JPMorgan Chase raised its takeover offer for Bear Stearns Cos on Monday to about five times its original bid and struck a deal to buy nearly 40 per cent of the bank, all but locking up the controversial acquisition.
Under the revised deal, JPMorgan will buy 95 million newly issued Bear Stearns shares and Bear's board agreed to vote in favor of the offer. With those shares, JPMorgan would own 39.5 per cent of Bear Stearns and have secured the backing of Bear Chairman James Cayne, owner of a 3 per cent stake in Bear.
"It looks like JPMorgan has this deal sewn up right now," said John Augustine, chief investment strategist with Fifth Third Investment Advisors.
The new offer valued Bear Stearns at about $2.1 billion, compared with $236 million under the original deal.
Additionally, JPMorgan would also be on the hook for the first $1 billion in losses stemming from Bear Stearns' less liquid assets, and would set aside $6 billion to cover severance, litigation and other transaction-related costs.
The new deal, which has financial backing from the Federal Reserve, is likely to raise concerns that the US government is prepared to help rescue Wall Street bankers even as millions of home owners face the possibility of foreclosure.
The Federal Reserve Bank of New York is providing $29 billion in special financing for the deal and will take control of a $30 billion portfolio of Bear's less liquid assets.
"This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning," the New York Fed said in a statement.
Rather than a bailout of Bear, the Fed's action "more closely resembles the torpedoing of a sinking ship" to remove a hazard to others and avert a broader crisis, said David Wyss, chief economist of Standard & Poor's.
"The bank is dead," he said.
JPMorgan, facing pressure from disgruntled Bear shareholders such as British billionaire Joe Lewis, raised its offer to about $10 a share in stock from its original bid on March 16 of $2 per share for the 85-year-old Wall Street investment bank, representing a boon to short-term traders who jumped in last week when the shares plunged.
While the new offer represents a less onerous fire-sale price, it is still 68 per cent below the March 14 closing price of Bear shares of $30.85, and more than 90 per cent below Bear's all time peak level of over $170.
Bear, recently ranked as the fifth-largest US investment bank, collapsed as large subprime mortgage losses and falling confidence in the company prompted a run on the bank.
"We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," Jamie Dimon, JPMorgan's chairman and chief executive, said in a statement. "We look forward to a prompt closing."
Bear shares surged 76 per cent to close at $11.25, as some investors speculated on an even higher offer. JPMorgan shares, which have climbed more than 25 per cent since the deal was announced, rose 1.3 per cent to close at $46.55.
"There are still going to be employees and shareholders unhappy with $10 a share," said James Ellman, a portfolio manager with Seacliff Capital. But "clearly, this increases the chance the deal goes through."
The perception of a done deal is important for JPMorgan to encourage banks and other customers that it's safe to do business again with Bear.
To that end, JPMorgan tightened its guaranty of Bear's liabilities. It agreed to back all of Bear's prime brokerage contracts and all of its short- and long-term loans.
If shareholders vote down the deal, the guaranty will run another 120 days unless extended. The guaranty expires if Bear's board recommends another deal.
The stronger guaranty and the increased probability of a deal prompted credit rating agency Standard & Poor's to raise its rating on Bear Stearns.
Also, the cost of protecting Bear's debt with credit default swaps fell to 175 basis points, or $175,000 on $10 million of debt, from 365 basis points on Friday.
But opponents of the deal could still challenge it in court and would likely attack JPMorgan's share purchase deal.
Under the revised deal, each share of Bear Stearns common stock will be exchanged for 0.21753 share of JPMorgan common stock. The previous exchange offer was 0.05473 JPMorgan share for each Bear Stearns share.
JPMorgan expects to complete the purchase of the new Bear shares by April 8. A date for Bear's shareholders to vote on the deal has not been set.
BlackRock Inc will manage the $30 billion portfolio of Bear's less liquid assets under guidelines established by the New York Fed.
Those guidelines are "designed to minimize disruption to financial markets and maximize recovery value," the New York Fed said.
The New York Fed is financing assets for 10 years and may renew the loan if it wishes. The rate on the loan is 2.5 per cent and will fluctuate with the discount rate. JPMorgan Chase is providing $1 billion of subordinated financing to the $30 billion portfolio and will receive an interest rate equal to the primary credit rate plus 4.75 percentage points, which is now a total of 7.25 percentage points.
The Fed said it would reap any gains that accrue from the portfolio. Proceeds from liquidating assets in the portfolio will first pay management fees and then the principal and interest due the New York Fed, and then JPMorgan Chase. (Reuters)
JPMorgan raises Bear Stearns bid, grabs stake