On Monday, JPMorgan raised its initial bid of $2 per share for struggling investment bank Bear Stearns to $10 per share. By increasing the bid, JPMorgan quelled any thought of a shareholder revolt, which threatened to jeopardize the deal and send Bear Stearns into bankruptcy.
In the beginning of March, Bear Stearns' (BSC) stock price was trading in the mid-to-high 70s. Two weeks ago, on Friday, March 14, the stock opened at $54.24 and closed at $30. The following Monday, the investment banking giant opened at a paltry $3.17, down nearly 95 percent from just one trading day before.
Many of the top shareholders of Bear Stearns, some of whom saw their personal fortune plummet in the two-day crisis, cried foul when the Federal Reserve pushed JPMorgan's $2 bid, which vastly undervalued the firm. At that price, JPMorgan was getting Bear Stearns at $236 million - an absolute steal considering the 85-year-old bank was once worth $25 billion.
With such a low price, large-stake shareholders figured they could get more money by either finding another buyer or by declaring chapter 11. British billionaire Joseph Lewis was among those who publicly questioned the deal. Lewis has a huge stake in the company, and he bought an additional half million shares before the price tanked. Bear Stearns employees, who collectively hold about 30 percent of the stock, were also threatening to vote the deal down to help protect what little value their shares had.
With this increasing pressure from the shareholders, JPMorgan quintupled its offer to $10 per share on Tuesday, raising the total value of the deal by about $2 billion.
In the new deal, JPMorgan has agreed to cover the first $1 billion in losses that it may incur if the value of Bear Stearns' risky mortgage securities falls. Any loss greater than that will be covered by the Fed, which helped engineer the deal. In effect, this Fed insurance policy greatly reduces the risk for JPMorgan, making it a much more attractive deal for them.
As a result of the negotiations, JPMorgan now has a 39.5 percent stake in Bear Stearns. Combined with the pledges of support from the Bear Stearns board of directors, JPMorgan has a controlling stake in the bank and the power it needs to approve the deal.
It has also been announced that JPMorgan is offering lucrative bonuses to the top brokers at Bear Stearns to get them to stay with the company after it is acquired. The bonuses have been valued at 100 percent of annual production to those brokers that earned at least $500,000 in the past year. Brokers earning between $250,000 and $500,000 will receive half their annual production. The deal is now expected to close on Tuesday, April 8.
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