How Much Higher Will Bear Stearns Ultimately Fetch? (BSC, JPM)

March 22, 2008 by Douglas A. McIntyre

The last 5 to 10 trading days have been dominated by Bear Stearns (NYSE: BSC).  Whether it was over the counterparties ceasing to accept their credit, whether it was the CEO publicly calling themselves solvent, whether it was the way out of the money put options trading, whether it was a looming implosion that would have occurred, or whether or not the JP Morgan Chase (NYSE: JPM) $2.00 buyout was fair…. It still commanded most of the talk this week, even with the huge volatility the markets saw this week. keeps regular dialog with traders, brokers, analysts, executives, and even competitors.  We all agree one one thing: Bear Stearns had to be bailed out because they were going to implode.  But there is yet another issue that is common: no one believes that anyone besides JP Morgan Chase and Jamie Dimon is getting anything close to a fair deal here.  We and others still acknowledge that the fallout of an outright and instant failure would have been a widespread financial crisis.  In recent weeks we even went as far as saying that many financial firms may in fact become mandated, like it or not.  If that turns out to be the case, then this one is the first mandated merger.

With the Fed having thrown in some $30 Billion in backstops and with the new packages available to primary dealers, many of the riskier or lower-valued assets will get to be handed in for a period of 28 days (we think that will be extended greatly, if not indefinitely), this $236.2 million to acquire Bear Stearns is one that amounts to one of the greatest fleecings on Wall Street in this generation.  Before taking this too far, Jamie Dimon can’t really be faulted here. He did the best thing for his shareholders in being able to be the only party and not paying more.  But Bear Stearns’ management will take much blame over this.

After speaking with many contacts, the topics and opinions surrounding this are nearly endless.  More than one contact used the exact terms "STAR CHAMBER" decision.  All extremes aside, it seems that many more lawsuits will be coming in the next few weeks to overturn some of the terms here.  Those terms might not just be limited to how much is paid.  One of the greatest criticisms is that Bear Stearns had to sign away their office building win or lose.

So, here are some of the key assets Dimon & Co. are getting: underwriting and research, wealth management, clearing, prime brokerage, energy trading, M&A advisory, and more.  The capital markets side of the equation with the endless "assets" that have no set value in today’s environment is the black hole, and the leverage there makes it a far larger black hole.  That’s where the $30 Billion backstop comes in.  Imagine if you could just strip that off and let the vultures come screaming down.

Is a higher price assured?  In truth, absolutely not.  Did management get forced into signing a deal under duress?  If not, it is a common belief that they "were made an offer they couldn’t refuse."  In fact, we have yet to find a single source out of our contacts that will say this is anywhere close to a good deal.

Frankly, it’s going to be a long road ahead and it is probably far from over.  It’s also hard to find too many institutions with the books that can assume the risks right now.  There are only a handful of firms that could compete against the merger because of the current malaise.

But on Friday, March 14 JPMorgan Chase shares closed at $36.54.  On Thursday, its shares closed at $45.97.  On Friday, March 14, Bear Stearns stock closed at $30.00, already down from over $70.00 the week before and down from year-ago highs north of $150.00.  Bear Stearns closed at $5.96 Thursday and it traded as high as $8.50 this week.

In any buyout and in any "creditor lines" the common shareholder is the last one to benefit and the first one to be totally hosed.  What is more than obvious anything is that those old much higher prices are merely in the history books.  And the all-stock buyout is worth more since JPMorgan Chase stock rose this week.  This bailout is a pure "takeunder" on any scale. A price of $30, $24, or even $20 would have hurt many old investors as is.  But it’s also the price of doing business and shows there are no sure things and no entitlements to making money.  Either way, $2.00 pre-adjusted on stock prices will ultimately turn many  fans into insurgents.

Imagine what this business would be worth in individual units in an auction if the Fed kept the $30 billion backstop in place.  After all, business entities of this size do keep most units separated in different corporate and business entities.  Most wine buyers know about "Two-Buck Chuck."  There is a real shot with all the whining on Wall Street and Main Street that Dimon won’t get to keep a new title of "Two-Buck Jamie."  This is far from over.

Barron’s also ran a piece this weekend saying that Dimon will have to up the ante here, although he’ll still get a steal.  We aren’t positive that a significantly higher price will come and we do think Dimon & JPMorgan will be the winner.  But the current price is too low regardless of what anyone in the administration, the Fed, or at JPMorgan or Bear Stearns has to say.

Jon C. Ogg
March 22, 2008