JPMorgan Chase Buys Bear Stearns for $2.00 a Share
Monday, March 17, 2008SUSIE GHARIB: A day of shock on Wall Street today in the wake of Bear Stearns fire sale to JPMorgan Chase for $2 a share. Just three months ago, Bear traded above $100. Also part of the deal: the Federal Reserve agreed to provide a $30 billion line of credit to JPMorgan to help cover Bear's potential liabilities. It's the first time the Fed has made such an offer since the great depression. We have two reports tonight looking at the Bear deal and whether other financial giants are facing a similar fate. We begin with Suzanne Pratt in New York.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: It is widely accepted on Wall Street that JPMorgan chase may have just made a sweetheart deal. By buying Bear Stearns for $2 a share or $240 million, JPMorgan is getting the beleaguered investment firm for a fraction of its estimated book value. It's also paying about one quarter of the value of Bear's headquarters building, located in midtown Manhattan. Sandler O'Neil analyst Jeff Harte, whose firm does investment banking and non-investment banking business with JPMorgan, says the purchase is a smart move for JPMorgan.
JEFFERY HARTE, BANKING ANALYST, SANDLER O'NEIL: Assuming the deal closes, it could turn into a home run. They are paying what seems like a very low price and getting some very nice assets that I think will work out well for them.
PRATT: For Bear shareholders, experts say it's hard to view the transaction as anything more than a fire sale. Many are questioning whether Chapter 11 might be a better option as perhaps Bear's assets could fetch more in liquidation. Some angry shareholders reportedly are already taking legal action. Bear stock, which closed on Friday at $30 a share, closed today near $5, $3 above the purchase price. Experts say the differential suggests some investors are hoping for a white knight.
HARTE: You begin to start thinking that some investors are willing to take the chance that a bigger bid will show up or that maybe Bear Stearns can get back on its feet again and actually realize something more than $2 a share in book value. In this current environment, I am skeptical that that could play its way out though.
PRATT: That's because even at $2 a share, JPMorgan is still taking on considerable risk. The nation's third largest bank says it's putting aside a total of $6 billion to account for litigation and other merger costs. Towers Perrin M&A expert Mark Arian says not only are distress acquisitions costly, but often they just don't work.
MARK ARIAN, GLOBAL LEADER, M&A, TOWERS PERRIN: You've got a situation where key talent may leave. You've got an issue where you've got organizational cultures that are very different, very disparate. You've got a situation where there's been very little integration preparation. So, a shotgun marriage has all the trappings of failure in that it can't lay good track.
PRATT: Still, others say if anyone can make this deal work its JPMorgan and CEO Jamie Dimon. Both have solid reputations for turning distressed assets into profitable businesses. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: This is Erika Miller. The collapse of Bear Stearns has investors worried other major financial firms could soon follow. Morningstar analyst Ryan Lentell says Lehman Brothers is probably the most vulnerable.
RYAN LENTELL, FINANCIAL ANALYST, MORNINGSTAR: It does face similar challenges in that it did have a lot of its business in the securitization market although it is a much more diversified business model.
MILLER: Today, Moody's Investors Service lowered its ratings outlook on Lehman's long term debt from positive to stable. For its part, Lehman maintains its liquidity position is strong. UBS shares fell 11 percent today on speculation it might be next to fall because it has been hit hard by sub-prime losses. But Lentell says Europe's biggest bank by assets probably won't go belly up.
LENTELL: It has a depository funding base which is much more stable funding than complete reliance on the repo market, as many of the investment banks in the U.S., the Lehmans, the Bears, the Morgan Stanleys are much more reliant on the short term debt markets.
MILLER: Lentell says JPMorgan Chase is in the best financial shape of all the major banks because it has relatively little sub-prime exposure. Market strategist Tony Dwyer warns investors against buying financial stocks right now.
ANTHONY DWYER, EQUITY STRATEGIST, FTN MIDWEST SECURITIES: It may be just a little bit too early because a lot of the financials, you don't know what they own yet and how its valued. Until you get a better handle on that rather than guess, we would wait to see the turn.
MILLER: But Dwyer does not think the trouble in the financial sector will pressure the overall stock market for long.
DWYER: Over the next three hours or three days, the outlook is very uncertain for stocks. Over the next three months to the next three quarters, I think it is very positive. Historically the market makes a low when you have a financial crisis and the Bear Stearns situation is certainly that.
MILLER: Investors will get more details on the health of the financial sector tomorrow when Lehman Brothers and Goldman Sachs report first quarter earnings followed by Morgan Stanley on Wednesday. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
