Scramble to Put a JP Morgan-Bear Deal Together

The Wall Street Journal reports that JP Morgan is trying to solidify a deal for Bear before the Asian markets open:

Terms of the deal were still being hammered out Sunday afternoon. Reflecting the dire situation at Bear, the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m. Last year, the shares hit $170.

One stumbling point appeared to be the amount of risk that J.P. Morgan would absorb in any type of transaction. While J.P. Morgan is eager to snap up some of Bear Stearns assets — such as its prime brokerage business that caters to hedge funds — Chief Executive Officer James Dimon was reluctant to pursue the deal without certain assurances that would protect his firm’s exposure, said people familiar with the matter.

Despite the emergency funding from J.P. Morgan and the Federal Reserve that was announced Friday and gives Bear access to cash for an initial period of 28 days, the clock is ticking against the 85-year-old company. Regulators, bankers and investors are concerned that the firm could plummet even further when markets open Monday. A continued exodus by parties that Bear trades with could even cause the investment bank to collapse….

People briefed on the talks describe them as very fragile, meaning that they could culminate in a deal or very well fall apart. The final price paid could also be in flux.

Bear also has been preparing for the possibility of a bankruptcy filing, with that as the likeliest scenario if an acquisition by J.P. Morgan falls apart, according to a person familiar with the situation. Such a filing might even occur before financial markets in Asia open for Monday trading..

However, as we noted in our earlier post, a “deal” at this point can be at most a letter of intent, not legally binding. Will that satisfy the markets and more important, customers and counterparties? CNBC picked up on that concern:

Bear’s board is currently meeting to discuss the proposal, which based on the 118 million shares outstanding, would be valued at between $1.8 billion and $2.4 billion.

A deal in principle could be announced Sunday night, although the agreement would still need shareholder approval.

Here’s what makes this a tricky situation: without shareholder approval, there is no real deal, so other banks and clients may be reluctant to deal with Bear on Monday unless it’s part of a well capitalized JP Morgan.

Because of this, most executives inside Bear believe the Federal Reserve and Treasury will play some role in making sure there is a backstop if the shareholder approval isnt reached.

Let’s hope there is a deal and the key actors are reasonably satisfied that it will go through. Otherwise, we will have a wild ride this week.

And as I indicated in an earlier post, a bankruptcy for Bear looks truly terrifying. I hope I’m wrong about the downside, should it come to pass.

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  1. ssternlight

    A bank holiday tomorrow would not be a bad idea to buy some time to sort this out. Having said that, I don’t think the shareholders should get anything. It is indeed crony capitalism when the fed has to assume losses — and there will be substantial losses no doubt — and the shareholders get a partial redemption up front.

  2. ssternlight

    $2/share of stock and a $30B Fed guarantee. I can live with that even though it should be $0. Now we just have to see if the Fed has to cut a day early…

  3. S

    Note the investment grade collateral commitment on the new NY Fed facility. The Fed is basically openeing its balance sheet fully. None of this is good despite what the reliefers will say.

  4. Anonymous

    (and my math is probably botched, but a quick calculation indicates that Bear Stearns’ employees lost $200,000 each, on average, over the last seven days… not bad.)

  5. S

    wierd that the fed cut and new facility for the ibanks isnt being reported on the major newsights?

  6. ssternlight

    I wonder if the Fed is signaling a smaller rate cut to the markets in exchange for sending your tired, your poor, huddled toxic paper yearning to breathe free — or at least a free lunch in any event. :(

  7. Anonymous

    $2 a share (at 11:30 pm ET)! And it looks like JPM gets all the upside with no risk.

    Wonderful! No wonder Wall Street loves Benny.

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