JPMorgan Chase (NYSE: JPM ) announced last night that it will acquire Bear Stearns (NYSE: BSC ) for $2 a share. That values the deal at about $236 million -- a staggering discount to the $3.5 billion market value Bear had as of Friday's close.
In the end, Wall Street's fifth-largest investment bank was brought down by the mortgage and credit crises. While stocks have been dragged down by those issues since late last year, Bear Stearns is its first big casualty.
Is this just the beginning, or is there more mess to sort through? What are the implications for individual investors? I put these questions to a panel of Fool analysts. Here's what they had to say.
1. JPMorgan has been up as much as 10% today, so investors seem to like the deal it made. What's your gut reaction to the deal?
Seth Jayson, co-advisor, Motley Fool Hidden Gems: I think Morgan might have made out like bandits here -- literally. They not only paid nearly nothing for Bear's valuable brokerage and clearing biz, along with a snazzy New York HQ, but they also got to offload $30 billion in balance sheet risk to us taxpayers via the Federal Reserve.
Bill Barker, Hidden Gems and Hidden Gems Pay Dirt senior analyst: It definitely seems -- seems, mind you, there's really no way for us to know -- that JPMorgan could have walked away with a heckuva deal here. Certainly acquiring Bear Stearns for about 1% of its market value of just three months ago stands as one of the all-time jawdroppers. We'll have to see whether the deal ends up going through at that price or not, but the rewards for JPMorgan here are pretty substantial. I'm sure that if the bidding opens up in any way from here, we'll start hearing about a few more interested parties.
Joe Magyer, sector editor, Fool.com: If I'm a JPMorgan shareholder, I love this deal. The company is picking up several profitable business units from Bear, along with Bear's new $500-million headquarters, for only about a quarter-billion dollars.
If I'm a Bear shareholder, I'm slack-jawed. The silver lining on the tornado for Bear shareholders is that the deal is a stock-swap for JPMorgan shares, which means that Bear shareholders would get to participate in some of the upside if this does turn out to be a steal for JPMorgan. I think another legitimate bid for Bear is unlikely, and I don't see JPMorgan raising its offer, which means that the market is being overly optimistic with its current $4 ask on Bear's shares. Given that, I would sell my Bear shares at this point. If you're a Bear shareholder who wants into JPMorgan, use the proceeds from the sale of your shares today to buy JPMorgan shares, rather than waiting for the stock swap to unfold.
2. The Financial Select Sector SPDR (AMEX: XLF ) exchange-traded fund is already off more than 17% year to date, and there's no telling where the bottom is. If investors hold financial stocks in their portfolio right now, what advice would you give them?
Jayson: Yowch. Is "build a time machine" an option? I don't mean to be flip, but some of us have been warning people to stay away from these banks for a long time. When you don't know what's on the balance sheets (and who really does?) and you knew banks weren't going to get more of this structured finance biz, the only good decision was to get out. Banks were value traps, and I imagine many still are today. Best advice I can give: Unless you know a lot about the assets on the balance sheet and what the business will look like going forward, find somewhere else for your money.
Barker: Be scared. Be very, very scared. Sorry, was that out loud? I think the financial sector has amply proven by now that it's a mess, that leadership had a widespread and profound miscalculation and misreading of risks in what they were choosing to produce as well as purchase, and how they record all of these things on their balance sheets. I have a feeling we're going to be reading about some of the more, ahem ... creative ... things that went down in this space for years to come.
Somebody is going to make a lot of money at the bottom, but it certainly won't be me. I don't know how you go about trying to value most of these companies at the moment, and that's a widespread concern. With little to guide investors on how to value these companies, and plenty of fear out there, you can be sure that ultimately the market is going to drive their prices down too far -- but where or when that too far is is anybody's guess. That's the biggest problem -- it's mostly guesswork at this point.
Magyer: Two words: Don't panic. The financial sector is about as beaten down as they come, and selling at this point would be a classic "Buy high, sell low" move. Given the already-incurred losses and the extremely negative sentiment swirling around the sector, I can't help but think we'll look back at this time a few years from now and say "What was I thinking not getting into financials at that point?"
However, I would be intensely selective when it comes to adding to any financial sector positions right now. Remember that you're an investor, not a speculator. Don't try to be a hero and chase after Marty Whitman into difficult-to-understand, black-box companies like MBIA (NYSE: MBI ) and Ambac (NYSE: ABK ) . If you feel compelled to play the space, look first to companies with transparent financials and a history of conservative lending. Namely, US Bancorp (NYSE: USB ) , which is actually up today in a flight to quality.
3. Thinking big-picture, how should investors respond to the events of the weekend?
Jayson: It's a tough call. I'll be buying, as I have been for a few weeks now. But I'm being very specific and studied in what I buy, and I am doing it with the full expectation that things might get a heck of a lot worse before they get better. I can't tell where the bottom is, so I'm buying what looks cheap now. That's always worked in the past.
Barker: Avoid bubbles, I suppose. When something has been called a bubble for a couple of years running, it usually ends up being just that. Real estate prices and credit availability -- even for the historically non-creditworthy -- existed and expanded far beyond what happens in normal markets. Why Bear Stearns, among so many others, such as UBS (NYSE: UBS ) , didn't factor that into their risk models is a mystery to me, unless you want to answer that mystery with the simple word, "greed." Is that the big-picture lesson? Yeah, I suppose so -- don't be greedy.
Magyer: I wouldn't retreat to the mountains with your family and a shotgun just yet. Again, keep your cool and think long-term. Keep making those regular contributions to your IRA or 401(k), recognizing that this is the time to be looking for opportunities to deploy funds, not to be taking money off the table. As Income Investor co-advisor James Early pointed out recently, most investors underperform the market over the long haul because they overtrade. Don't be that guy or gal. Even in an environment where a lot of great companies have been beaten down, move slowly and do your due diligence before making buy or sell decisions.
4. How risky are stocks in general in the current environment?
Jayson: Very. People are in panic mode, so in the short term, stocks are very risky. But because we don't know when panic mode ends, all we can do is take a hard look and try to estimate long-term value, then buy companies that look to be trading at a significant discount to that value.
Barker: Stocks in general don't worry me. Moving away from financial companies, you've got balance sheets that are cash-heavy, and debt isn't a problem. Things on the manufacturing side -- especially where you're talking about companies related to real estate -- are bound to be looking at a couple more quarters of relative trouble. But I love that equation, actually. Short-term trouble in the midst of long-term success stories makes for far lower prices than short-term explosive growth in the midst of long-term success. Combine today's prices with today's balance sheets and I think that the risk (measured for long-term investments) is really attractive.
Magyer: Bear or bull market, investing in stocks is always a risky proposition. You can't eliminate all of your downside risk, but you can rest easier by doing careful due diligence and diversifying your portfolio. Beyond that, you'll have to accept that the risk of loss is an unpleasant but ever-present part of the game.
For related Foolishness:
- Bernanke Bails Out Bear
- Credit Crunch Cuts Down Bear Stearns
- Roundtable: Should You Be Buying Stocks Today?
Brian Richards does not own shares of any company mentioned. Seth, Bill, and Joe also do not own shares of any companies mentioned. JPMorgan Chase and US Bancorp are Motley Fool Income Investor recommendations. Read about the Fool's disclosure policy here.