Bear Stearns got bailed out?
Posted
Mar 19 2008, 03:07 AM
by
Matt Koppenheffer
If Bear Stearns got a bailout this week, then it's sure news to the company's shareholders. The price that JPMorgan is expected to pay is around 1% of the company's value last year and in the range of 5% of what it was fetching on Friday when the original plan was announced for JPMorgan to loan Fed money to Bear.
So who did get bailed out here? On the top of my list are Bear's creditors. At the end of Bear's most recent fiscal year it had $11.6 billion in unsecured short term debt and another $68.5 of longer term debt on its books -- and that's not to mention the hundreds of billions of other liabilities that the company had. If the super-duo of JPMorgan and the Fed hadn't swooped in those creditors are likely working with bankruptcy courts to sort out what they could recover.
But even beyond bailouts there are plenty of people making out like bandits. I've heard commentators suggest that JPMorgan could face as much as $6 billion in litigation stemming from this deal, but it still seems like the bank is getting a pretty sweet deal -- it's picking up Bear for $236 million and it has the Fed backing up a big slug of Bear's assets.
In the "who made out" column, let's not forget about Bear Stearns management. While it's easy to focus on the fact that some of these guys lost a heck of a lot of money on their stock holdings -- former CEO Jimmy Cayne owned about 5% of the company -- these guys have been hitting the bonus jackpot over the past few years as the housing market raged. Between 2004 and 2006 Jimmy Cayne took home nearly $40 million worth of cash bonuses, and Alan Schwartz, who was at the helm when the ship sank, pocketed $38 million.
So what's next for Bear and its investors? Well, since the stock closed on Tuesday at nearly triple the proposed buyout price, it's apparent that a lot of people think that somebody is going to swoop in and bid above JPMorgan, or at least that the deal with JPMorgan will be renegotiated. Though there will no doubt be a lot of weight thrown behind the push to get more from the buyout, it seems very unlikely that we'll see an alternate outcome.
In The Motley Fool's CAPS community, CAPS All-Star EnochRoot also believes that the deal will go through, and noted that bondholders will likely have a big hand in that:
This melt-up is a result of short covering and the bondholders buying stock. The goal is for the bondholders to own enough equity to vote the deal through. With $150b in bonds at par, the bondholders are essentially giving up ~$300mm in losses on the stock [($7-$2)*59mm shares or 50.1% of shares outstanding] in order to save billions in bond value.
In the end, some traders speculating on Bear stock might be able to make some money as the stock bounces around wildly in the coming days, but investors are probably best served taking the current price and moving on to greener pastures.
