Monday, June 25, 2007

In Defence of the Old Firm

by Ken Houghton

The authors of Naked Capitalism (h/t cactus at Angry Bear) post the first discussion taking last week's events to their logical conclusion.

It may well happen, but it won't be cause and effect. Dealing strictly with public information:
  1. There have been rumours of other firms (most noticeably HSBC) making serious bids for the firm in the past several years
  2. There are firms that would be a very good fit (most notably, imnvho, this one).
  3. James E. Cayne isn't getting any younger.

That said, both of their conclusions are reasonable:
However, [Merrill Lynch analyst Guy] Moszkowski estimated that if Bear Stearns loses half the amount of its loan, that would knock roughly $7 a share off its net earnings in a year. That's about half this year's forecast profit, the analyst noted.

He added that if such losses mount, Bear Stearns could become vulnerable to a takeover....

Bear has never seemed eager to sell itself, but would benefit from a greater global presence, Moszkowski wrote.

"Never seemed eager to sell itself" is appropriately wishy-washy, but leaves an impression that is (being wishy-washy myself) arguably inaccurate.

More accurate is Naked Capitalism's own comment:
But that begs the question of who would be so rash as to purchase Bear. Investment bank acquisitions have a terrible track record, and Bear would be a particularly tough deal. It has the most sharp-elbowed culture on the Street, and also the highest payout on revenue production, a toxic mix to any acquirer (bringing pay practices in line with those of the new parent would lead to an exodus of the best talent). And its most attractive business, its number one spot in prime brokerage, appears almost certain to be on the verge of a cyclical, if no a secular, decline.

The second part may be true, even if Ken Lewis doesn't think so. On the first, you have to assume that the "best talent" would be able to find acceptable compensation elsewhere.

In short, there is a reason that BSC trades lower than its "comparables," and the takeover price would, were the market efficient, adjust accordingly. As usual, it would be a matter of haggling over the price.

If it does happen, the delay has probably cost BSC shareholders several dollars per share. But, again, Jimmy Cayne isn't getting any younger, and may see last week as an opportunity.

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