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
March 17, 2008
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.
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.