then the guarantee would eventually go away when that process has run its course, which is over the course of 12 months."
Bear shareholders may be thinking that if they vote the deal down for several months, markets may calm down and the value of the brokerage firm may recover, leaving them room to ask for more money from J.P. Morgan, Morningstar's Lentell said. In the meantime, J.P. Morgan's guaranty remains in place for as long as a year.
This strategy also increases that chance that another bidder may appear later on, he elaborated. "You wouldn't get another bidder until the markets recover," he commented.
Bear Stearns shares fell 84% to $4.81. J.P. Morgan shares climbed 10% to $40.31.
Still, Bear shareholders may have been left with nothing if the firm wasn't acquired quickly and had to file for bankruptcy protection instead, experts said.
In that scenario, the firm's assets may have been sold at big discounts and counterparties may not have been able to collect quickly on their positions, leading to wider problems across the financial system, they explained.
"Had it gone into bankruptcy the systemic risk for the economy would be very large," Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School, said in an interview.
A particular concern was Bear's derivatives business, which is a counterparty on credit-default swaps (CDS), a type of derivative that pay out in the event of default.
If Bear went bankrupt, all the firm's CDS agreements with hedge funds and other counterparties would have to be unwound, Lerner said.
"Someone who bought CDS from Bear to hedge positions wouldn't be able to reconstruct that hedge again," Lerner said. "Take that situation and multiply it by maybe 100,000 and you get a sense of how ugly it would be."
Indeed, J.P. Morgan was probably a major counterparty to Bear in the market for CDS and other financial products, said John Jay, senior analyst at Aite Group, a financial-services research firm.
"J.P. Morgan has pretty good motivation for getting this deal done," Jay said in an interview. "They're getting businesses that they've wanted all along and will avoid a bankruptcy situation, which may have taken a long time and is usually a complete mess."
Börsengewinne sind Schmerzengeld. Erst kommen die Schmerzen, dann das Geld...(A.K.)