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By Jennifer Yousfi
The original deal, first mentioned in October 2008, had CITIC, the security firm subsidiary of China's state-controlled CITIC Group, making a $1 billion investment that would convert to a 6% stake. The terms of the agreement amounted to a Bear Stearns stock price of approximately $120 per share.
But before the deal was finalized, Bear Stearns suffered a liquidity crisis that sent its share value plunging and ultimately resulted in a U.S. Federal Reserve-backed buyout by JPMorgan Chase & Co. (JPM) at a rock-bottom price of only $2 per share.
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"The preconditions and basis for the strategic cooperation agreement announced on Nov. 2, 2007, do not exist any more after the JPMorgan acquisition," CITIC Securities said in a statement last week. "As a result, the company has decided to terminate cooperation plans with Bear Stearns including originally planned investments by Bear Stearns and CITIC Securities in each other."
The agreement, which had Bear Stearns investing $1 billion in CITIC for an eventual 2% stake, was still awaiting final approval. As a result, CITIC was able to withdraw without sustaining any losses.
"Since the company has never signed any formal agreement with Bear Stearns and has never paid any money to Bear Stearns, the company will not bear any losses or investment risk from the termination of the originally planned deal," CITIC Securities said in the statement.
CITIC was able to back out with its $1 billion still intact, but other recent bailout investors haven't been quite so lucky.
In recent months, sovereign wealth funds have injected more than $70 billion into struggling commercial banks, brokerages and investment-banking institutions – most of them in the West. Most recently, the funds have provided bailout capital to such heavyweights as Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER), UBS AG (UBS), and Morgan Stanley (MS).
Many of those deals were valued at much higher stock prices than the banks are currently trading it. But the deals were made with a mid- to long-term perspective, with plenty of time for the stocks to recover. In addition, the emergency capital infusions left many of the state-controlled funds as the largest stakeholders in the respective banks, a feat that would have been nearly impossible to accomplish on the open market.
And many of these funds, what we here at Money Morning like to call the "Global Cash Barons," are looking for more than just an investment return: They are seeking the deal-making know-how that over time will transform them into global financial titans.
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Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street"