Bear Stearns sells itself to JP Morgan for $2/share or $236 million

[Teh Don Ditty]

JPMorgan acquires troubled Bear

The deal values Bear Stearns at just $2 a share. Regulators hope purchase will stave off wider chaos in financial markets.

By David Ellis and Tami Luhby, CNNMoney.com staff writers
Last Updated: March 17, 2008: 4:56 AM EDT
NEW YORK (CNNMoney.com) -- JPMorgan Chase & Co. said Sunday that it would acquire troubled Wall Street firm Bear Stearns for a mere fraction of what it was once worth amid deepening fears about further erosion of the world's financial markets.

The rock-bottom price left investors feeling queasy. Asian markets tumbled, with Japan's benchmark Nikkei index finishing Monday's session nearly 4% lower. U.S. stock futures plunged, indicating a miserable start for Wall Street.
The all-stock deal values Bear Stearns at $236 million, or just $2 a share. The company's stock had closed at $30 on Friday, down a staggering 47% for the day.

Regulators support the deal and the Federal Reserve provided $30 billion in funding: With the global credit crisis worsening, the Fed has been taking dramatic action to help banks and prevent widespread panic.

Over the past three days, roughly 200 JPMorgan staffers were working on the deal, assessing the strengths of Bear Stearns' different businesses and its exposure to toxic mortgage securities, JPMorgan executives said during a conference call held Sunday night.

They noted that the offering price, which comes at a steep discount to Bear Stearns book value price of $84 per share, was to provide a cushion to protect JPMorgan in turbulent times and would provide the company "margin for error."

The fire-sale price raises questions about the value of other investment banks.

"A $2 per share price will send a shudder through every investment bank investor in the world," said James Ellman, head of San Francisco-based Seacliff Capital, a hedge fund specializing in financial services. "Many will say that stand-alone investment banks' days are numbered."

That could spell trouble for firms such as Lehman Brothers and Jefferies Group, which, like Bear Stearns, don't have large asset or wealth-management businesses for support. These divisions are helping prop up firms such as Morgan Stanley during these tough times on Wall Street.

Bear Stearns was on the brink of financial collapse Friday when JPMorgan (JPM, Fortune 500) and the Federal Reserve Bank of New York said they would provide the brokerage a short-term loan. Bear was dealing with a classic run-on-the-bank: The firm's short-term creditors refused to lend the firm any more money and simultaneously demanded repayment of outstanding debt.

Treasury Secretary Henry Paulson said on Sunday that talks about how to rescue Bear had continued throughout the weekend. He defended the Fed's bailout on Friday as "the right decision" and said the Bush administration was ready to take other actions to bring stability to the financial markets.

The fast-track deal, which is expected to close by the end of June pending shareholder approval, is expected to generate roughly $1 billion in after-tax earnings for JPMorgan over the next 12 to 18 months.
.
Risks and opportunities for JPMorgan

JPMorgan has been on the prowl for a prime brokerage business, which services hedge fund clients. This was one of Bear Stearns' specialties, though many of its customers started fleeing last week.

JPMorgan will likely focus on retaining clients of this division, while trying to wring out costs from businesses the two have in common, such as investment banking, mergers and acquisitions, and research. But at $2 a share, the bar is not too high to make the deal profitable, experts said.

The danger for JPMorgan will be its potential exposure to lawsuits from Bear Stearns' subprime mortgage division and risks from its derivatives business.
Bear Stearns has approximately 14,000 employees worldwide and plans for them were not made clear.

As part of the deal, JPMorgan Chase will essentially act as a backstop for any current or future business transactions with Bear Stearns until the deal is completed. Even if Bear shareholders were to reject the buyout, which the JPMorgan executives believed was unlikely, any transactions leading up to then would still be guaranteed.

At the same time, JPMorgan would also take on Bear Stearns' mortgage portfolio, worth an estimated $33 billion as of the end of February. Just $2 billion of that amount was made up of subprime, with the remainder made up of both commercial mortgage backed securities as well as other residential mortgage securities.

Bear Stearns issued a statement late Sunday saying that as a result of the announcement, it would not report its first-quarter results on Monday, as previously scheduled.

Downward spiral

The deal marks an inglorious chapter for 85-year-old Bear Stearns, a storied Wall Street firm whose unraveling has been fast and furious.

Rumors that Bear Stearns was on the verge of collapse started buzzing around Wall Street trading desks last Monday. Chief Executive Alan Schwartz appeared on television on Wednesday afternoon to reassure the markets that the firm was stable. But on Thursday, the run on the bank picked up speed, forcing the government and JPMorgan Chase to step in the next day.

Shares of Bear Stearns (BSC, Fortune 500) opened last week at $69.75 and traded as high as $159 last year, before the firm's bad bets on subprime mortgages blew up two of its hedge funds last summer.

First Published: March 16, 2008: 4:31 PM EDT

Not Good.

 

[obeygiant]

The Bear Stearn's Building itself is worth more than $2 a share.

Hopefully the sectors outside of the financials will stay green.

Either way its going to a an ugly day on wall street.

 

[pilotError]

That's what happens when there's a run on the bank.

In less than a week, the creditors put it out of business...

Where's George Bailey (its a wonderful life) when you need him?

 

[edesignuk]

This has been on the news all morning, pretty incredible to see such a big and respected name tumble so severely.

 

[IJ Reilly]

This has been on the news all morning, pretty incredible to see such a big and respected name tumble so severely.

Big, but not always respected. The management at Bear Stearns was questioned even before this latest meltdown. Still, a pretty remarkable event. As mentioned above, their headquarters building in Manhattan is worth more than the buyout price, which tells you what JP Morgan Chase thinks they are getting for their money -- a gigantic boat anchor.

 

[mahashel]

Regulators support the deal and the Federal Reserve provided $30 billion in funding: With the global credit crisis worsening, the Fed has been taking dramatic action to help banks and prevent widespread panic.

Since that's 30 *BILLION* of the taxpayers money, does that mean we all own Bear Stearns (as well as JPM) now?
Anybody remember how well the S&L bailout went down? Have we learned nothing?
How much will the Stearns execs make in return for pooching their financial institution? (hint: you'll likely need a calculator that does scientific notation)

 

[edesignuk]

Since that's 30 *BILLION* of the taxpayers money, does that mean we all own Bear Stearns (as well as JPM) now?

You should come be a UK tax payer, we own £100bn ($200bn!!!) in Northern Rock debt, and that's between a population of 60m vs your 305m

ahhh, the finance world is doing just spiffy.

 

[Unspeaked]

How much will the Stearns execs make in return for pooching their financial institution? (hint: you'll likely need a calculator that does scientific notation)

Actually, the execs get screwed in this deal.

BS had a no golden parachutes clause in the event of takeover.

They basically have whatever they get for their shares, which is a fraction of what they were worth even last week.

All employees combined owned 30% of the company, and that collective value has toppled from $14 billion to $22 million in about a year.

The executives only owned about 9%, meaning their entire stake in this deal is around $8 million. There are single CEOs who've gotten away with more than that for running a company into the ground in the past...

 

[IJ Reilly]

Anybody remember how well the S&L bailout went down? Have we learned nothing??

Not sure what you mean by "went down," but it did prevent the financial markets from disintegrating. The S&L bailout stunk, but the alternative could have been worse. A lot worse.

 

[GoCubsGo]

Since that's 30 *BILLION* of the taxpayers money, does that mean we all own Bear Stearns (as well as JPM) now?
Anybody remember how well the S&L bailout went down? Have we learned nothing?
How much will the Stearns execs make in return for pooching their financial institution? (hint: you'll likely need a calculator that does scientific notation)

This is where corporate governance comes in if you ask me.

Actually, the execs get screwed in this deal.

BS had a no golden parachutes clause in the event of takeover.

They basically have whatever they get for their shares, which is a fraction of what they were worth even last week.

All employees combined owned 30% of the company, and that collective value has toppled from $14 billion to $22 million in about a year.

The executives only owned about 9%, meaning their entire stake in this deal is around $8 million. There are single CEOs who've gotten away with more than that for running a company into the ground in the past...

That is right, I don't believe there is a golden parachute waiting for them but if you follow the news and the SEC filings you'll soon see they've already collected their tens (sometimes hundreds) of millions.

As for the announcements, just another one to go down. Sub-prime doesn't exist any more. It will again one day in another form as there needs to be an outlet for people with good credit but high debt to income ratios or bad credit and higher debt to income ratios. And no, we didn't learn jack from the S&L crash.

 

[edesignuk]

Woah, Lehman Brothers has dropped over 30% in share value Morgan Stanley is down 10%. Freaking hell.

 

[lord patton]

meanwhile, the Fed is accepting questionable debt in exchange for cash so that the other financials can remain liquid.

Who's going to bail out the Fed itself (or will it just keep printing money?)? By which I mean, when will the U.S. be considered a "counterparty not to be trusted" by the other central banks of the world?

 

[Teh Don Ditty]

Woah, Lehman Brothers has dropped over 30% in share value Morgan Stanley is down 10%. Freaking hell.

Just noticed that?

There has been talk that other firms might go the way of Bear Stearns.

 

[edesignuk]

Just noticed that?

Yeah, the font office monkeys analysts were having a little freak out about it while I was down there a moment ago.

oh dear...

 

[heehee]

How much will the Stearns execs make in return for pooching their financial institution? (hint: you'll likely need a calculator that does scientific notation)

According to Bloomberg..."Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under terms of the JPMorgan takeover, his holdings are now worth about $12 million."

Linky

 

[Teh Don Ditty]

Yeah, the font office monkeys analysts were having a little freak out about it while I was down there a moment ago.

oh dear...

Teehee monkeys. Monkeys are fun.

It's been a hot topic over here at Cap1 as well. Sucks to be a stock holder of any of those companies right now. There's no guarantee that they will ever get back up to where they once were.

 

[mahashel]

The S&L bailout stunk, but the alternative could have been worse. A lot worse.

Understood. Choosing the "less horrible" path is difficult, and ends up horrible either way. A tough spot to be in.
It's debatable whether or not the federal government should be bailing individual companies out at all. However, that's not really what annoys me. What riles me up is a combination of the "mismanagement" of funds whenever the government throws financial assistance at something, and the seemingly perpetual state of white-collar crime. ..and wouldn't you know it, the headlines are reading like we've got a heaping portion of both today.
You have people at the top skimming cash and trying to cover their tracks. The S&L bailout was a good example of this. (ie: The Keating Five)
The bailout itself may have been a well-conceived idea, but it's the white-collar criminals who abused it. Arguably, such shysters are what put us in such predicaments.
Combine these folks with our GOV's impressive inability to oversee the mountains of cash they shovel onto crises and you get the perfect s**tstorm. (How's the government's approval rating regarding NOLA or Katrina again?)
As for the Bear Stearns execs getting nothing out of the takeover. That's true, on paper. The sale doesn't even give them full market value for their stock (which is in the crapper). However, I'd watch for the top brass to end up with a little something extra after the cliche umpteen millions of the government's (well-meaning) aid gets "misplaced".
Anyway, I'll sit down and put my tinfoil hat away. Maybe I just need to go for a walk or something. lol

 

[pilotError]

Teehee monkeys. Monkeys are fun.

It's been a hot topic over here at Cap1 as well. Sucks to be a stock holder of any of those companies right now. There's no guarantee that they will ever get back up to where they once were.

Hey Teh Don Ditty, did you see any of the BS folks over at Mulcahy's???

I'm at Moran's and didn't spot anyone! LOL

 

[obeygiant]

Surprisingly, the market ended up today despite all the bad news. It could be a sign that we're near or at a "bottom". When there is a waterfall of bad news and stocks won't go much lower may mean that we're at the trough.

 

[Teh Don Ditty]

Hey Teh Don Ditty, did you see any of the BS folks over at Mulcahy's???

I'm at Moran's and didn't spot anyone! LOL

I'd still ask them to buy me drinks because I'm sure they still have some money left.

Surprisingly, the market ended up today despite all the bad news. It could be a sign that we're near or at a "bottom". When there is a waterfall of bad news and stocks won't go much lower may mean that we're at the trough.

I was kinda surprised that the market ended up. However, I still don't think we're done with all this mess.

 

[IJ Reilly]

I was kinda surprised that the market ended up. However, I still don't think we're done with all this mess.

Agreed. More shoes to drop, in all probability. Some of the other investment banking firms are also considered vulnerable. The markets are probably reacting to the Fed's more proactive response to this week's financial crisis, and also in expectation of another huge rate cut.

 

[Queso]

Surprisingly, the market ended up today despite all the bad news. It could be a sign that we're near or at a "bottom". When there is a waterfall of bad news and stocks won't go much lower may mean that we're at the trough.

I just hope there's no more bad news for a few days, so we get a bit of a rebound. Luckily most of my stuff's in the Eurozone so the drop in stock prices is offset by the currency's rising value, but even so it's not a good time to be an investor

 

[rdowns]

It could be a sign that we're near or at a "bottom". When there is a waterfall of bad news and stocks won't go much lower may mean that we're at the trough.

I hope you're right but don't think you are.

Very glad my financial advisor and I moved a lot of my retirement monies into overseas funds. THey've kept me from being really down YTD.

 

[Teh Don Ditty]

Agreed. More shoes to drop, in all probability. Some of the other investment banking firms are also considered vulnerable. The markets are probably reacting to the Fed's more proactive response to this week's financial crisis, and also in expectation of another huge rate cut.

Lehmans is seen as the next likely shoe to drop. Also, the bank (Washington Mutual [WM:NYSE] and Citibank [C: NYSE]) stocks aren't doing all very well either. We might be seeing some more consolidation in that sector. IMHO.

 

[IJ Reilly]

Lehmans is seen as the next likely shoe to drop. Also, the bank (Washington Mutual [WM:NYSE] and Citibank [CIT:NYSE]) stocks aren't doing all very well either. We might be seeing some more consolidation in that sector. IMHO.

All the banks have been hammered AFAIK but it seems like the investment banks are the ones with their backsides really hanging out. Consolidation -- isn't that a polite word for going out business?