JPMorgan Chase said Sunday it will acquire rival Bear Stearns in a deal valued at $236.2 million -- or $2 a share -- a stunning collapse for one of the world's largest and most venerable investment banks.
The last-minute buyout was aimed at averting a Bear Stearns bankruptcy and a spreading crisis of confidence in the global financial system.As usual, the first thoughts are:
Why so cheap?
Bear Stearns shares close Friday at $30 a share. At their peak, the shares traded at $159.36.
The deal marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29.The bullish side of me thinks this is a good deal, and JPM was smart enough to milk it for all it's worth. Seems BSC didn't really have a choice on this. It's either Chap 11 or collapse. And they even got good ol' Uncle Sam to pay for the deal.
The Fed will provide special financing to JPMorgan Chase for the deal, JPMorgan Chase said. The central bank has agreed to fund up to $30 billion of Bear Stearns' less liquid assets. Risky bets on securities tied to subprime mortgages -- loans given to customers with poor credit history -- crippled Bear Stearns, the nations' fifth-largest investment bank.It does appear to be in everybody's interest though, for the BSC buyout.
A collapse of Bear Stearns could have created a further crisis of confidence in world financial markets amid a deepening credit crunch. JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago.
Wall Street analysts say the bid to rescue Bear Stearns was more than just saving one of the world's largest investments bank -- it was a prop for the U.S. economy and the global financial system. An outright collapse could cause huge losses for banks, hedge funds and other investors to which Bear Stearns is connected.Some nagging thoughts that I have at the back of my head regarding this deal, although I presume the smart bankers would have done their due diligence on this, are:
How does their cash flow look like?
To whom are their obligations? What are the maturities and when are they due? A company may be asset heavy (and I'm not saying that BSC is), but may not be able to meet its immediate cash obligations if lenders are not confident enough to be able to accept their commercial papers, or if their assets are not liquid enough to immediately convert for cash. Their market cap would be entangled in a death spiral.
What consititutes their book value?
Even though this deal was done at many times under the book value, there is the underlying accounting uncertainties: What are their assets? Tangible or intangible? Or would much of their book value be eroded with the declaration of bankruptcy? What I mean is, can BSC be sold for parts and still allow JPM to be in the money on the deal?
Obviously, for the bears out there, this ostensibly good deal might signal weakness in the market and the lack of confidence in the economy. It could perhaps hurt the USD even more. This deal, just because it was done over the weekend, could possibly have averted a collapse of the US financial market.
[Update]
Ok, some clarification thoughts on the BSC deals yah.
Myth: wah liew.. 2 USD somemore leh. now USD cheap cheap too
It's a stock for stock deal - No cash; 1 JPM share for XX BSC shares. In any case, there should not be any FX exposure since both companies' revenues are largely in USD, and both stocks are traded in USD.
Having said that, there is a risk of dilution of ownership with this deal, though the way I see it, when the deal is done and all the debts are absorbed into JPM, it might weaken JPM's financials and consequently their share price after the next results announcement (assuming this expectation is not already priced into their shares from the outset). Then JPM management will swoop in and buy their shares back! *MUAHAHAHAHA*
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