Wednesday, March 19, 2008

JPM to buy Bear Sterns @ 2$ a piece, yet the stk is trading @ $6 ?

Bear Sterns went belly up a couple of days [link]

JP Morgan Chase with the Federal Reserve's support has offered to buy Bear Sterns out at $2 a piece. This technically means that shares of Bear Sterns are worth nothing more than $2 per share, provided the deal goes through, which in all probability it will.

However, the Bear Sterns stock continues to trade above $ 5-6 a share. This more than 150% more than the JPM bid. Why is it trading at such a high level?


Barry Ritholz has an explanation -

There is a simpler explanation, one that might surprise you: BOND HOLDERS are buying up Bears loose stock. As much as they can get.


Consider: there is ~$75 billion in outstanding bonds (see Bloomberg screen below), and another $75 billion in other miscellaneous paper. (UPDATE: The NYT pegs it at $300B). Prior to the BSC/JPM deal's announcement, the BSC Bonds were trading for 80 cents on the dollar.

Imagine your fund owned a one billion dollars worth of Bear bonds (mark to market = $800 million). Isn't it worth buying 10 million shares or so at $3 - 4 or so dollars a share? You will get $2 per share in JPM stock, so buying it a few bucks over the takeover price isn't all that risky. Remember, insiders own 30%, and Joe Lewis also owns about 10%.

So as mad as the accumulation appears, its actually quite rational -- IF YOU ARE A MAJOR BOND HOLDER, and are doing this to capture voting stock. (All the other idiots buying BSC are pretty much fucked).

[Link to the entire article]


Felix Salmon of also has a similar explanation -

In a nutshell: those shares are being bought by Bear's creditors, in the hope that the deal will go through and the stock will fall.

The big winners from the Bear Stearns acquisition are Bear's bondholders. They came close to an event of default this weekend; if all goes according to plan, they'll soon own nice safe debt from JP Morgan Chase. The only thing which can derail their glide path (if Krugman can mix his metaphors, so can I) would be if the deal doesn't go through at $2 as planned.

The main thing that needs to happen for the deal to go through is that shareholders vote in favor. And the only way that bondholders can ensure yes votes for the deal is to own those shares and vote them themselves. Says Neubert: "They will eat the difference between where they buy the equity and $2.00 in order to protect much higher numbers in debt."

[Link to the entire article]

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