JPMorgan lifts Bear offer fivefold
Legal snags hit original offer
Financial Times
By Ben White and Francesco Guerrera in New York
Published: March 24 2008 13:33 | Last updated: March 24 2008 20:55
JPMorgan Chase quintupled its original bid for Bear Stearns to $10 a share on Monday after its initial offer for the beleaguered Wall Street bank was undone by legal snags and furious opposition from Bear shareholders who viewed it as far too low.
The new all-share offer, coupled with surprisingly strong home sales data, helped spark a broad market rally in the US when investors hoped the worst fallout from the subprime mortgage crisis might be at an end. All three big US stock market indices were up at least 2 per cent in midday trade.
The five-fold increase in the offer for Bear represents a remarkable turnround for JPMorgan executives. Late last week they suggested privately that they had no plans to increase their bid, which they said represented the best possible outcome for Bear. They said then that if the offer failed they would let Bear shareholders fend for themselves in bankruptcy court.
The new offer, which values Bear at about $1.2bn, raises questions about the role of the Federal Reserve, which has been careful to avoid being seen as bailing out Bear’s shareholders.
Jamie Dimon, JPMorgan chief executive, said he raised the offer for several reasons, including the need to close the deal more quickly. He said that would encourage Bear’s best employees and clients to stay with the bank.
Mr Dimon said he listened to concerns from Bear shareholders that the initial offer was too low and wanted to improve the language of the merger agreement to eliminate several unwanted provisions, including one that would have made JPMorgan liable for Bear’s trades for a year, even if the offer had failed.
“We wanted to get something more certain, more definitive. I don’t mind being responsive to reasonable requests from the other side,” he said in an interview.
Under the initial agreement, the Fed agreed to fund up to $30bn of illiquid assets on Bear’s balance sheet. Under the new agreement, JPMorgan is responsible for the first $1bn of these assets with the Fed funding the remaining $29bn. In addition, JPMorgan will guarantee Bear’s borrowings from the Fed under a new facility extended to investment banks.
Under the revised agreement, Bear will sell JPMorgan 95m newly issued shares, representing 39.5 per cent of the bank’s outstanding stock, at $10 a share. Bear’s board, which controls about 5 per cent of the shares, has agreed to vote in favour of the deal. That leaves JPMorgan near the majority it will need to close the deal. The 95m share purchase is to close on April 8.
In theory, JPMorgan could buy the rest of the shares it needs to close the deal on the open market, but the bank could face legal issues if it did so at a different level than the offer price.
Bear shares, which rose last week on expectations of a higher offer, nearly doubled on Monday, closing 89 per cent higher at $11.25. JPMorgan shares ended the session 1.3 per cent higher at $46.55.
The new agreement came after JPMorgan discovered several errors in the initial merger agreement, which was completed early on the morning of March 17 after a frenetic weekend of talks between executives of both banks and federal officials.