By Jason Simpkins
JPMorgan Chase & Co. (JPM) more than quadrupled its bid for troubled investment bank The Bear Stearns Cos. Inc. (BSC), from $278.5 million [$2.32 a share] to $1 billion [$10 a share]. News of the higher bid sent Bear Stearns shares up 115% by midday yesterday (Monday), before settling at $11.26, up 90% at the close for the day.
As insurance, JP Morgan also acquired a 39.5% stake in the beleaguered investment bank. Bear Stearns will issue 95 million new shares without seeking shareholder approval, the companies said.
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That means JP Morgan will need only 10% of shareholders to approve the takeover. Employees' total stake will drop to about one fifth from one third once the company issues the new stock. The amount JP Morgan will pay for the stake was undisclosed.
"This will help the deal go through," George Ball, who leads 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 [JPMorgan Chief Executive Officer James "Jamie" L. Dimon] needs to win over."
However, it is still possible for shareholders to pursue a lawsuit to block the deal on the grounds that the unorthodox board vote was an act of coercion.
Bear Stearns investors, many of who are at risk of losing their life savings, were outraged by the initial offer that valued the company at a mere one-fifteenth of its market price. According to a New York Times report, employees were seen crying in the hallways of the firm's Manhattan headquarters.
British billionaire Joseph Lewis said last week that he would use every bit of leverage from his 8.4% stake in the crippled financial giant to block the deal. Lewis said his shareholder group would take "whatever action that they deem necessary and appropriate to protect the value of their investment in the shares," including lobbying Bear Stearns and third parties to consider another transaction.
Lewis and Bear Chairman James Cayne were allegedly courting other possible suitors with the hopes of securing a rival bid.
Sources close to the deal told the Times that the U.S. Federal Reserve, which brokered the emergency deal to prevent a collapse, directed JPMorgan to pay no more than $2 a share for Bear because it didn't want the action to be perceived as an investor bailout.
In a television appearance on NBC's "Today" show Treasury Secretary Henry Paulson, who was also involved in negotiations, portrayed the deal as a move to ensure stability in the financial markets rather than an outright rescue.
"Let me say that the Bear Stearns situation has been very painful for the Bear Stearns shareholders," Paulson said. "So I don't think that they've been bailed out here."
JPMorgan was also lured back to the bargaining table after the company realized several "mistakes" had slipped through the original contract, including a sentence that would require JPMorgan to guarantee Bear Stearns' trades even if shareholders voted down the deal.
One source told the Times that JPMorgan Chief Executive Officer James Dimon was "apoplectic" when the error was discovered, and reportedly made several fervent calls to the company's lawyers.
As the possibility of the deal falling through became more likely, Dimon, who had previously threatened to "send Bear back into bankruptcy," was forced back into negotiations with Bear and the Federal Reserve, Friday.
Dimon offered his empathy to Bear Stearns employees in a speech last week.
"No one on Wall Street could have anticipated this. I feel terrible sometimes when people think we took advantage. I don't think we could possibly know what you all are feeling, but I hope that you give JPMorgan a chance," he said.
News and Related Story Links:
New York Times:
JPMorgan Raises Bid for Bear Stearns to $10 a Share
Bear Stearns' Friday Stumble, Sunday Sale Reignites Concerns About More Failures in U.S. Financial Sector