Bear Stearns Gets Sweeter

Last week, I was pretty certain the $2-per-share offer for Bear Stearns (NYSE: BSC  ) by JPMorgan (NYSE: JPM  ) would be the final offer on the table. Some of my Foolish colleagues speculated that a sweeter offer would come, but I doubted that was the reason behind Bear's peculiar price since the original deal was announced.

Thankfully for Bear Stearns shareholders, I was very wrong. JPMorgan upped its bid for the embattled investment bank to $10 per share, a five-time jump above its original, paltry offer.

Shareholders revolt
After I put my reasons on the table last week, I got an email from a Bear Stearns employee that laid out what led to the raise:

You said it yourself. Bear Stearns shareholders are not going to vote for this deal. Nobody agrees $2 [per share] is what our company is worth. We have no intention to vote for a deal that completely wipes out everything we've worked for during our careers.

I underestimated the influence of the employees and other shareholders on JPMorgan. It raised the offer to appease them -- including billionaire investor Joe Lewis, a staunch critic of the original offer -- and to solidify Bear's adoption into JPMorgan.

When the merger is completed, JPMorgan will be the new "parent" of Bear's talented employee pool. The last thing it wants is a flood of new employees who resent how the hasty deal was done. Investment banks rely heavily on the services their employees generate; without a motivated workforce, a firm's value is negligible.

This new offer is certainly welcome news for Bear shareholders, but the fight is not over yet. Bear shares traded as high as $13.85 Monday morning, signaling that some are likely crossing their fingers for an even higher bid.

Take it or leave it
That's still unlikely to happen. Terms of the new offer give JPMorgan the right to purchase 95 million newly issued shares at $10 per share without approval from shareholders. From the get-go, that gives it 39.5% of voting power in Bear Stearns. With that much clout, it's doubtful shareholders will have enough leverage to swing a vote in the other direction.

And because the Federal Reserve has dubbed JPMorgan to be the buyer of choice, the prospects of a counteroffer from a rival bank such as Citigroup (NYSE: C  ) , Goldman Sachs (NYSE: GS  ) , or Bank of America (NYSE: BAC  ) are low.

JPMorgan is getting handsome assistance from Fed chairman Ben Bernanke on this deal, including $30 billion in financing to purchase Bear's riskiest assets without facing much liability if those assets default. Part of the new offer dictates JPMorgan will be responsible for the first $1 billion of losses on those financed assets, but taxpayers will pick up the pieces after that.

There's been no mention of similar terms being offered to anyone else in the case of a rival bidder, which will undoubtedly discourage a counterbid.

Nonetheless, the new offer is still a tiny fraction of what Bear was worth two weeks ago, and it is catastrophically below its likely book value. The $8 additional per share takes some of the sting off the eye-popping $2 price tag, but it is still a humiliating fall for what was once Wall Street's fifth-largest player. The new deal values Bear Stearns at about the $1.2 billion price tag its New York headquarters building would fetch. Ouch.

It's still unbelievable
The fact that JPMorgan can quintuple its offer over the course of one week and still be excited about the deal reveals how incredibly cheap Bear's assets are right now. With the blessing of the Fed, it's hard to fathom a situation in which JPMorgan will not come out ahead after integrating Bear Stearns into its platform.

It's a tough finish to a rough six months for Bear Stearns, but, alas, it appears the final chapter has been written. It's hard to swallow, but $10 per share sure beats $2 per share. And it's worlds better than the only other option: bankruptcy.

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