Explaining Bear Stearns' Current $7 Price

Explaining why Bear Stearns is trading at $7 today despite a $2 deal from JPMorgan has become a cottage industry. After all, there is the JPM price, of course, and then there is the provision in the deal that gives Jamie Dimon & Co. 20% of the Bear Stearns stock at $2 without further shareholder approval. All of which makes it a little surprising to most reasonable people that Bear Stearns stock is stubbornly trading at $7 or so.

The trouble, of course, is looking at this like a reasonable person. Markets, as always, don't reward such people.

So, why is it? Favorite naive theories on takeout targets trading over the bid are usually that someone thinks a higher bidder will emerge. We're seeing a spate of such pieces, and they're wrong. Because while it's possible, it's highly unlikely in this case. The implicit break fee in the deal, given the 20% slice to JPM, makes that unpalatable for most competitors, and you still end up gifting Bear's New York headquarters to JPM for a song.

Another naive theory is that JPM will be forced to up its bid. That seems unlikely too, given that there are no other competitors (see above), and whether the deal happens at $2 or $7 there are likely to be shareholder lawsuits. So why would Dimon's JPMorgan bother?

A credible partial explanation is channeled here by Portfolio's Felix Salmon, and it essentially has to do with Bear debtholders protecting themselves. They can buy relatively cheap stock and influence the likelihood of the deal going through, thus protecting billions in bonds that they also hold. Now, by doing that they're bringing nutty mo-mo sorts into the stock, and generally causing people to think there is more than meets the eye, but that's the gist.

I subscribe to the idea that there is buying from bondholders, as Felix says, but there is also oodles of short covering from higher levels. That combined effective buying blip has brought in momentum sorts and hedge fund nutters, which is temporarily supporting the stock at current levels -- and which won't last long.

Feel free to add your own theories, of course.

Comments

[Derek Dizhi...:]

ALthough it sounds like $2/share is a good deal, but if you look under Yahoo.com, Major Shareholders, we will see most of the institutional investors and major shareholders are holding BSC at above $80/shares. Are they going to go for scrap value of $2/share BSC or will they try to find a possible turnaround situations? There are analysts sending out negative news, why, because they want to drive down the price as well. There is a still high chance the investors will vote NO to $2/share. I am betting some of my IRA on BSC for a possible turnaround situation.

2008 Mar 18 03:03 PM

[Ashish S:]

Shareholders will almost certainly reject this offer. On Monday morning, while all other financials hit the tank, JPM added $10b to its market cap, suggesting that BSC was worth AT LEAST $10b to JPM (and therefore likely other banks without liquidity problems). However, now that markets have somewhat stabilized, BSC is no longer today in the same position as it was on Sunday night. Therefore, BSC's counterparties are going to now be more comfortable with their risk and have had time to hedge. Shareholders reject the deal and bear is at least a $2b company by week's end.

2008 Mar 18 03:45 PM

[todd07:]

Bond holders protecting themselves & short covering. That is (was) the $5 premium, pure & simple.

2008 Mar 18 04:37 PM

[Mr kumar:]

The shareholders will definitely hold out for a new deal , it doesnt make sense for them to vote yes to a 99% loss on their investments.
We should remember that the FED was desperate to save Bear Stearns from being bankrupt since it would have sent nasty ripples across the market.
This whole deal is to save the rest of the market , but unfortunately it smacks the shareholders , their argument would be that why should they take a huge loss when everyone else profits.
As long as they have the power to stop the deal , they will definitely do that. If they keep blocking this deal and if there is no other option then the FED might have to come in and increase the offer to the shareholders
How much is the $256 million dollar question

2008 Mar 18 05:42 PM

[GRG:]

What if a counter party thinks they can influence the outcome of the shareholder meeting by buying a ton of stock for a pittance and then reject the bid. Stock goes up they make a very very nice premium and become a major stake holder in Bear. They then turn around and make a counter offer for bear higher than the one by JP, which shareholders might approve in the long run, especially if they rope in people like Joe Lewis for support. If Lehman could get back their liquidity then under the same market conditions i dont see why Bear should have any problems. A lot of trading desks last week were asked to halt dealing with both Lehman and Bear. The questions is who has the monetary backing to do that and at the same time go against JP and the FED.

2008 Mar 18 08:57 PM

[gekko13:]

I don't know much about stock trading technicalities like the rest of you, but what I DO know is that BSC has 136 million shares outstanding, a float of 115 mill, yet it had a volume of almost 167 million yesterday. Meaning shares traded hands more than once. Do I smell the influence of just your average run-of-the mill day trading here? Ah...the great Ponzi Scheme strikes again!

2008 Mar 19 01:44 AM

[sammyg123:]

I think it is also worth considering that BSC shareholders would like a better price than 2 bucks. I think of the JPM deal as a put on BSC. BSC can move higher, and should, especially if another buyer emerges. Perhaps it doesn't seem like the vultures are circling right now, but those vultures might also be buying the stock as well. A savvy liquidator might get shareholders and bondholders what they want. JPM just put in a floor price, as liquidator of last resort. Time will tell if another suitor comes around. Jimmy Cayne is crossing his fingers, assuredly, while playing bridge.

2008 Mar 19 06:47 AM

[ss01:]

Other possible explanations:

Yes Voters:
1. JPM could buy the shares themselves up to some price to insure the deal.

No Voters:
1. CDS owners would certainly buy to prevent a default.
2. BS shareholders on sentiment that it's a raw deal.
3. Other potential acquirers -- although I agree this is a low probability event unless the valuation is way off.


Indifferent:
1. Momentum traders knowing this could climb on board accentuating the move.
2. Option MM's hedging the above.

2008 Mar 19 01:51 PM