Last Updated: March 24, 2008: 1:16 PM EDT
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Bulls run wild at Bear Stearns

The stock's rise says investors are betting on an even better deal, but this time JPMorgan's hand looks much stronger.

By Colin Barr, senior writer

NEW YORK (Fortune) -- Can Bear Stearns shareholders do even better? Hopes may be running high after Joseph Lewis, a major Bear Stearns shareholder, has squeezed a higher offer out of JPMorgan Chase.

JPMorgan Chase (JPM, Fortune 500) agreed Monday to quintuple the value of its all-stock offer for Bear Stearns, to $10 a share. The revamped agreement, valued at $1.18 billion, comes just a week after JPMorgan agreed to buy the cash-strapped brokerage firm with backing from the Federal Reserve. The deal staved off a probable Bear Stearns bankruptcy that threatened to swamp the financial sector with a new wave of uncertainty.

Monday's revised deal seeks to placate Bear Stearns shareholders who were outraged that they initially stood to get only $2 apiece for shares that fetched as much as $159 each a year ago. A majority of Bear Stearns shareholders must approve the transaction - a fact that hasn't been lost on investors such as Lewis, the billionaire currency trader who is Bear's second-biggest shareholder. Lewis had called the deal "derisory" and, in a regulatory filing last week, vowed that he and other members of his group would "take whatever action that they deem necessary and appropriate to protect the value of their investment in the shares."

Bear Stearns (BSC, Fortune 500) shares soared last week on Lewis' veiled threat - and prompted JPMorgan chief Jamie Dimon to sweeten his offer. "We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," Dimon said in Monday's press release, "and bring more certainty for our respective shareholders, clients, and the marketplace."

Or maybe not. Some investors are betting that we haven't heard the last from Lewis. Bear Stearns shares doubled in heavy trading Monday, to $12 each, showing that some on Wall Street believe even the revised deal isn't high enough.

There are other possible explanations for Bear's latest rally. Paul Hickey at Bespoke Investment Group in Harrison, N.Y., says there is "a big contingent of holders who aren't selling" Bear Stearns stock.

Hickey notes that Bear employees hold about 30% of the stock, but many do so through restricted shares that haven't yet vested and therefore can't be traded. Other holders who are unlikely to sell are big investors like Lewis, who owned 12 million shares after a purchase earlier this month, and perhaps some passive investors such as index funds, Hickey says.

Further adding to the mix is the hefty short position in Bear Stearns, which Hickey estimated at 20% as of Monday morning. Investors who have been betting the shares would fall will be inclined to buy the stock Monday to close out those trades now that it's clear what the stock might be worth.

What's more, the structure of the revised merger agreement suggests it's unlikely that JPMorgan would sweeten the pot yet again. The new pact calls for JPMorgan to buy 95 million Bear Stearns shares at $10 apiece within two weeks. That will give JPMorgan a nearly 40% stake in Bear before shareholders vote on the deal. Bear's directors have agreed to vote in favor of the deal as well, throwing cold water on the notion that Jimmy Cayne, the bank's chairman and former CEO, might put together a rival bid.

Alan Schwartz, Bear Stearns' chief, said in a statement that the JPMorgan share purchase was "a necessary condition to obtain the full set of amended terms, which in turn, were essential to maintaining Bear Stearns' financial stability."

Together, those factors seem to remove any doubt about whether JPMorgan will be able to carry the shareholder vote, whenever it takes place.

Also complicating matters for a rival bidder is the Fed. Regulators have gone out on a limb, politically, to make this deal happen, including a $30 billion guarantee to help finance it. The New York Times reported earlier Monday that the Fed wasn't happy with a higher price for Bear Stearns stockholders because it wanted to avoid being seen as having bailed out equity holders with taxpayer money. To placate regulators, JPMorgan agreed to take on the first $1 billion of losses from Bear Stearns' bond portfolio - a move that likely eased Fed worries. It also presents another hurdle for potential bidders.

The Fed, in a statement, said it would set up a limited liability company to control $30 billion worth of Bear Stearns assets. Those assets, in turn, will be pledged as collateral for the Fed's guarantee, now valued at $29 billion.

So what accounts for the 20% premium that Bear Stearns shares were fetching midday Monday? Perhaps traders have observed that speculating on a better buyout price worked once - so why not try it again?

"Who knows exactly what it is that's causing it," Hickey says. But there are signs that sanity is slowly returning. After last week's huge gains, Hickey says, Monday's trading in Bear stock is at least "closer to what you'd expect." To top of page

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