Bear Stearns: The Last Big Story?

It’s official. Bear Stearns (BSC) is being bought out by JP Morgan (JPM) for $2 per share, or $236 million. The stock traded as high as $159 per share with a market capitalization of over $21 billion as recently as last spring. Its last quarterly earnings release indicated that the company had total shareholder equity of $11.8 billion.

The collapse is apparently the result of a concentration of subprime mortgages that the company held. This is alarming news, and it makes me wonder who’s next. Yes, Bear Stearns wrote down $1.9 billion in assets a quarter ago, but it is amazing to think the company could fail less than three months later. Its last earnings announcement contained the following statement:

James E. Cayne, Chairman and Chief Executive Officer said:

We are obviously upset with our 2007 results, particularly in light of the fact that weakness in fixed income more than offset strong and, in some areas, record-setting performance in other businesses. Our underlying fixed income franchise remains strong and we have taken steps to size the division to market conditions. We are taking appropriate measures to position Bear Stearns for renewed profitability in 2008 by focusing our resources on the businesses with growth potential in the current environment, while streamlining our operations in areas with lower expected activity levels. We are confident that these efforts will ensure Bear Stearns remains a strong and profitable competitor in the global marketplace in the years to come. (emphasis mine)

How many investors are reading similar statements and maintaining some optimism for their investments in 2008? How many mutual funds have been exposed to this company and others like it?

Today should be interesting.

I believe that this year could present the opportunity to purchase solid companies with favorable long-term prospects at significant discounts to what they are really worth. I will, however, be avoiding the vast majority of financial stocks in the coming year.

Comments

[raman kandola:]

Enter your comment hereA forced marriage by the FED

FED must stop the chain reaction before it happens or almost every major finanical institute would face a severe counter party risk based write down(much more uglier than sub-prime).

cheap load(arranged friday) to BSC is useless too as no one would think that is enough and the run would continue and BSC would be forced to file chapter 11.

So they need some big guys to boost the confidence, i.e. JPM.

JPM doesn't really want it or else what would be the difference between 1.28B(that is more likely to be approved quickly by the share holders) vs 286M when they said it can make 1B/year after the completion and cleaning up the mess ? beside, it is not cash but printing more certs. A bit more dilution but worth it if they really want it so badly.

BSC's management doesn't want to give in yet or else they can play hard with the 'I am going to drag everyone down if I don't get say 12/share' trick. As they have depleted all the cash anyway so even their client want to draw money, they have still to wait for the liquidation(to find out what money belongs to whom). A no loss situation for the management(other employee must go immediately though) if they think 10/share is the max they can get(I believe the book is already negative).

the deal sounds more like a 'convertable note' style credit line to me where JPM+FED gives the backing to BSC for 12 months and they hope the situation(the so called dislocation in bond market) would improve and by that time, BSC has unwinded its huge position and have a positive book value and its share holders would reject the deal. And in the meantime, expect the reject it again and again(the agreement is very strange/smelly to allow the share holders to do this)

If that doesn't work, they would take it in and the 1B would be sort of a premium they received, to reduce the risk a bit.

Now whether this would work is beyond anyone's guess since it can send a signal of 'if BSC worth 2/share, how about LEH/GS/MER etc' ? We are already seeing LEH being punished, the next target may be.

I was thinking that the FED would broker a deal in the 30-50 range(forget whether BSC does worth that much as it doesn't matter) that would boost the overall confidence and buy the market some more time. May be they are playing a 'shock and awe' trick hoping a capitulation style bottoming.

2008 Mar 17 07:13 AM