Monday, March 24, 2008

A Buyout is a Buyout, No Matter How Small

by Ken Houghton

UPDATE: Well, that was quick. A Bailout is a Bailout, No Matter How Small.

UPDATE II (via Dr. Black): There is a reason to renegotiate the contract from the JPMC side, but it should hardly be worth 4x the price of the firm, unless the stuff really is pure shite. Which would make this a true textbook case of Moral Hazard. Anyone taking bets whether Mankiw or Varian or any of the other intro or intermediate texts ever cites it? UPDATE V: John Carney gives the lie to that claim.

UPDATE III: The pity party thrown last week by the WSJ for Bear's senior, er, management appears to have omitted some data:
Insiders at Bear sold a total of 715,000 shares last year worth more than $75 million, up from 2006 but down considerably from 2004, when sales of more than 1.5 million shares worth $147.9 million took place, the data show.
Since 2000, Cayne has sold 2.37 million shares worth about $182.7 million, while Schwartz has sold more than one million shares for roughly $67.2 million.

UPDATE IV: And it becomes official:
JPMorgan Chase & Co. (NYSE: JPM) and The Bear Stearns Companies Inc. (NYSE: BSC) announced an amended merger agreement regarding JPMorgan Chase's acquisition of Bear Stearns.

Under the revised terms, each share of Bear Stearns common stock would be exchanged for 0.21753 shares of JPMorgan Chase common stock (up from 0.05473 shares), reflecting an implied value of approximately $10 per share of Bear Stearns common stock based on the closing price of JPMorgan Chase common stock on the New York Stock Exchange on March 20, 2008.

The Old Firm is projected to open trading today between 9.87 and 9.88 per share. Since its current takeover offer is slightly over $2/share ($2.41 last I looked, based on the then-current JPMChase price), and it was around $6.39 Thursday night, there is clearly a different type of Resurrection on the market's mind.

If the market turns out to be correct, then[It was; see Updates above] I will change my mind and agree with Tom and Cactus that the actions last weekend were a bail-out, even if the Fed didn't intend them to be.

Until then, the severance offer* alone strongly suggests that most of the employees will vote their shares in favor of the takeover.

*Three weeks per year of service for the first five years, two weeks for each year after that, and last year's bonus paid for this year. This is only slightly worse** than what the people who were severed in November got.

**November was three weeks per year, regardless of service time.

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As much as many of the shareholders of BS don't want to admit it, the board of BS understands that the company's value is negative. (If nobody wants to buy what you have, and you have obligations to buy other stuff on top of it all, you have negative value.)

The Fed could have given its assurances to BS directly. Instead it gave them to JPM for whatever reason. (Maybe they think the assets may be more likely to have value if they don't have the BS taint?) But, while JPM gets the bigger gift, I find it hard to believe that BS shareholders are not getting a gift of $2 per share.
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