Amusing Financial Quoatation: Bear Stearns Shareholders

From the ever indispensable Steven Davidoff (on May 9th):

According to the latest filings with the Securities and Exchange Commission, JPMorgan now owns 49.43 percent of Bear Stearns, and so a “yes” vote to approve the combination is a virtual certainty.

I just can’t believe that 0.57 percent of Bear’s shareholders don’t vote yes for whatever reason, including just simple confusion. And the broker votes may even have the bravery to go JPMorgan’s way. Game over for Bear.

(Emphasis mine.)

Update: Some weirdness with the URL and title. Probably from editing in multiple places. Sorry.

Bear Stearns: Where We Are, Some Little Known Facts, and Opinions

Well, it looks like the dust has settled on the situation. My predictions have actually fared quite well–lawsuits, retention bonuses, brokers jumping ship, and some interesting rumblings about management seeking out new bidders.

Bloomberg even highlighted Jamie Dimon’s greenmail:

Dimon made the proposal to several hundred Bear Stearns senior managing directors at a meeting yesterday evening in the securities firm’s Manhattan headquarters, according to two people who attended. He said members of the group who are asked to stay after the acquisition is complete will get additional JPMorgan shares, according to the attendees, who asked not to be identified because the meeting was private.

Bear Stearns employees own about a third of its stock, with a large concentration in the hands of senior managing directors. Their support may help JPMorgan counter opposition from billionaire Joseph Lewis, who owns 8.4 percent of Bear Stearns and said yesterday he may seek an alternative to the bank’s proposed purchase.

“He’s basically bribing them for their votes,” said Richard Bove, an analyst at Punk Ziegel & Co., referring to Dimon’s presentation. “In this environment, there are no jobs on Wall Street, so he can bribe them by letting them keep their jobs and they’ll vote for him.”

Lots of people have opined on the merger terms and the possibilities for other bidders, and even some odd provisions that suggest no one knows the entire story yet. Everyone who reads my blog knows what I think on the obvious points. Here’s an interesting fact, too, that I haven’t seen elsewhere. From the Times Online:

A counter-offer for Bear Stearns would face a series of hurdles. Part of the JPMorgan Chase offer, which values Bear at $2 a share, includes the financial support of the Federal Reserve Bank of New York, which has underwritten $30 billion of the most toxic of Bear Stearns’s investments. The New York Fed also extended special financing to JPMorgan to cover the cost of Bear Stearns redundancies and impending litigation. Any new bidder would have to convince the central bank that it should transfer its underwriting to support a new offer.

(emphasis mine).

Wow. Talk about a sweet deal! I’m not sure what that sentence means, but I know I haven’t seen that anywhere else, so I remain skeptical, but it wouldn’t surprise me. So, with this heavy handed approach, here’s a question: Why does the Fed care so much about ensuring the specific deal they got JPM to ink goes through? In the above Deal Journal post, it’s made clear that the Fed wants this deal to go through. So, if there is another bidder out there, at a higher price, then why does it matter who gets Bear? Certainly the crisis they were talking about ha been avoided, no? Let’s examine the facts (from a myriad of sources):

• Bear Stearns had gotten a 28 day loan, via JPM, from the Fed.
• The Fed had decided toget Bear sold A.S.A.P., this left other bidders out, as reported by the media.
• The Fed decided to guarantee, essentially, $30 billion in assets on Bear’s balance sheet.
• The Fed has now decided to open up it’s discount window to securities firms, to avoid this situation in the future.

These actions seem inconsistent. Why would you force a securities firm to be bought, but then allow other to borrow at the discount window? Why would you make a 28 day loan, and then, with not much else changing, force another alternative? Why would you try to get JPM to accurately asses the value of Bear, and then, when they are unable to do so, both guarantee the most troublesome assets and allow JPM to lock in a very low bid price?

Now, I hate to be trite, but the taxpayers now own $30 billion dollars of stuff that is nearly impossible to value and, simultaneously, not going up in value (leaving only flat or down). JPM shareholders are getting roughly $1 billion in incremental earnings (I, obviously, would claim that when all is said and done that number will be lower, but that’s their number and we have no reason to believe that they don’t believe it to be accurate) for a fraction of the outlay in cash (and potentially not even the legal expenses, if indeed the above statement from The Times Online is true). And all the while, the Fed is standing guard over the gasping, bleeding body of Bear Stearns warding off further bidders? This isn’t the kind of intervention that I can honestly say sounds “above board.” To me, one either let’s Bear file for bankruptcy protection or they are bailed out–forcing a suitor onto them seems a bit weird.

Now begins the next chapter in this saga, exploring who profited from the demise of Bear and the source of the rumors that caused this whole mess.

Good News or Bad News First? (And Some Bear Links)

The good, for continuity. I spent about an hour chatting over IM with Felix Salmon and Equity Private (with a quick guest appearance by DealBreaker’s Bess Levin). It was quite an interesting time, to say the least!

The bad, now. They actually killed my post ideas. Yes, you heard me right, killed them dead. Well, it was a bit conspiratorial. I had conjectured that JPM’s option to purchase 20% of Bear at $2.00 and their “locking up” Bear’s building meant that they were happy to have someone else come in higher (earn the difference between the higher bid and $2 on 20% of Bear’s shares, and get the building). Alas, the fly in the ointment? Felix pointed out Section 6.9 of the merger agreement (Tidbit: Section 3.2 … “please provide”). I still believe that Bear’s advisory and Leveraged Finance business have value to, say, a P.E. buyer.

Well, even if it wasn’t likely, the markets must be assuming that a higher bid was likely, right? To that end, I had a post all ready! Bear closed at $5.91 today. If you assume that premium is due to a higher price, then there’s a 50/50 chance Bear get’s bought at $9.50 ($5.91 – $2.00 is approx 50% * ($9.50 – $2.00), essentially assuming the share price premium is a probability times a premium from a higher priced deal). I had all the numbers crunched. Alas, Felix has quashed that one too. I’m not 100% sure I buy the “debt holders are buying the stock” argument, but my other theories are all killed.

Unfortunately, then, I have no clever post. Although, here is one question answered.

Bear Stearns: Notes and Predictions

Wow. What a difference a day makes. Bear Stearns is now, apparently, being fire-sold for $2 a share to avoid being fire-sold for the values of it’s assets minus it’s liabilities.

I was reading the WSJ piece on the topic, and it seems like there was a lot of pressure applied by the Fed to ensure Bear got sold, with no regard for shareholders (the article states this, in essence). So counterparty risk is now secure. Great! But wouldn’t it have been better to run a real process and determine the value of the company? Wouldn’t it have been more valuable to not send the message that the “health of the financial markets” is more important than a firm’s sale occurring at their true equity value? (And aren’t both of those, taken together, a contradiction? Mis-valued assets was how this mess got started.)  So, let’s make some bold predictions! I don’t think they will all be right, but they are obviously all reasonable to me. I’ll show my hand and give the probability I ascribe to the prediction coming true, as well.

Prediction: Lots of shareholder lawsuits. K.K.R. was looking a bidding, so was J.C. Flowers, and the Fed says the deal needs to be done today, so they get crammed out. Who do you sue? Everybody of course! Hence JPM estimates $6b in costs for this transaction, first item listed–litigation. Probability: 100% (Bonus prediction: Someone notable from Bear joins in a lawsuit or files one themself! Probability: 50%)

Prediction: The price gets raised. A process wasn’t run, shareholders will demand more, and the Fed is taking $30 billion in risk. For $1 billion in accretion to earnings, and not even being in the first loss position on the toxic assets Bear is holding, why pay such a low price? This will become a problem for JPM. Keep in mind, this can be raised (the pruchase price) by having to pay out certain shareholders more than the bid price. For example, employees they wish to retain might have shares made whole at a higher level than the sale (you have 40k shares of BSC, you get $40 in JPM stock for each share if you stay, for example). Probability: 70%

Prediction: JPM will never see some of those assets add to their franchise. If the prime brokerage business really saw the kinds of outflows reported by the media (from Bear, that is) JPM could already be finding itself over-paying for that asset. And the mortgage and securitization business at Bear? Management for that business are at the top of that market in terms of knowledge and relationships–watch that business experience brain drain quickly. Probability: 70%

Prediction: Integration will be a nightmare. Culture clash will occur at many points in the process and within many businesses. JPM and Bear’s cultures aren’t compatible. Bear is a very raw environment and is very cut-throat. You’ll see this get ugly, fast. Big names on both sides will leave and power struggles will be common. Perhaps this is normal merger behavior, but it will be worse because the Bear employee have already been financially destroyed. You’ll see resentment for JPM from ex-Bear employees and silos form within the firm. It will be difficult to interact with certain parts of the firm depending on where you worked when JPM bought Bear. Ouch. Probability: 60%

Well, that’s it for now. I’m sure much more information will leak out as this deal develops. If this drags on or lots of game-changing information comes to light, I might revisit these later.