Why JPMorgan Should Buy Bear Stearns

The newspapers Friday were all a buzz about Bear Stearn’s (BSC) liquidity crunch and the concerted efforts that the JPMorgan (JPM) and the Fed are taking to provide some immediate relief. The New York Times reports that [bold and italics added for emphasis]:

For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.

Isn’t it ironic that Bear Stearns, which had refused to go along with other Wall Street firms to save Long Term Capital Management [LTCM] in 1998, is now faced with the same problem? However, Jamie Dimon, the CEO of JPMorgan, is a shrewd banker who will not let that bit of history get in the way of getting Bear Sterns at a very discounted price.

JPMorgan’s Bear Hug

While JPMorgan has repeatedly publicly stated that it is not in the market for an investment bank, Bear Stearns makes a very good case from a risk/reward basis. Given the near collapse of the Bear Stearn’s stock price, the market cap of Bear Sterans is approximately $4.4 billion, as of midday Friday, March 14, 2008. Given JPMorgan’s strong capital position – $88.7 billion in reserve (resulting in an approximately 8.1% Tier 1 capital ratio and approximately 12.6% capital ration, overall) and $71.9 billion in tangible common equity, at the end of 2007.

Given the strength of their financial statements, JPMorgan can easily absorb Bear Stearns without substantially denting their capital.

Additionally, Bear Stearns is not a true investment bank as it historically dealt heavily in mortgage back securities and did not diversify out of this niche. Additionally, Bear has valuable business units, such as its real estate, hedge fund servicing, and strong back office units.

Why It Makes Sense

Since Bear Stearns was really a mortgage back securities trading firm, rather than a full service investment bank, Bear’s mortgage-back securities and mortgage trading business will help to boost JPMorgan’s standing in the global debt capital league market.

According to Thomson Financial's global mortgage-backed securities league table (B10) for FY 2007, JPMorgan at $77.9 billion was ranked 6th and Bear at $86.5 billion was ranked 3rd. If combined, JPMorgan would move to the top at $164.4 billion, displacing Lehman Brothers (LEH) at $115.8 billion.

Additionally, Bear Stearns has one of the best back office units in the business. The market for debt securities will improve. By using this period of uncertainty and slow business, JPMorgan has the time to combine the two back offices together and be prepared to take larger share of the settlement business when the market returns.

Finally, I think that Bear’s office, which is located directly across the street from JPMorgan’s headquarters at 270 Park Avenue, provides easy logistical integration. I hope Jamie takes this opportunity to takeover Bear Stearns.

Go Jamie!

Disclosure: The author holds long positions in JPM at this time.

Comments

[steveballmer:]

Microsoft will buy BS first!

2008 Mar 16 06:27 AM

[HandyDan:]

Regardless of the value you see, there is likely to be a much larger loss looming in the mortgage securities that will take Bear Stearns value into the negative. Why would a smart banker pick such a target when he could get the assets much cheaper in bankruptcy?

2008 Mar 16 12:28 PM

[Quinn:]

As long as the Fed does not get involved in the bailout. Bad decisions need to find there status in the market place and not at the taxpayers tab.

2008 Mar 16 12:42 PM

[Pj568:]

If JPM wasn't willing to put their own money at risk in a lending transaction why would anyone think there would be an interest in buying the company. Maybe selected assets or people but why a company with an unlimited/undeterminab... downside risk.

2008 Mar 16 02:08 PM

[texasgolfer:]

I will make you the same deal the Government does on your taxes, give me a dollar and I will give you 27 cents. Why buy what has unknown value? Deposits gone, clients gone, securities value unknown, location across the street? and didn't the back office get them where they are now? Maybe E Bay would have a buyer.

2008 Mar 16 02:39 PM

[Pj568:]

The result is now in, JPM buys Bear at $2.00 per share.

2008 Mar 16 08:04 PM

[Zyx007:]

Kudos, for hitting the nail on the head.

2008 Mar 17 11:51 AM

[Vanessa:]

Well is it a good time to buy the stock?

2008 Mar 19 03:00 PM