J.P. Morgan Raises Its Offer for Bear Stearns
Tuesday, March 25, 2008
J.P. Morgan Chase yesterday increased its offer for the investment banking giant Bear Stearns by about $2 billion, putting down a shareholder revolt and all but guaranteeing that the wounded Wall Street firm would be sold before its troubles spread to the rest of the financial system.
The deal had been threatened by Bear Stearns shareholders, who saw their fortunes nearly wiped out last week when the firm agreed to be acquired for a paltry $2 per share in a deal engineered by the Federal Reserve. The hastily arranged transaction was designed to prevent a bankruptcy that could have led to a string of other investment bank collapses.
Stocks surged yesterday after investors learned that J.P. Morgan had boosted its offer to $10 a share. The Dow Jones industrial average jumped 1.5 percent yesterday and is up 3.7 percent in the last two days of trading. The Standard & Poor's 500-stock index, a broader measure, also rose 1.5 percent, and Bear Stearns stock zoomed ahead 89 percent.
A report showing an unexpected increase in home sales added to the cheer on Wall Street.
As part of the new Bear Stearns deal, the Fed's role was also renegotiated. The central bank originally had agreed to put public dollars on the line to guarantee $30 billion of risky mortgages owned by Bear Stearns. In the reworked deal, J.P. Morgan agreed to cover the first $1 billion in losses if the value of those securities falls, with the Fed responsible for any losses beyond that.
The New York Fed, which played a leading role in the negotiations, also provided more detail yesterday about how this multibillion-dollar government guarantee will work. The Fed will place the securities in a newly created limited liability corporation and hire BlackRock Financial Management to sell the securities gradually to minimize the market disruption.
Some of Bear Stearns's shareholders remained unhappy with the new price. But they now have little choice but to accept it.
J.P. Morgan was able to buy a 39.5 percent stake in Bear Stearns as a result of the new negotiations. Together with previously owned shares and pledges of support from Bear Stearns's board of directors, J.P. Morgan now has a lock on the majority it needs to win shareholder approval for the deal, according to a banker involved in the negotiations. The deal is slated to close April 8, he said.
"It's a done deal from a shareholder-vote perspective," said the banker, who spoke on condition of anonymity because he was not authorized to talk publicly about the negotiations.
Even at the higher price, the acquisition of Bear Stearns is a major coup for J.P. Morgan's chief executive, James Dimon. Ten years ago, his career seemed over after being forced out at Citigroup by his former mentor, Sanford Weill. Dimon returned to Wall Street as the head of J.P. Morgan two years ago, and since he took over, J.P. Morgan has surpassed Citigroup in market value.
In Bear Stearns, Dimon is acquiring one of Wall Street's top brokerage businesses, one long the envy of its peers. And he is getting it on the cheap. Two weeks ago, Bear Stearns was trading above $70 a share.
"Certainly it is a fivefold better deal for the shareholders," said George Ball, chairman of the brokerage firm Sanders Morris Harris. "And I think Jamie Dimon is delighted to pay a higher price to have a crew at Bear Stearns that might be sullen as opposed to outright riotous."