The Opportunity in Bear Stearns' Adversity by Andrew Bary
Summary: Credit market woes have hurt Bear Stearns' (BSC) mortgage trading and LBO financing businesses. The investment bank's shares are down 32% this year, vs. 10% for rivals Goldman Sachs (GS) and Morgan Stanley (MS). Bear's lucrative brokerage or fixed income business accounts for 45% of revenues, but 30% of that is in mortgage trading which has suffered from subprime fallout. Investors worry over Bear's stability after it shuttered two hedge funds and a third one wobbles. Bear's risk arbitrage business is down as investors increasingly question LBO viability-- its $9b in LBO commitments could mean a $500 million Q2 loss. Bear counters that its LBO commitments are hedged and still profitable, and that it is liquid and thrives in volatile markets. Barron's thinks these setbacks make Bear a more attractive takeover target: 1) Shares trading at $110 are at 1.2x book value vs. rival Lehman Brothers (LEH) 1.6x book price, and Goldman's 2.2x book. 2) Bear will swallow easier as a "small cap" with just $13 billion in equity capital vs. MS's $40b and Goldman's $35b. 3) Bear owns valuable real estate. 4) Bear is 1/3 employee-owned. Loyal workers may prefer a possibly $200/share buyout price over multi-million dollar market gyrations.
BSC LEH MS GS 1-yr. chart: