So Bear Stearns (BSC) had a book value of $80 per share? It might be a fraction of that. Either way, fortunately for BSC shareholders, they’ll end up with at least SOMETHING as the company enters a lengthy and detailed bankruptcy process, right?
Wrong. In the words of Treasury Secretary Paulson yesterday, “we felt it was very important that this be resolved as a way to minimize impact on our economy.” So Bear shareholders can rest easy that it’s got less to do with the value of the business, and more about preserving the financial system, preventing runs on other banks, and protecting other banks’ book values.
I understand the fact that perception became more important than reality in this case (especially as firms are so reliant on short term financing), but if I were a BSC shareholder I’d rather take my chances with liquidation (and the faint hope of something left over for common equity holders) than accept a take-under at this level.
One scenario is that Bear’s board of directors knows that 30% of the common shares are held by Bear employees, and in a bankruptcy filing they’d fare much worse than in this scenario, in which the risk for JPMorgan (JPM) is so low that they can offer better job-security promises than Bear employees would see in bankruptcy.
$250m for a business which JPMorgan said in its presentation slides will eventually produce $1b in earnings. Now that’s a great PE! And you gotta think the estimate of $6 billion in “transaction-related costs” that JPMorgan is citing will prove to be inflated, but at least they’re trying to make their bid seem slightly more respectable.
If it turns out that shareholders would not have fared better in liquidation, fine. But what blows me away is the possibility that BSC common equity is being (basically) scrapped to calm the financial markets, and that’s wrong. Hopefully the BSC board will fill in its shareholders on why this transaction was in their best interest.
Disclosure: none
