Last week when J.P. Morgan announced a Fed-supported acquisition of Bear Stearns for the fire sale price of $236 million (roughly $2/share), it unleashed a frenzy of activity in various corners of the financial markets which will play out over the coming months. The transaction has already resulted in strong dissention from shareholders, in legal claims against Bear Stearns, in government investigations, and in competition over how Bear Stearns’ carcass will be devoured.
The background of Bear Stearns’ demise has been well publicized. Beginning at least as early as late 2006 and continuing through 2007 Bear Stearns experienced an array of problems arising out of the subprime securities crisis that lead to the ensuing credit crunch. Throughout this period, Bear Stearns consistently maintained that its finances and liquidity were more than adequate to sustain its business. As recently as the week of March 10 2008, Bear Stearns maintained that its book value remained at approximately $84/share. At the same time Bear Stearns CEO Alan Schwartz appeared on CNBC and stated “we don’t see any pressure on our liquidity, let alone a liquidity crisis.” Bear Stearns’ stock was trading at around $60/share. Several days later, Bear Stearns needed money to sustain operations. Still the value of Bear Stearns shares only dropped to about $26/share. Then came the announcement that J.P. Morgan, with support from the Fed, had agreed to buy Bear Stearns for $2/share.
The J.P. Morgan transaction has generated a wave of protest from Bear Stearns’ shareholders. Major shareholders of Bear Stearns stock included Bear Stearns employees (which collectively hold about one third of Bear Stearns stock), billionaire Joseph Lewis, Morgan Stanley, Legg Mason, Barclays Global Investors, and State Street Global Investors. British billionaire Joseph Lewis called J.P. Morgan’s offer “derisory” and said he would take “whatever action” necessary to protect his investment which is estimated to be in excess of $1 billion. Similarly, many Bear Stearns employees (who reportedly stand to lose some $5.2 billion in value) expressed opposition to the transaction questioning whether even Chapter 11 bankruptcy was a better deal for shareholders.
Almost immediately after the J.P. Morgan/Bear Stearns agreement was announced lawsuits were initiated. A class action lawsuit was filed alleging, among other things, that Bear Stearns had failed to disclose sufficient information to the public regarding the various problems it was encountering as a result of the deteriorating subprime market and ensuing credit crunch. An array of additional actions are anticipated on behalf of investors and Bear Stearns shareholders.
As a result of the uncertainty surrounding Bear Stearns, many of its competitors including Merrill Lynch, Morgan Stanley, UBS and Citigroup began soliciting top Bear Stearns employees to change firms. Reports indicate that certain Bear Stearns employees were being offered millions of dollars to move to new firms. While J.P. Morgan tried to reassure employees with offers of cash and stock, headhunters believe that many of Bear Stearns key employees will make a move. At weeks end, J.P. Morgan CEO Jamie Dimon was reportedly asking other firms to lay off hiring Bear Stearns employees for a while.
In other activity surrounding Bear Stearns, Citic Securities Co. (China) announced that it was terminating plans to buy Bear Stearns stock and the Securities and Exchange Commission announced that it was investigating questionable trading in Bear Stearns options in the weeks preceding its demise.
Finally, in an attempt to placate angry shareholders and salvage the acquisition, J.P. Morgan and Bear Stearns have reportedly renegotiated the contemplated transaction. The terms of the revised deal are reported to be “significantly different” than the earlier deal and increase J.P. Morgan’s offer to approximately $10/share. As part of the renegotiated deal, J.P. Morgan will acquire 39.5% of Bear Stearns through the purchase of newly issued shares. J.P. Morgan obviously hopes that the increased offer will change the attitude of existing Bear Stearns’ employees.
The whole Bear Stearns situation remains a quagmire of intrigue and closed door dealings. As time passes it promises to get ore and more interesting.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in representing individual and institutional investors regarding their subprime problems. For further information, please contact us.