March 17 (Bloomberg) -- JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. for $240 million, about 90 percent 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 yesterday. The Federal Reserve is providing financial backing to JPMorgan, the second-biggest U.S. 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 Chief Executive Officer Jamie Dimon bought Bear Stearns, once the biggest underwriter of U.S. 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 Inc. ``This was done in the market's best interests. They had to get this done or they would risk runs on other companies.''
`Serious Crisis'
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 88 percent to $3.63 in Frankfurt trading today.
``JPMorgan Chase 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.''
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 Corp., the biggest U.S. bank by market value.
Eight-Month Slide
``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 systemically 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. Today'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 Inc. and Kidder Peabody & Co. as the biggest in Wall Street history.
``The past week has been an incredibly difficult time,'' Schwartz, 58, said in the statement. ``This transaction represents the best outcome for all of our constituencies based upon the current circumstances.''
Reduced Fortunes
Schwartz, an executive with more than 30 years of experience at Bear Stearns, became CEO less than three months ago, as the hand-picked choice of his predecessor, James ``Jimmy'' Cayne, 74.
Cayne, who remains non-executive chairman, stepped down after reporting an $854 million fourth-quarter loss, the first in the company's history. He was at a bridge tournament in Detroit last week as speculation about the firm's cash position pummeled the stock.
Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under terms of the JPMorgan takeover, his holdings are now worth about $12 million.
Joseph Lewis, Bear Stearns's second-largest shareholder, has spent more than $1 billion on the firm's stock since September, paying as much as $150 a share. Lewis, a 71-year-old billionaire, wasn't planning to reduce his stake, a person close to him said March 11. He's now entitled to $22 million of JPMorgan shares.
Citic Scraps Deal
Beijing-based Citic Securities Co. canceled a proposed $1 billion investment in Bear Stearns, said Kong Dan, chairman of Citic Group, the company's parent, in an interview today. Citic had agreed in October to buy a stake in Bear Stearns when the company's stock was trading at more than $117.
``To see a situation involving a bailout lead to shareholders getting pretty much wiped out is a pretty significant event for the market,'' said Ben Wallace, who helps manage $800 million, including stock in JPMorgan, for Grimes & Co. in Westborough, Massachusetts. ``It's going to raise concerns'' about the value of financial stocks, he said.
The Fed's attempt to rescue Bear Stearns last week with a cash infusion failed to avert a crisis of confidence among the company's customers and shareholders, who drove the stock down a record 47 percent on March 14, when the emergency funding was announced.
45-Story Building
Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per-square- foot that comparable office space in the city is currently fetching.
JPMorgan Chief Financial Officer Mike Cavanagh said on a conference call after the sale was announced that the bank was comfortable with the values Bear Stearns had assigned to the mortgage-related assets on its books. Asked to explain why JPMorgan was paying about $2 a share for a company with a book value -- assets minus liabilities -- of $84 a share, Cavanagh said the price reflected the risk the firm was taking.
It ``gives us the flexibility and margin of error that's appropriate given the speed at which the transaction came together,'' he said. JPMorgan said it was confident Bear Stearns shareholders would approve the sale.
Counterparty Risk
``If you're buying equity for free and the liabilities are pretty well capped, it sounds like it's good for JPMorgan shareholders,'' Wallace said. ``The thing that everybody's been worried about has been the counterparty risk, and if this gives people more confidence, that will be good for the markets.''
Minutes after the deal was announced, the Fed cut the so- called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it.
Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts said.
`A Lot of Value'
The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July during the biggest housing slump in a quarter century.
``As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,'' said William Fitzpatrick, who helps oversee $1.6 billion at Racine, Wisconsin- based Optique Capital Management, including JPMorgan shares. ``That's the crown jewel, and that would fit into JPMorgan's business extremely well.''
Dimon's New York-based company has suffered fewer losses than rivals during the credit-market contraction, which has prompted $195 billion of writedowns and losses by Wall Street's biggest banks and securities firms.
JPMorgan has posted $3.7 billion of writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc., the third-biggest U.S. bank by market value.
Paulson Involved
Treasury Secretary Henry Paulson defended the Fed's bailout yesterday, saying policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy. Paulson said he was involved with the discussions on Bear Stearns's future this weekend, without elaborating.
``There's always a decision to be made to say what's best for the stability of the marketplace, the orderliness of the marketplace,'' Paulson said. ``I think we made the right decision.''
When Bear Stearns invited potential buyers for detailed presentations by department chiefs, only JPMorgan and private equity firm J.C. Flowers & Co. showed up, according to people familiar with the talks.
Other potential buyers, such as Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn't send representatives.
Bear Stearns has offices in cities including London, Tokyo, Hong Kong, Beijing, Shanghai, Singapore, Milan and Sao Paulo, according to its Web site.
JPMorgan's participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Charles Geisst, the author of ``100 Years on Wall Street.''
The bank has also profited from its intervention. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.
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 yesterday. The Federal Reserve is providing financial backing to JPMorgan, the second-biggest U.S. 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 Chief Executive Officer Jamie Dimon bought Bear Stearns, once the biggest underwriter of U.S. 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 Inc. ``This was done in the market's best interests. They had to get this done or they would risk runs on other companies.''
`Serious Crisis'
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 88 percent to $3.63 in Frankfurt trading today.
``JPMorgan Chase 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.''
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 Corp., the biggest U.S. bank by market value.
Eight-Month Slide
``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 systemically 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. Today'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 Inc. and Kidder Peabody & Co. as the biggest in Wall Street history.
``The past week has been an incredibly difficult time,'' Schwartz, 58, said in the statement. ``This transaction represents the best outcome for all of our constituencies based upon the current circumstances.''
Reduced Fortunes
Schwartz, an executive with more than 30 years of experience at Bear Stearns, became CEO less than three months ago, as the hand-picked choice of his predecessor, James ``Jimmy'' Cayne, 74.
Cayne, who remains non-executive chairman, stepped down after reporting an $854 million fourth-quarter loss, the first in the company's history. He was at a bridge tournament in Detroit last week as speculation about the firm's cash position pummeled the stock.
Cayne ranked as Wall Street's richest CEO, with $1.3 billion of assets, according to Forbes magazine's 2007 billionaire survey. His stake in the firm approached $1 billion last year when the shares reached their peak price of $170. Under terms of the JPMorgan takeover, his holdings are now worth about $12 million.
Joseph Lewis, Bear Stearns's second-largest shareholder, has spent more than $1 billion on the firm's stock since September, paying as much as $150 a share. Lewis, a 71-year-old billionaire, wasn't planning to reduce his stake, a person close to him said March 11. He's now entitled to $22 million of JPMorgan shares.
Citic Scraps Deal
Beijing-based Citic Securities Co. canceled a proposed $1 billion investment in Bear Stearns, said Kong Dan, chairman of Citic Group, the company's parent, in an interview today. Citic had agreed in October to buy a stake in Bear Stearns when the company's stock was trading at more than $117.
``To see a situation involving a bailout lead to shareholders getting pretty much wiped out is a pretty significant event for the market,'' said Ben Wallace, who helps manage $800 million, including stock in JPMorgan, for Grimes & Co. in Westborough, Massachusetts. ``It's going to raise concerns'' about the value of financial stocks, he said.
The Fed's attempt to rescue Bear Stearns last week with a cash infusion failed to avert a crisis of confidence among the company's customers and shareholders, who drove the stock down a record 47 percent on March 14, when the emergency funding was announced.
45-Story Building
Bear Stearns's profit exceeded $2 billion in 2006, yet the price JPMorgan is paying is about one quarter the value of the securities firm's headquarters building in midtown Manhattan. The 1.2 million-square-foot, 45-story structure built in 2001 is worth about $1.2 billion, based on the average $1,000 per-square- foot that comparable office space in the city is currently fetching.
JPMorgan Chief Financial Officer Mike Cavanagh said on a conference call after the sale was announced that the bank was comfortable with the values Bear Stearns had assigned to the mortgage-related assets on its books. Asked to explain why JPMorgan was paying about $2 a share for a company with a book value -- assets minus liabilities -- of $84 a share, Cavanagh said the price reflected the risk the firm was taking.
It ``gives us the flexibility and margin of error that's appropriate given the speed at which the transaction came together,'' he said. JPMorgan said it was confident Bear Stearns shareholders would approve the sale.
Counterparty Risk
``If you're buying equity for free and the liabilities are pretty well capped, it sounds like it's good for JPMorgan shareholders,'' Wallace said. ``The thing that everybody's been worried about has been the counterparty risk, and if this gives people more confidence, that will be good for the markets.''
Minutes after the deal was announced, the Fed cut the so- called discount rate by a quarter of a percentage point to 3.25 percent. The Fed also will lend to the 20 firms that buy Treasury securities directly from it.
Bear Stearns's prime brokerage unit, which provides loans and processes trades for hedge funds, generated $1.2 billion in revenue last year. That business is probably the only piece left of the company with value after the mortgage market collapsed last year, analysts said.
`A Lot of Value'
The prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. About a sixth of the firm's income came from packaging and trading mortgage bonds, a market that has been almost completely frozen since July during the biggest housing slump in a quarter century.
``As bad as things are at Bear Stearns, this is still a franchise with a lot of value, particularly the prime brokerage business, which is what JPMorgan is after,'' said William Fitzpatrick, who helps oversee $1.6 billion at Racine, Wisconsin- based Optique Capital Management, including JPMorgan shares. ``That's the crown jewel, and that would fit into JPMorgan's business extremely well.''
Dimon's New York-based company has suffered fewer losses than rivals during the credit-market contraction, which has prompted $195 billion of writedowns and losses by Wall Street's biggest banks and securities firms.
JPMorgan has posted $3.7 billion of writedowns, a fraction of the $22.4 billion reported by New York-based Citigroup Inc., the third-biggest U.S. bank by market value.
Paulson Involved
Treasury Secretary Henry Paulson defended the Fed's bailout yesterday, saying policy makers will do whatever is needed to prevent disruptions in financial markets from hurting the economy. Paulson said he was involved with the discussions on Bear Stearns's future this weekend, without elaborating.
``There's always a decision to be made to say what's best for the stability of the marketplace, the orderliness of the marketplace,'' Paulson said. ``I think we made the right decision.''
When Bear Stearns invited potential buyers for detailed presentations by department chiefs, only JPMorgan and private equity firm J.C. Flowers & Co. showed up, according to people familiar with the talks.
Other potential buyers, such as Royal Bank of Scotland Group Plc and HSBC Holdings Plc, which had expressed interest in the past, didn't send representatives.
Bear Stearns has offices in cities including London, Tokyo, Hong Kong, Beijing, Shanghai, Singapore, Milan and Sao Paulo, according to its Web site.
JPMorgan's participation in the bailout follows a long tradition at the bank of stepping in to rescue financial markets from crisis, according to Charles Geisst, the author of ``100 Years on Wall Street.''
The bank has also profited from its intervention. JPMorgan got at least $725 million of revenue for taking on half the energy trades from collapsed hedge fund Amaranth Advisors LLC in 2006.
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