Morgan's revised bid for Bear emphasizes original ripoff, Fed desperation

This emphasizes that MorganChase's original offer for Bear Stearns was even more of a ripoff and even more desperate a maneuver by the Federal Reserve than was originally suspected.

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JPMorgan Raises Bear Bid, Grabs Stake

By Chris Reiter
Reuters
Monday, March 24, 2008

http://www.reuters.com/article/topNews/idUSN2430313520080324

NEW YORK -- JPMorgan Chase & Co. on Monday raised its takeover offer for Bear Stearns Cos to about five times its original bid and struck a deal to buy nearly 40 percent of the bank, all but locking up the controversial acquisition.

Under the revised deal, JPMorgan will buy 95 million newly issued Bear Stearns shares, and Bear's board agreed to vote in favor of the offer. With those shares, JPMorgan would own 39.5 percent of Bear Stearns and have secured the backing of Bear Chairman James Cayne, owner of a 3 percent stake in Bear.

"It looks like JPMorgan has this deal sewn up right now," said John Augustine, chief investment strategist with Fifth Third Investment Advisors.

The new offer valued Bear Stearns at about $2.1 billion, compared with $236 million under the original deal.

Additionally, JPMorgan would also be on the hook for the first $1 billion in losses stemming from Bear Stearns' less liquid assets, and would set aside $6 billion to cover severance, litigation and other transaction-related costs.

The new deal, which has financial backing from the Federal Reserve, is likely to raise concerns that the U.S. government is prepared to help rescue a failing Wall Street bank while declining to bail out millions of home owners facing the possibility of foreclosure.

The Federal Reserve Bank of New York is providing $29 billion in special financing for the deal and will take control of a $30 billion portfolio of Bear's less liquid assets.

"This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning," the New York Fed said in a statement.

JPMorgan raised its offer to about $10 a share in stock from its original bid on March 16 of $2 per share for the 85-year-old Wall Street investment bank, representing a boon to short-term traders who jumped in last week when the shares plunged.

While the new offer represents a less onerous fire-sale price, it is still 68 percent below the March 14 closing price of Bear shares, which last year peaked at $170.23.

Bear, recently ranked as the fifth-largest U.S. investment bank, collapsed as large subprime mortgage losses and falling confidence in the company prompted a run on the bank.

"We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise," Jamie Dimon, JPMorgan's chairman and chief executive, said in a statement. "We look forward to a prompt closing."

Bear shares surged, rising 89 percent to $12.16 in afternoon trading, as some investors speculated on an even higher offer. JPMorgan shares rose 2.6 percent to $47.18.

"There are still going to be employees and shareholders unhappy with $10 a share," James Ellman, a portfolio manager with Seacliff Capital. But "clearly, this increases the chance the deal goes through."

The perception of a done deal is important for JPMorgan to encourage banks and other customers that it's safe to do business again with Bear.

To that end, JPMorgan tightened its guaranty of Bear's liabilities. It agreed to back all of Bear's prime brokerage contracts and all of its short- and long-term loans.

If shareholders vote down the deal, the guaranty will run another 120 days unless extended. The guaranty expires if Bear's board recommends another deal.

The stronger guaranty and the increased probability of a deal prompted credit rating agency Standard & Poor's to raise its rating on Bear Stearns. Also, the cost of protecting Bear's debt with credit default swaps fell to 175 basis points, or $175,000 on $10 million of debt, from 365 basis points on Friday.

Under the revised deal, each share of Bear Stearns common stock will be exchanged for 0.21753 share of JPMorgan common stock. The previous exchange offer was 0.05473 JPMorgan share for each Bear Stearns share.

JPMorgan said it expects to complete the purchase of the new Bear shares by April 8. It's unclear when Bear's shareholders will vote on the deal.

BlackRock Inc, will manage the $30 billion portfolio of Bear's less liquid assets under guidelines established by the New York Fed.

Those guidelines are "designed to minimize disruption to financial markets and maximize recovery value," the New York Fed said.

The Fed said it would reap any gains that accrue from the portfolio.

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