Did JP Morgan Overpay For Bear Stearns?

So it's done. Bear Stearns (BSC) is being sold to JP Morgan Chase(JPM) for the (not so) astonishing price of - gulp - $2 per BSC share. Get the prime brokerage operation, the clearing business, the high net worth franchise, the nice building, and trash the rest. My only question is: did JPM overpay?

Here is what I said a mere two days ago:

Bear Stearns, as we know it, is gone and never to return. Why did Ace have to give up the reins? Ace was all about managing risk. It is hard to imagine this happening with him at the helm. But bottom line: we are seeing another LTCM-style bail-out, only with the Fed's more active involvement. I believe moral hazard will be skirted because equity will largely be wiped out. This is a crisis of liquidity as well as a crisis of uncertainty. Just how much are those illiquid assets worth? Incalculable at this time...JP Morgan Chase (as a potential acquirer)? A very strong possibility due to the business synergies and knowledge of their book. A headache for sure, but at the right price they'll simply take a few aspirin and call me in the morning. They'll print the trade.

Well, it pretty much played out as I expected. JPM as the buyer and equity holders wiped out. From $170 to $2 - simply stunning. The fact is, however, that notwithstanding the seemingly bargain-basement price of $236 million that JPM bought the stock - and with it all of the associated assets and liabilities - of Bear Stearns. Just how large that difference between book value and the $2 is, as I wrote Friday night, currently incalculable.

Sure, they get some plum assets as mentioned above. But that asset value could be wiped out in a nanosecond if some of those Tier III derivatives go to hell, the mortgage book continues to erode as do all the other leveraged credits on their balance sheet. JPM is making a Citadel/E*TRADE type bet, with the hope that the margin of safety is at least as large. The jury will be out for quite some time, but I wouldn't say that the deal is a slam dunk.

I don't take (much) issue with Jamie Dimon for doing this deal. He is taking a calculated risk, a risk that JPM certainly can absorb in exchange for the prospects of a rich payoff. But before we go patting Mr. Dimon on the back let a little time go by. Because this deal might look a lot less like a bargain a few months from now.

Addendum (Monday 3/17 AM):

A few additional comments. JPM is buying the stock, not the assets, of BSC. Therefore, JPM is effectively stepping into BSC shareholders' shoes, open to all the the portfolio write-downs that will inevitably commence. So discussions around the value of one-off assets ("Gee, isn't their building worth $1 billion - so doesn't this mean that JPM is getting paid to take BSC for $236 million?") is neither here nor there except in the context of getting to the bottom of what hard book value is, which is to say net of portfolio write-downs and diminution in the value of BSC's most valuable businesses due to uncertainty.

Just because something thinks prime brokerage was worth $2 billion yesterday doesn't mean that it is today. The same applies to the clearing, high net worth and other client-driven operations. Clients have been voting with their feet and fleeing, so I put little credence in any breakup analyses I've seen to date. Until the dust settles on the current phase of our financial meltdown, who knows. The only thing immune from such client-driven value destruction is the headquarters building (though clearly not immune from other types of value destruction).

I believe the Fed's $30 billion backstop addresses most if not all of the portfolio issues related to BSC's holdings of mortgage securities with some left over. However, the combination of hard-to-value Tier III holdings and leveraged loans together with the value diminution in their high-value businesses raises the question "is it enough?" Bottom line: likely yes. But is also wasn't so likely last week that BSC shareholders and employees would be wiped out and left to wonder "what happened?" So I am invoking the sentiment of that brilliant philosopher Yogi Berra: It ain't over 'til its over. And believe me, my friends, it ain't nowhere near over.

Comments

[zenalgorithm]

Quoting one's self is a big ego booster!

JP Morgan is giving the FED the crap holdings.

The FED is doing exactly what it was created to do: protect JP Morgan interests.

If this deal doesn't work out, the FED can always bail out JP.

Google "Fiat Empire".

[fxtrader07]

JPM, one of the largest shareholders of the Fed gets BSC basically for next to nothing and all the risks get taken up by the "fed" - no, stupid, by the taxpayer and by the rest of the world. The Fed can priont its way out of any problem - with everybody who is holding the green buck is, well, holding the bag.
Even to seriously ask whether JPM "overpaid" discloses that the author has ZERO understanding of the deal and the powers at work here. Overpaying?? Give me a break! The manhattan headquarters alone is worth twice the amount. Does really anybody out there think that JPM will be left with the illiquid securities? Certainly not.
As a BSC shareholder I would oppose the deal. I mean, c'on what did I have to lose here? the remaining 2, 3 or 6% of my former holding?
This is a robbery commited by jpm on bsc shareholders, it is so blatant it is breathtaking. The only thing more breathtaking is that the Fed is actively borkering the deal. The same Fed who, under Mr. "RECKLESSNESS&quo... Alan Greenspan has been busy for years and years in creating and nurturing the whole mess in the first place.
If this isn't a wake-up call for the American People to abolish this evil cancer-like institution then what else do you need?
Unfortunately, though, except for Ron Paul none of the presidential candidates even has a remopte understanding of the matter, not to speak of doing anything on it.. Obama can rant against the establishment all day and will achieve close to zero as long as the root of the evils is not adressed and cured: a (privately owned) central bank and agovernment spending way beyond its means.

[InformationArbitrage]

fxtrader07, your comment is emotional, populist drivel. JPM doesn't have a put back on the deal. They are assuming it all - the good, the bad and the ugly, with a margin of safety provided by the Fed. Your value of the building comment is inane, because you can't strip out an asset from the analysis and compare it to the acquisition consideration. As I wrote in my post, it is about the true assessment of hard book value taking into account the factors mentioned. So a guarantee is not what JPM received. Repeat, not a guarantee.

This isn't the result of a cabal; it is the work of a Fed and a Treasury that is completely at a loss about what to do. They are not acting out of malice - they are acting out of fear. I know you think you and Mr. Paul have all the answers, but I guarantee that you do not. While I am not happy with many if not most of the Fed's actions over the past six months, they can hardly be chided for trying to act quickly and decisively to stem the ripple effect of the failure of a bulge-bracket firm. With trillions of dollars of interconnected transactions in the swaps and credit derivatives markets, taking them out of the picture would leave a lot of loose ends.

[sammyg123]

What purpose would it have served to "save" BSC anyway. Their liquidation is a good thing, and offers the chance that the derivatives/credit deadlock can be loosened. As money is raised to unwind the derivatives mess, things will start to get better. Banks will trust each other enough to lend. Perhaps more firms need to get liquidated to help unwind the derivatives mess?

I'm not happy about companies going under. I am less happy about what these companies did to our economy, and how that has forced the fed to cut interest rates and devalue our currency. I'd like what little currency I have to be worth something. I worked for it, as I am sure everyone else has worked for theirs. So, if we have to liquidate some poorly run companies that were parties to the problem, so be it, if that means somewhere down the road, the USD will trade at parity with the Euro.