On Monday, JP Morgan-Chase (NYSE: JPM) offered what amounts to $10 a share for troubled investment bank Bear Stearns (NYSE: BSC). JP Morgan altered its original offer from roughly one week ago which was valued at around $2 per share. Shareholder outrage and concern over the controversial nature of the first proposed deal undoubtedly played a part in crafting the revised offer. The new offer is roughly five times the price of the original offer, or around $1 billion for 39.5% of the company. The total valuation of Bear Stearns, in light of this proposal, would be slightly over $2 billion, as opposed to the scant $236 million according to the original offer by JP Morgan. Investment observers are widely divided on the fair value of Bear Stearns, or even how to reasonably assess this, given the turbulent recent events.
The complex new proposal for a deal would have JP Morgan liable for the first $1 billion of losses which might occur, while the Federal Reserve (again assuming a unique position in this offer as well as the original bid) would lend $30 million and – in addition to its backing the deal – would potentially stand to profit on the debt side of the business should those Bear Stearns debt instruments prove profitable. A third party, Blackrock Investment (NYSE: BLK), was chosen by the Fed to manage this portion of the portfolio on behalf of the Fed. Any profits in this less liquid portion of the portfolio would accrue specifically to the New York Fed.
While it is tempting to label the potential deal as unprecedented, we are finding an eclipse of that definition seemingly week-by-week in the financial markets. Bear Stearns Chairman James Cayne and many of the partners, as well as major shareholders, have signed off on this new proposed deal, where there was less than unanimity regarding the first proposal. While Cayne currently owns 3.3% of Bear Stearns, there are other investors such as Joe Lewis who held more than a billion dollars worth of Bear Stearns stock. A shareholder vote on the deal is expected to take place sometime in early April.
Reaction on Wall Street was more measured than on Main Street, where consumers are feeling the pinch of the slowing economy – some firsthand as their homes are foreclosed. The question is, why should Bear Stearns be bailed out when individuals and other financial institutions at risk are not? The Fed, for its part, maintains that this is not a bailout or a windfall for Bear Stearns, and that they are not propping up a failing institution. Their statements regarding the deal see their role as instead trying to maintain if not guarantee the liquidity and the orderly nature of the capital markets. Still, with the Fed in line as a potential beneficiary and a financial partner in a for-profit deal, questions naturally arise.
With the complex nature of the deal and the uncertain value (or even potential value going forward) of the Bear Stearns assets, many investors are uncertain how to regard the deal. After the revised offer was announced, the major averages were boosted and the stock shot up well beyond the $10-a-share proposed price, to as high as $13 a share, then settled back at $11.75. In further trading on Tuesday, Bear Stearns hovered around the $10 mark. It remains to be seen, if the deal goes through, how the complicated portfolios of Bear Stearns’ current assets will perform for JP Morgan-Chase going forward. Only future events will make it clear how much impact the deal will have on JP Morgan-Chase’s earnings and value as a company. The eventual impact of the proposed deal on the financial markets, far beyond a short-term situation, will then be much clearer as well.
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