When Bear Stearns’ officers and directors agreed to sell the company to J.P. Morgan for the “fire sale” price of $2/share ($236 million in total), did they protect the interests of the company’s shareholders and get reasonable value for the stock? This question is likely to be debated in the court system for many months.
While many explanations have been given for why the transaction was necessary to protect the financial markets and keep the financial system running smoothly, no one has explained why bankruptcy was not a far better alternative for Bear Stearns’ shareholders. At the end of its last fiscal year (November 2007) , Bear Stearns reportedly had $11.1 billion in tangible equity. As late as last week, Bear Stearns claimed that its book value was still about $84/share. On Saturday, the Wall Street Journal reported that the Bear Stearns’ headquarters building appeared to be worth $1.2 billion or more. Today, the Journal reported that “J.P. Morgan is essentially getting Bear’s coveted prime brokerage business for free. It is twice the size of Bank of America’s prime brokerage, which is on the auction block for about $1 billion.” In light of these circumstances, shareholders have to question whether they would have been better off with a bankruptcy filing and an orderly liquidation of assets.