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JPMorgan to buy Bear Stearns at fraction of value

Latest update : 2008-03-18

JPMorgan Chase & Co said it would only pay 2 dollars per share to bail out the troubled investment bank Bear Stearns. The price is way below the $171 per share the bank was trading at in January 2007.

NEW YORK, March 16 (Reuters) - JPMorgan Chase & Co said on
Sunday it would buy stricken rival Bear Stearns for just $2 a
share in an all-stock deal that values the U.S. investment bank
at the centre of the credit crisis at about $236 million.
 

The takeover, which has the backing of the U.S. Federal
Reserve and the Treasury, underlines the deepening risks banks
and financial companies are facing as the U.S. mortgage crisis
deepens, while the rock-bottom price raises questions over
valuations in the banking sector.
 

Minutes after the deal was announced, the U.S. central bank
made an emergency interest rate cut and opened direct lending
to Wall Street, but the moves failed to soothe panicky
investors. The U.S. dollar fell to a new record low against the
euro and Asian stock markets were pummeled in early Monday
trade.
 

Bear's stock closed on Friday at $30.85, valuing it at $3.5
billion, after tumbling 46 percent that day. Shares in the
fifth largest U.S. investment bank hit a record high of more
than $171 in January 2007.
 

"The fact that the Bear Stearn's board is letting these
assets go at such a deep discount brings into question the
value of assets on a lot of corporate balance sheets," said
Timothy Ghriskey, chief investment officer at Solaris Asset
Management in New York.
 

"The main concern is what other financial institutions are
worth in the current environment, given the discount that JP
Morgan is acquiring Bear at."
 

Bear Stearns' cash reserves were drained by fleeing
customers on Thursday, and on Friday the bank secured emergency
funding from the Federal Reserve, extended through JPMorgan.
 

Under the deal, the Federal Reserve will provide special
financing and has agreed to fund up to $30 billion of Bear
Stearns' less liquid assets.
 

In a statement, JPMorgan said it would exchange 0.05473
shares of its stock for one share of Bear Stearns' stock. It is
guaranteeing the trading obligations of Bear Stearns and its
subsidiaries.
 

Bear Stearns' chief executive, Alan Schwartz, said in a
statement the deal represented the "best outcome for all of our
constituencies based upon the current circumstances."
 

JPMorgan's chief executive Jamie Dimon said in a statement:
"Bear Stearns' clients and counterparties should feel secure
that JPMorgan is guaranteeing Bear Stearns' counterparty risk."
 

JPMorgan chief financial officer Michael Cavanaugh said on
a conference call Sunday evening that deal related costs would
total $6 billion but that it sees $1 billion in earnings
accretion when the bank is fully integrated.
 

He also said Bear Stearns had $16 billion exposure to
commercial mortgage backed securities assets and $15 billion
exposure to prime, Alt-A mortgages, and $2 billion exposure to
subprime.
 

He said he sees the deal to buy Bear Stearns closing in
about 90 days. The $6 billion costs include costs of
litigation, de-leveraging, conforming accounting and severance
costs. Bear Stearns employs more than 14,000 people.
 

Bear Stearns would still be open for business, a JPMorgan
executive said on the call, with the acquisition helping to
avoid a fire sale of Bear Stearn's assets.
 

Bear's positions would be de-levered in an orderly fashion,
JPMorgan said.

Date created : 2008-03-17

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