JPMorgan high-fives Bear Stearns
Brokerage quintuples offer to $10 a share and will purchase 39.5% of company to help ensure deal goes through
NEW YORK (CNNMoney.com) -- Seeking to calm angry shareholders and employees, JPMorgan Chase quintupled its offer for Bear Stearns Cos. to roughly $10 a share Monday.
The bank will also acquire 39.5% of Bear Stearns (BSC, Fortune 500) by scooping up 95 million newly issued shares to make it tough to derail the deal, according to a statement issued just after the U.S. stock markets opened. This part of the arrangement is scheduled to be completed around April 8. JPMorgan would only need another 10.5% of shareholder votes to close the merger.
Bear Stearns shareholders will now receive 0.21753 share of JPMorgan stock, up from 0.05473. Bear Stearns shares closed Monday at $11.25, up 88.8%, while JPMorgan (JPM, Fortune 500) shares were up 1.3% to $46.55.
The completion of the buyout was brought into question last week after some large Bear Stearns shareholders mobilized against the buyout. The deal, which was negotiated over three days at the prompting of the federal government and announced the evening of March 16, initially valued the troubled investment bank at $2 a share, a 93% discount from its closing price on March 14.
But shares traded above that all week in anticipation of another suitor making a higher bid.
Many Bear Stearns employees, who together own about a third of the company, were furious that their stakes would be virtually wiped out. Billionaire Joseph Lewis, whose holdings include 8.35% of Bear Stearns, said in a federal filing last week that his investment funds would "take whatever action that they deem necessary and appropriate to protect the value of their investment."
Executives at both firms defended the modified terms.
"We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," Jamie Dimon, JPMorgan Chase's chief executive, said in a statement.
"Our Board of Directors believes that the amended terms provide both significantly greater value to our shareholders, many of whom are Bear Stearns employees, and enhanced coverage and certainty for our customers, counterparties, and lenders," Alan Schwartz, Bear Stearns' chief executive, said in a statement.
"The substantial share issuance to JPMorgan Chase was a necessary condition to obtain the full set of amended terms, which, in turn, were essential to maintaining Bear Stearns' financial stability," he added.
The new arrangement will likely see the deal to completion, said Brad Hintz, senior analyst at Sanford C. Bernstein & Co. Opponents would have to try to contest JPMorgan's purchase of a 39.5% stake in court.
"The 39.5%, plus the support of the shares owned by the insiders sitting on the board, will make it difficult for a competing bidder," Hintz said.
Also, even at $10 a share, the agreement should not be viewed as a bailout since shareholders will still lose the bulk of their stakes, he said. Government officials have come under criticism for organizing a bailout of Bear Stearns, while doing less for the millions of Americans losing their homes to foreclosure.
In addition to the price, which now values Bear Stearns at a relatively paltry $1.4 billion not including the additional shares being issued, or $2.3 billion with them, other terms of the agreement were modified.
JPMorgan now will bear the risk of the first $1 billion of losses if Bear Stearns' assets go bad. The Federal Reserve Bank of New York will cover the risk for the remaining $29 billion, instead of being on the hook for all of the first $30 billion in losses, as was originally announced March 16.
To do this, the New York Fed will take control of $30 billion of Bear Stearns' assets through a newly formed limited liability company managed by BlackRock Financial Management. The assets would serve as collateral for $29 billion in financing from the New York Fed at a 2.5% rate.
JPMorgan Chase will be responsible for the first $1 billion of losses in the portfolio, while the New York Fed would keep any gains.
The Fed, with the support of the Treasury Department, is taking these steps "to bolster market liquidity and promote orderly market functioning," the central bank said in a statement.
By transferring responsibility for the first $1 billion in losses to JPMorgan, the Fed is minimizing both its risk and criticism that it created a "moral hazard" by giving the impression it will bail out failing firms, David Hendler, analyst with CreditSights, wrote in a report.
JPMorgan was first called March 14 to rescue Bear Stearns, which had suffered a classic run on the bank the day before.
Amid rumors questioning Bear Stearns' financial health, institutional customers started demanding their funds and asking the bank to put up more collateral to back its borrowings. Bear Stearns turned to the Fed, which asked JPMorgan to funnel funds to the embattled investment bank that the government would provide.