I Bear-ly Knew You
So it’s done. Bear Stearns is being sold to JP Morgan Chase (JPM) for the (not so) astonishing price of - gulp - $2 per BSC share. Get the prime brokerage operation, the clearing business, the high net worth franchise, the nice building, and trash the rest. My only question is: did JPM overpay?
Here is what I said a mere two days ago:
Bear Stearns, as we know it, is gone and never to return. Why did Ace have to give up the reins? Ace was all about managing risk. It is hard to imagine this happening with him at the helm. But bottom line: we are seeing another LTCM-style bail-out, only with the Fed’s more active involvement. I believe moral hazard will be skirted because equity will largely be wiped out. This is a crisis of liquidity as well as a crisis of uncertainty. Just how much are those illiquid assets worth? Incalculable at this time…JP Morgan Chase (as a potential acquirer)? A very strong possibility due to the business synergies and knowledge of their book. A headache for sure, but at the right price they’ll simply take a few aspirin and call me in the morning. They’ll print the trade.
Well, it pretty much played out as I expected. JPM as the buyer and equity holders wiped out. From $170 to $2 - simply stunning. The fact is, however, that notwithstanding the seemingly bargain-basement price of $236 million that JPM bought the stock - and with it all of the associated assets and liabilities - of Bear Stearns. Just how large that difference between book value and the $2 is, as I wrote Friday night, currently incalculable. Sure, they get some plum assets as mentioned above. But that asset value could be wiped out in a nanosecond if some of those Tier III derivatives go to hell, the mortgage book continues to erode as do all the other leveraged credits on their balance sheet. JPM is making a Citadel/E*TRADE type bet, with the hope that the margin of safety is at least as large. The jury will be out for quite some time, but I wouldn’t say that the deal is a slam dunk.
I don’t take (much) issue with Jamie Dimon for doing this deal. He is taking a calculated risk, a risk that JPM certainly can absorb in exchange for the prospects of a rich payoff. But before we go patting Mr. Dimon on the back let a little time go by. Because this deal might look a lot less like a bargain a few months from now.
Addendum (Monday 3/17AM):
A few additional comments. JPM is buying the stock, not the assets, of BSC. Therefore, JPM is effectively stepping into BSC shareholders’ shoes, open to all the the portfolio write-downs that will inevitably commence. So discussions around the value of one-off assets (“Gee, isn’t their building worth $1 billion - so doesn’t this mean that JPM is getting paid to take BSC for $236 million?”) is neither here nor there except in the context of getting to the bottom of what hard book value is, which is to say net of portfolio write-downs and diminution in the value of BSC’s most valuable businesses due to uncertainty.
Just because something thinks prime brokerage was worth $2 billion yesterday doesn’t mean that it is today. The same applies to the clearing, high net worth and other client-driven operations. Clients have been voting with their feet and fleeing, so I put little credence in any breakup analyses I’ve seen to date. Until the dust settles on the current phase of our financial meltdown, who knows. The only thing immune from such client-driven value destruction is the headquarters building (though clearly not immune from other types of value destruction).
I believe the Fed’s $30 billion backstop addresses most if not all of the portfolio issues related to BSC’s holdings of mortgage securities with some left over. However, the combination of hard-to-value Tier III holdings and leveraged loans together with the value diminution in their high-value businesses raises the question “is it enough?” Bottom line: likely yes. But is also wasn’t so likely last week that BSC shareholders and employees would be wiped out and left to wonder “what happened?” So I am invoking the sentiment of that brilliant philosopher Yogi Berra: It ain’t over ‘til its over. And believe me, my friends, it ain’t nowhere near over.
Addendum 2 (Tuesday 3/25PM)
Well, it’s nice to see that at least someone agrees with me. And this someone is none other than Richard Bove, banking analyst at Punk Ziegel. He is now saying that JPM paid too much, heresy based upon much of the feedback I’ve received in the wake of my bold and irreverent statement. From today’s AP via Crain’s NY Business:
J.P. Morgan Chase & Co. will end up paying about $65 per share for
Bear Stearns Companies Inc., too high a price for a ”deeply troubled
company,” a Punk, Ziegel & Co. analyst said Tuesday.
Analyst
Richard Bove’s comments came after J.P. Morgan Chase raised its
per-share bid to $10, or about $1.47 billion, from $2. But Mr. Bove
noted the investment bank will spend just under $1 billion to buy an
additional 39.5 million Bear Stearns shares by April 8, and will absorb
the first $1 billion in losses from Bear Stearns’ portfolio.While the total initial costs are about $3.44 billion, J.P. Morgan will
likely record a 12-month loss of $6 billion to unite the two companies,
bringing the final per-share price to about $65 per share, he said.
Bear Stearns’ stock opened trading on March 12 at $65.60.
While
some may think that J.P. Morgan is getting Bear Stearns at a bargain
price, ”I do not,” Mr. Bove said in a note to clients. ”Bear Stearns
is a deeply troubled company which would have no value if the Federal
Reserve had not stepped in to bail it out.”
J.P. Morgan does
not need Bear Stearns mortgage operation, has a ”much stronger
investment banking business,” and the Bear Stearns New York
headquarters is ”just another piece of Manhattan real estate that it
must rid itself of,” Mr. Bove said.
While J.P. Morgan may want
Bear Stearns’ prime brokerage business, it is likely that the unit’s
best customers have already left for Goldman Sachs, he said.
Now I don’t know if Dick reads my blog, but his arguments are not that dissimilar from my own over the past 10 days. Nice to see someone on the sell side stepping up and making a contrarian call. I like it a lot.
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COMMENT:
AUTHOR: Timothy Sykes
EMAIL: tim@timothysykes.com
URL: http://www.timothysykes.com
DATE: 03/16/2008 10:33:33 PM
And thats why you are the master
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COMMENT:
AUTHOR: james
EMAIL: timmerjames@yahoo.com
URL:
DATE: 03/16/2008 10:43:53 PM
what do you think of wachovia? I’m in at $33+ and am wondering how bear might affect them; I’m looking long term 5+ years out. Thanks.
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COMMENT:
AUTHOR: Paul Denlinger
EMAIL: paul.denlinger@gmail.com
URL: http://www.chinavortex.com
DATE: 03/16/2008 10:54:13 PM
The question now is whether JP Morgan Chase with the Fed’s help can contain this, or whether it will become so big that it will threaten JP Morgan Chase and the others.
Time will tell…
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COMMENT:
AUTHOR: howard lindzon
EMAIL: howard@lindzon.com
URL: http://www.howardlindzon.com
DATE: 03/16/2008 11:35:35 PM
plus he is just using his paper roger. no cash
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COMMENT:
AUTHOR: Chris Rechtsteiner
EMAIL: txtinsight@gmail.com
DATE: 03/16/2008 11:54:39 PM
The deal may only be a value b/c the Fed is putting $30B up to ‘support it’. It is amazing how little play that safety net is getting.
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COMMENT:
AUTHOR: Roger
EMAIL: roger@informationarbitrage.com
URL: http://www.informationarbitrage.com
DATE: 03/17/2008 12:00:44 AM
Chris, I agree with you. Margin of safety. Will it be enough? Dunno. But yes, without the backstop a stock purchase would have been a non-starter.
Howard, the fact that it is stock is irrelevant. It was only a few hundred million bucks, anyway. The big issue is the value of the balance sheet, marked-to-market, relative to the Fed backstop plus the time JPM can hold the less liquid positions.
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COMMENT:
AUTHOR: Jason
EMAIL: jktang21981@gmail.com
URL:
DATE: 03/17/2008 03:31:02 AM
Isn’t the BS building in Midtown worth something north of 1Billion? If you factor in that (I don’t know if Bear owns it outright or not), then it looks like BS paid JPM to take them over ;).
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COMMENT:
AUTHOR: dave
EMAIL: doleary@mcocapital.com
URL:
DATE: 03/17/2008 09:32:32 AM
This deal is long from done. Shareholders must approve, and they will not. Not at $2, Jamie got greedy. Once the Fed made it clear he was bidding against himself the price dropped from 15 to 2 in an hour. Given that near every shareholder is 90% plus under water, who votes for this offer? The 5-10% of BSC employes who have a shot at keeping their jobs aside, the is no reason for any sane shareholder, without ulterior motivation, to support the transaction. They have far better chance of recovery forcing an orderly liquidation. Terms of the deal mandate that once voted down it must have a re vote in 12 months. That is a lot of time, as Don Ameche knows well, things change. We are a long way from done with this.
Agreeing to this merger was BSC management’s latest failure.
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COMMENT:
AUTHOR: Jason
EMAIL: jktang21981@gmail.com
URL:
DATE: 03/17/2008 10:15:38 AM
dave
I think the shareholders should vote for the offer - it is that or nothing. I can’t imagine Bear securing any other funding in the future, so they’re basically going to liquidate. If you’re a shareholder of Bear voting against the takeover, you’re basically betting that after liquidating all that toxic paper in a completely illiquid market, you’ll have more then 2 bucks a share after all the debt holders have been paid off.
Without knowing any other details, that just looks like a poor bet.
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COMMENT:
AUTHOR: jim
EMAIL: jsnyder@greatlakeshsa.com
URL:
DATE: 03/17/2008 12:01:14 PM
building isn’t part of the deal - plus there is a bit of debt on the building. I wonder how they came up with the $2 share price?
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COMMENT:
AUTHOR: just.a.guy
EMAIL: justa@guy.com
URL:
DATE: 03/17/2008 12:10:30 PM
dave, remember that ~30% of Bear’s equity is held by its employees. They probably have quality enough front row seats to know what happens if JP Morgan doesn’t put them on life support with the guarantee of the American taxpayer / Fed.
You think a Wall Street investment bank doesn’t know how to squeeze maximum value from a set of assets? To think they could hold out for a better deal is just asinine.
BSC shareholders should be thankful they’re getting anything, because in an “orderly liquidation,” they wouldn’t be.
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COMMENT:
AUTHOR: JustSemantics
EMAIL:
URL: http://profile.typekey.com/JustSemantics/
DATE: 03/17/2008 03:48:12 PM
What about the credit default swaps that JPM holds on Bear? That should count as part of the value they’re getting (vs. bankruptcy). Having to pay up on these in the near term might also have pushed JPM into dangerous balance sheet territory.
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COMMENT:
AUTHOR: alex morrow
EMAIL: texalope@gmail.com
URL:
DATE: 03/17/2008 05:03:47 PM
Bear shareholders became sacrificial lambs for the greater good. I feel saddest for the employees.
In my estimation, the Fed is reactive and doesn’t recognize the ramifications of their actions. Although I’m not an admirer of Cramer and his ways, I keep going back to his rant early on ” they have no idea”
I THINK GREENANKE will go down in history as the 2 worst fed chairman in history.
JPM shareholders have profited at the expense of BSC shareholders. Chase said they will use the process to make Bear shareholders keep voting for a year if necessary. Why, because Dimon knows he stole this business with the assistance of the US government on the backs of Bear shareholders and employees.
Under the theory of what comes around , goes around, I hope that Chase has severely underreserved for the lawsuits that are just starting.
Then again, maybe the Fed has clandestinely guaranteed to backstop those too.
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COMMENT:
AUTHOR: Yaser Anwar
EMAIL: yaser@yaseranwar.com
URL: http://www.linkedin.com/in/yaseranwar
DATE: 03/17/2008 05:46:42 PM
Bear Stearns: Worth Four Goldman Executives
Posted by Heidi Moore
Bear Stearns is worth $236 millionñat least to J.P. Morgan Chase. Do you know what else is worth that much? Well, its less than compensation of the top four executives at Goldman Sachs Group.
Thatís right, with the same money you can acquire an all-star investment-banking team of Lloyd Blankfein, Gary Cohn, Jon Winkelried and David Viniar, plus $34 million of seed money. Or you can buy Bear Stearns (at least you can if you have the backing of the Federal Reserve).
SEC filings show the compensation of Lloyd Blankfein at $70.3 million, President Gary Cohn at $72.5 million, Jon Winkelried at $71.4 million, and Chief Financial Officer David Viniar at $58.4 million. All together: $272.6 million.
Of course, Goldman is largely the exception among its brokerage-house brethren; the firm has remained relatively healthy and its total compensation expenses are larger than the gross domestic product of Panama. With its $62.4 billion market cap, Goldman could easily afford to buy 17.8 Bear Stearns, it also could buy 1.6 Merrill Lynches.
The former idea isnít so far-fetched: Goldman was apparently seen kicking the tires down at Bearís Madison Ave. headquarters last weekend. Goldman reports its earnings tomorrow. Still, given a general feeling of pessimism about brokerage houses, it may not be that anyone is in a buying mood.
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COMMENT:
AUTHOR: Stephen
EMAIL: charakter0@aol.com
URL:
DATE: 03/18/2008 11:47:50 PM
I agree JPM is buying the stock of BSC, and not the assets. But if you buy every share of the company, then you own the assets, correct?
Also - if the Fed has agreed to give JPM up to $30bn if the bad paper on Bear’s books actually goes up in flames, how does JPM not make out??
So in theory, they paid $236mm and now own a bulidng worth $1.2bn, even if all the businesses are now worth nothing.
What am I missing here?
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COMMENT:
AUTHOR: Roger
EMAIL: roger@informationarbitrage.com
URL: http://www.informationarbitrage.com
DATE: 03/19/2008 07:19:02 AM
Stephen, what you are missing is that $30 billion might not be enough of a backstop, even after taking their assets into account. Losses on their current debt portfolio, off-balance sheet derivatives positions, assets that are sold for less than expected, litigation costs, etc., may make the deal uneconomic. So yes, JPM is getting the building, the prime brokerage and clearing businesses, but it needs to be looked at in context and along with all the other crap they are getting. This is why looking at the value of the building in isolation and comparing it to the $236 million is a worthless exercise.
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2 years ago
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