In a controversial deal struck last week with the help of the Federal Reserve, JP Morgan had offered Bear Stearns investors about $2.50 per share in a fire sale buyout deal for the struggling firm. The company raised that offer to $10 per share Monday, hoping to soothe angry Bear Stearns shareholders — many of whom are also employees — whose stock peaked at $171.51 last year and was trading at about $60 two weeks ago.
“This will help the deal go through,” Wall Street analyst George Ball, of the brokerage firm Sanders Morris Harris Inc., told Bloomberg News. “The price is still catastrophically low, but it will change the attitude of people who stay at Bear. Those are the people Jamie [Dimon, CEO of JP Morgan] needs to win over.”
The Federal Reserve helped engineer the deal amid fears that Bear Stearns could collapse as its funds dwindled. The investment bank had invested heavily in the troubled mortgage-backed securities market.
The Fed’s move was controversial, with some analysts saying that it amounted to a government bailout of the bank.
But Bear Stern shareholders were also angry over what they saw as an undervaluing of their company stock. Last week, employees whose life savings were tied to the company’s stock were seen crying in the hallway, according to the New York Times.
“Let me say that the Bear Stearns situation has been very painful for the Bear Stearns shareholders,” Treasury Secretary Henry Paulson said last week on the NBC “Today” show, referring to the $2 a share price. “So I don’t think that they think that they’ve been bailed out here.”
Under the new deal, each share of Bear Stearns common stock will be exchanged for .21753 shares of JP Morgan stock, as opposed to the .05473 shares offered last week. That puts the value of the Bear Stearns stock at about $10 per share.
JP Morgan also agreed to buy 95 million newly issued shares of Bear Stearns common stock–about 39 percent of the outstanding Bear Stearns stock, according to the New York Times. In addition, JP Morgan will take responsibility for the first $1 billion of any losses associated with Bear Stearns assets, while the Fed agreed to finance the other $29 billion.
“We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise,” Dimon said in a statement.
Bear Stearns stock jumped 92 percent Monday morning after the news broke, from $5.49 to $11.45, according to the Associated Press. JP Morgan stock rose 3 percent, from $45.97 to $47.70.