Two days after JPMorgan Chase (NYSE: JPM) agreed to buy Bear Stearns (NYSE: BSC) for $2 per share, BSC stock is trading for slightly more than $5 per share. How could this be? Aren't investors afraid of losing that $3 difference when the deal closes?
The market is factoring in the serious, if not likely, possibility of a rival offer from another bidder.
How did this happen?
On Sunday, Bear Stearns had a choice between selling at any price or declaring bankruptcy. Bear chose selling, at any price. To avert a bankruptcy that it felt might massively destabilize world markets, the U.S. government brokered a deal for JPMorgan to buy Bear at $2 per share. As an incentive, the government offered to put up $30 billion in collateral to help JPMorgan to fund Bear Stearns' less liquid assets.
The Feds were mainly concerned with maintaining a liquid market for the securities, not evaluating the buyout price. Is $2 a fair price for the stock, when just one week ago, Bear sported an estimated book value of more than $80 per share? To put it another way, JPMorgan paid $236 million for a company that many believe is worth nearly $11 billion. That's an insanely good deal.
JPMorgan did point out that the buyout will probably end up costing $5 billion to $6 billion in transaction fees, leaving it to settle for the mere $5 billion in value remaining in Bear.
Could anyone else buy?
Unfortunately for Bear, it'll be very difficult for anyone but JPMorgan to buy the firm. The Fed agreed to put up $30 billion for this specific deal, with this specific buyer. It's highly doubtful that the Fed will offer such an incentive to anyone else. And at this point, it's very unlikely that another company would be willing or able to inherit the massive risk associated with these assets without the Fed's backing.
However, the market conditions that rendered the Fed's $30 billion backing necessary could change. If stability returns to the mortgage-backed securities markets, and the bleeding stops, many potential suitors could step up -- perhaps a UBS (NYSE: UBS) or a Bank of America (NYSE: BAC). In addition, 30% of Bear Stearns' shareholders are also employees who can vote against the JP Morgan deal. I know I would.
People may tell tall tales, but markets seldom lie. The market clearly expects a rival bid.
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