Bear Stearns Buyout: Insiders and the Merger Contract

Commentators have written endlessly about all of the carrots and sticks J.P. Morgan (JPM) “negotiated” into its agreement to acquire Bear Stearns (BSC). In “Is the Bear Simply Buying an Insurance Policy?”, I reiterated JPM’s options for Bear’s building and 20% equity (at $2/share). Now, Friday’s Wall Street Journal reports that JPM can invoke the equity option if another party accumulates a 20% equity stake. Put this together with incentives to Bear’s management that include: indemnification, retention bonuses, and 25% of their accumulated BSC stock awards converted into JPM stock. With the actual merger agreement not yet public, who knows how much of this is true. True or false, the “smart money” believes JPM has a bear hold on its prey.

Preliminaries aside, let’s move on to more interesting questions. Given that indemnification has a real monetary value, and outsiders cannot convert four shares of BSC for one share of JPM; are insiders actually being paid more than $2/share? Of course the value of these could be far in excess of $2/share. Also, is it legal to pay insiders a higher price per share than outsiders in a takeover?

I do not believe JPM’s incentives can be compared to normal retention bonuses. No cash bonuses or stock options have been reported. JPM is in essence offering over $10/share to insiders (if the deal closes), while offering only $2 to outsiders. Clearly, JPM engineered a system to bribe insiders to vote in favor of the merger.

Merger: Pot of Gold for the Chosen

From Bloomberg/Yalman Onaran “JPMorgan Woos Bear Stearns Insiders as Lewis Dissents”:

“Dimon, 52, said Bear Stearns employees who stay until the deal is complete will receive cash payouts ranging from 25 percent to 35 percent of their 2006 compensation, the people said. Even those who ultimately don't get a job at JPMorgan are entitled to the payments, so long as they stay until the closing, Dimon told the group.”

“JPMorgan hasn't indicated how many Bear Stearns employees it will retain. Those who accept jobs at JPMorgan will get shares of the bank equal to their 2007 pay, Dimon said.”

The Merger Contract

From the M and A Law Professor Blog: “Agreement and Plan of Merger by and between The Bear Stearns Companies, Inc. and JPMorgan Chase & Co.”

JPM can match any competing offer:
“Company and its advisors has negotiated in good faith with Parent to make adjustments in the terms and conditions of this Agreement such that such Alternative Proposal would no longer constitute a Superior Proposal.”

If stockholders do not approve, renegotiate:
“If Company shall have failed to obtain the requisite vote or votes of its stockholders for the consummation of the transactions contemplated by this Agreement at a duly held meeting of its stockholders or at any adjournment or postponement thereof, then, unless this Agreement shall have been terminated pursuant to its terms, each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein (it being understood that neither party shall have any obligation to alter or change the amount or kind of the Merger Consideration, or the Tax treatment of the Merger, in a manner adverse to such party or its stockholders) and to resubmit the transaction to Company’s stockholders for approval, with the timing of such resubmission to be determined at the reasonable request of Parent.”

Disclosure: Author unfortunately is long BSC.

Comments

[katmark]

Reader unfortunely long too!!!!!!

[TM]

NY Times is reporting that JPM is in talks to increase the offer to USD10/share to appease angry shareholders... Lets see what happens

[khinsaaa]

do you think that will cause it to rally tomorrow?

[Internal Source]

BEAR + JPM = ILLEGAL HR PRACTICES!!

Dimon called all the i-banks on the Street and asked them not to recruit away or have interviews with Bear employees. I work at Bear HQ and someone from MS is interested in me, has seen my CV, but said he can't meet or interview me until at least a week or two has passed - on orders from above! All this while I wait to see if Dimon wants to keep me or cull me away in a massive layoff! I am not a SMD or some other big-earner, either; I'm just in a middle office role and need to support my family! Thanks Jamie for screwing us once, then twice! (I also didn't lose a fortune in shares since I got mostly cash - small cash, that is - for a bonus).