JPMorgan Buys Bear Stearns for $2 a Share After Clients Flee
By Yalman Onaran
March 16 (Bloomberg) — JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for about $2 a share after a run on the company ended 85 years of independence for Wall Street’s fifth- largest securities firm and prompted a bailout by the Federal Reserve.
The central bank will fund as much as $30 billion of Bear Stearns’s “less-liquid assets,” the two companies said in a statement today. The deal values New York-based Bear Stearns, with 14,000 employees, about $270 million, far less than the $4 billion market value on March 14. The stock had fallen 80 percent in the past 12 months.
JPMorgan Chief Executive Officer Jamie Dimon had the upper hand in negotiations after coming to the smaller firm’s rescue last week with a cash infusion engineered by the Federal Reserve Bank of New York. Bear Stearns’s CEO, Alan Schwartz, faced the prospect of bankruptcy as clients pulled $17 billion in two days last week and creditors stopped renewing loans.
“JPMorgan Chase stands behind Bear Stearns,” Dimon said in the statement. “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”
Bear Stearns’s sale to JPMorgan caps an eight-month slide in the company’s fortunes that began last July with the collapse of two of its hedge funds. Those failures sparked a wider market concern that called into doubt the value of any asset linked to the mortgage market, Bear Stearns’s biggest business.
Without a resolution this weekend, the situation would probably have continued to deteriorate when markets resumed trading tomorrow, according to analysts and investors including Cambiar Investors LLC’s Brian Barish.
The Fed’s rescue attempt last week failed to avert a crisis of confidence among Bear Stearns’s customers and shareholders, who drove the stock down a record 47 percent after the cash infusion was announced.
Bear Stearns’s profit exceeded $2 billion in 2006, yet JPMorgan’s deal values that company at about one quarter the value of just the securities firm’s headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per-square-foot that comparable office space in the city is currently fetching.
Bear Stearns’s prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts have said.
The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm’s income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July.
“As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,” said William Fitzpatrick, who helps manage $1.6 billion at Optique Capital Management, including JPMorgan shares. “That’s the crown jewel, and that would fit into JPMorgan’s business extremely well.”
Dimon’s New York-based firm has suffered fewer losses than rivals during the credit-market contraction, which has prompted $195 billion of writedowns and losses by Wall Streets biggest banks and securities firms.
JPMorgan, the third-largest U.S. bank by assets, has posted $3.7 billion in writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc., the biggest U.S. bank.
Crisis of Confidence
“It’ll be perceived as a positive for the markets,” said E. William Stone, who oversees $77 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “It puts a floor under all the financials. The longer-term thesis is that the Fed won’t let good companies fail based on lack of liquidity and a crisis of confidence.”
Treasury Secretary Henry Paulson defended the Fed’s bailout today, saying policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy. Paulson said he was involved with the discussions on Bear Stearns’s future this weekend, without elaborating.
“There’s always a decision to be made to say what’s best for the stability of the marketplace, the orderliness of the marketplace,” Paulson said. “I think we made the right decision.”
Bear Stearns, founded in 1923, survived the Great Depression and first sold shares to the public in 1985. Schwartz, an executive with more than 30 years of experience at Bear Stearns, was the hand-picked choice of his predecessor, James “Jimmy” Cayne, 74, who remains non-executive chairman of the firm.
Cayne stepped down after reporting an $854 million fourth- quarter loss, the first in the company’s history. He was at a bridge tournament in Detroit last week as the firm faced speculation about its cash position. Cayne came under fire last July for playing golf and bridge while the hedge funds collapsed.
On a conference call with analysts and investors after the bailout announcement on March 14, Schwartz said the company’s book value was “fundamentally” unchanged. Clients continued to withdraw funds, he said. The book value was about $80 a share at the end of November.
When Bear Stearns invited potential buyers for detailed presentations by department chiefs yesterday, only JPMorgan and private equity firm J.C. Flowers & Co. showed up, according to people familiar with the talks.
Other potential buyers, such as Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn’t send representatives. Hundreds of Bear Stearns employees went to work yesterday to help with the sale process and the presentations.
Bear Stearns employs 14,000 people worldwide, according to its Web site, and has offices in cities including London, Tokyo, Hong Kong, Beijing, Shanghai, Singapore, Milan and Sao Paulo.
Joseph Lewis, the second-largest shareholder in Bear Stearns Cos., wasn’t planning to reduce his stake, a person close to him said March 11. Lewis, a 71-year-old billionaire, has put in more than $1 billion into the firm since September, paying as much as $150 for a share.
JPMorgan’s participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Charles Geisst, the author of “100 Years on Wall Street.”
The bank has also profited from others’ crises. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.
The only way this could have happened so quickly was if the Fed guaranteed to backstop any and all losses on the deal JPMC might have incurred in the future. JPMC has apparently assumed all of BSC’s derivatives positions, and there was no way they could have carefully evaluated even a significant majority of those in the space of four days. That would have required confirming the liquidity of the counterparties to the vast majority of the trades, etc, etc …
So Bear was overvalued by 1400% as of Friday’s close …