Mar 21, 2008

Bear Stearns sold to JP Morgan - $240 million buyout

Bear Stearns sold to JP Morgan

NEW YORK: JPMorgan Chase & Co agreed to buy Bear Stearns for $240 million, about 90% less than its value last week, after a run on the company ended 85 years of independence for Wall Street's fifth-largest securities firm.

Shareholders of Bear Stearns will get stock in JPMorgan equivalent to about $2 a share, compared with $30 at the close on March 14, the New York-based companies said in a statement late Sunday. The Federal Reserve is providing financial backing to JP Morgan, the second-biggest US bank, and also cut the rate on direct loans to banks in its first emergency weekend action in almost three decades to stave off a broader market panic.

JPMorgan CEO Jamie Dimon bought Bear Stearns, once the biggest underwriter of US mortgage bonds, for less than the value of its real estate after clients, alarmed by speculation about a cash shortage, withdrew $17 billion in two days. Faced with the prospect of bankruptcy, Bear Stearns CEO Alan Schwartz was forced to accept the deal less than five days after he assured investors that the company's "liquidity cushion" was sufficient to weather credit-market losses.

"Bear Stearns shareholders are at the short end of the stick," said David Hendler, an analyst at New York-based CreditSights. "This was done in the market's best interests. They had to get this done or they would risk runs on other companies."

JPMorgan will give investors 0.05473 shares of its common stock for every share of Bear Stearns they own. Including shares in an employee-incentive plan, the purchase price may reach $270 million. JPMorgan, whose shares closed at $36.54 in New York trading on March 14, will get funding for the transaction from the Fed, including support for as much as $30 billion of Bear Stearns's "less-liquid assets".

Bear Stearns plunged 87% to $3.97 in Frankfurt trading on Monday. "Jamie Dimon's done a great deal because the Federal Reserve is paying for it," said investor Jim Rogers, who co-founded the Quantum Hedge Fund with George Soros in the 1970s, during an interview. JPMorgan "stands behind Bear Stearns," Dimon, 52, said in the statement.

"Bear Stearns's clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns's counterparty risk," he said. Without a resolution this weekend, Bear Stearns's situation would have continued to deteriorate when markets resumed trading, according to analysts and investors. Yet the value placed on the company, whose shares closed as high as $158.39 last April, raised questions about share prices for the rest of Wall Street.

"This is a serious crisis," said David Goldman, portfolio strategist at Asteri Capital in New York and former head of debt research at Bank of America, the biggest US bank by market value. "For Bear's stock price to go to effectively zero, contrary to market expectations, even at the close on Friday, tells us that something is systematically very wrong and we're at a very dangerous moment," Goldman said. If a sale hadn't been announced, Bear Stearns, which employs about 14,000 people, probably couldn't open its doors for trading, he said.

Founded in 1923, Bear Stearns survived the Great Depression and first sold shares to the public in 1985, under then-CEO Alan "Ace" Greenberg. Monday's fire-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, which invested in securities linked to subprime mortgages.

Those failures caused investors to doubt the value of any asset linked to the mortgage market, Bear Stearns's biggest business. The collapse of Bear Stearns ranks along with Drexel Burnham Lambert as the biggest in Wall Street history.