$236 million sounds like a lot of money, certainly a great deal more than the “$2/share” that JP Morgan (NYSE:JPM) is paying to acquire Bear Stearns (NYSE:BSC). The purchase price doesn’t sound stupendous when compared to the $80 book value per share that Bear Stearns’ CFO claimed on Friday to be the appropriate figure of his soon-to-be-former securities dealer.
Lazard: The stock closed at $30 on Friday, and shareholders will want to see a decent lift from here if they’re going to support a deal.
JP Morgan: How about $5 a share? That’s what the HQ is worth right now in a tough real estate market. The rest of the business is a wash.
Lazard: Are you kidding? We’ve got J.C. Flowers. Citadel Investment Group. KKR. CITIC. All big names with deep pockets. They’re down the hall right now, pouring over the books.
JP Morgan: None of them can close in 28 days, which is all the time we’ve agreed to provide the $30 billion of Fed-backed emergency funding for. And since none of them are domestic banks, the Fed won’t utilize them as conduits for this, shall we say, unusual funding scheme. Citigroup’s hands are full. Soc Gen can’t play. Lehman Brothers doesn’t even want to admit they’ve ever heard of Bear Stearns, for fear that counterparties start to look askance at them, as well. We are it.
Lazard: Fair enough. But $5? The stock was $120 last summer when Jimmy Cayne was golfing and bridging his way throught the meltdown of our two hedge funds. Do you know how much money this will cost him?
JP Morgan: We don’t want to buy an investment bank. We are interested solely in the prime borkerage division. And maybe the office headquarters. But that’s it. We’ll give you fair value for those two assets, and you can use the cash to prop up the rest of the business.
Lazard: But a take-under? The stock closed at $30 on Friday.
JP Morgan: You heard the CNBC bingo callers on Friday am. They said that the equity was a “lottery ticket”. It was worth either zero or $100 a share. Even Jim Cramer told his folks on Friday to play the debt and not the equity.
Lazard: You’re killing me here! The Board of Bear Stearns needs comfort that the liabilities are ring-fenced. Selling you the crown jewels will just leave us with the radioactive stuff.
JP Morgan: Radioactive?
Lazard: Okay. Poor choice of words. The part of the business that’s currently hard to put a value on.
JP Morgan: How about $2 a share?
Lazard: That’s just $236 million for the entire business! Our client bought back $1.6 billion of stock in 2007 alone. How about putting that $5 figure back on the table?
JP Morgan: So much for the wisdom of share buybacks during declining credit markets. $2, and the Bear board must support it.
Here’s the math:
Bear Stearns’ HQ
383 Madison Avenue
1.2 million sq. feet
Bear Stearns’ Clearing Unit
2007 revenue: $1.2 billion
2007 profit: $566 million
Crane & Co.
Value: $75 million
2007 AUM: $42.7 billion
Value: $700 million
2007 revenue: $1.38 billion
2007 revenue: $891 million
2007 revenue: $1.32 billion
Employee Compensation and benefit costs
2007: $3.425 billion
Other non-interest expenses
2007: $2.32 billion
CDOs, Mortgages, MBS and ABS (pdf file)
2007: $46 billion of mortgages, mortgage backed and asset backed securities including approx. $12 billion of floating rate commercial loans and approx. $3 billion of fixed rate commercial loans. ABS CDO-Related Exposure $755 million. U.S. Subprime Mortgage Exposure $(582) million.
Value: Negative $4.3 billion
And there you have it. The very figures JP Morgan might have had to work out a price of two bucks a share. It has gotten itself the “deal of the year,” and it's only March. It doesn’t seem quite fair, does it?
That white-shoed JP Morgan is acquiring Bear Stearns at a firesale price after 83 profitable years isn’t about fairness, of course. It’s no more complicated than this: JP Morgan has the heft, resources and $124 billion market cap to make this deal a layup.
When Bank of Canada Governor Mark Carney says that size doesn’t matter in the world of commercial banking, you have to wonder if his clipping service follows this stuff at all.
As for Lehman Brothers (LEH), the shorts will be all over that ticker this morning. In the name of all things independent, let’s hope it can ward off the dark cloud that has engulfed Wall Street. Friday’s announcement of a new $2 billion unsecured credit facility was a good start.
In the meantime, other banks can just lick their chops and be envious of what JP Morgan was able to acomplish this past weekend.