Monday, March 24, 2008

JP Morgan may up bid to $10 for Bear Stearns

In a surprising move, JP Morgan will most likely raise its bid to $10/share for Bear Stearns according to Bloomberg. This appears to be a smart move by JP Morgan because there was an angry mob of Bear Stearns shareholders that seemed ready to go down kicking and screaming. The question that I have about this whole takeover is why were there no other offers for Bear Stearns from competing banks or private equity?

I find this fact very interesting and IMO it says a lot about how poor the balance sheets must be at our financial institutions. Bear Stearns building alone in NYC is valued at $1.2 billion. If Bear's offer is raised to $10 share then JP Morgan is buying Bear Stearns for about $1 billion. This is less than Bear Stearns headquarters alone is worth!!! Its not like Bear Stearns shareholders haven't been trying to find another buyer as Bloomberg explains:

"Lewis and James ``Jimmy'' Cayne, Bear Stearns's 74-year-old former chief executive officer, are trying to recruit investors to counter JPMorgan's offer, the New York Post reported last week, citing people familiar with the situation.
The two have approached private equity firms including J.C. Flowers & Co. and Kohlberg Kravis Roberts & Co.; banks including Barclays Plc, HSBC Holdings Plc, Credit Suisse Group and Royal Bank of Scotland Group Plc; sovereign wealth funds and China's Citic Securities Co., according to the Post."

So BSC shareholders went to everyone including the banks, SWF's, and private equity and found no takers. So the question must be asked: Is this a sign that Bear Stearns books are that bad and its completely worthless or are its competitors in such bad shape themselves that they can't even afford to take on Bears risk and cough up the $1 billion dollars in cash? My guess is its somewhere in between.

The fact that the Fed was pushing to get this deal done at $2/share shows you the lack of confidence that the Fed has in the financial markets right now. A comment from Jay Moghe:

Jay Moghe, who helps manage $160 million as the Singapore-based head of Opes Prime Asset Management Pte. ``It would look quite embarrassing to the Fed now if the situation results in there being a bidder at a higher price, seeing as they have underwritten the deal at $2.''

The Fed pushing for a deal at $2/share when the final number ends up at $10 a share tells you they are in full panic mode. Imagine the data they are able to see that we can't. Please take these developments a strong warning sign that this crisis is nowhere close to being over and invest accordingly.

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