Where Does Bear Stearns Go From Here?

From $4.81 straight to $2 per share. Or $0 if shareholders are really dumb. If there weren't already lots of opportunities to lose money on this stock, somehow certain investors are gluttons for punishment.

As noted in my earlier post, even with the $30 billion Fed backstop, it is not baked-in-the-cake that this deal is a winner. And what about those for whom the guarantee isn't forthcoming, say, a private equity consortium, a sovereign wealth fund or a foreign bank? Forget about it. They're not buying.

Yes, as my esteemed blogging colleague Andrew Clavell notes, it is ironic that the very shareholders who have gotten terribly hurt will be the very ones voting on the deal. But in the event that the vote doesn't support the deal (which I believe is very unlikely), then what? This simply tosses BSC (not to mention the equity holders) into no man's land. The Fed will be enraged, Chapter 11 will be in the offing and we may see our own version of financial markets martial law.

Can the Federal Government unilaterally assume the obligations of BSC, providing equity holders with -0- and getting down to the business of protecting the financial system (at least in their eyes)? Of course they can. And they will, if pressed. I mean, look at Eric Dinallo and the municipal bond insurers. Forcing a split? Are you kidding me? And while $236 million for BSC isn't much, it's something. The Fed and the U.S. Treasury aren't fooling around. They're severely freaked out. And they will do what they believe is necessary to make sure the current crisis doesn't turn into Chernobyl. Little water is getting to the reactor core right now, notwithstanding their efforts to inject some liquid(ity) into the system. And if some pissed-off equity holders are getting in the way of their rescue mission? Consider them road-kill.

Comments

[Jeff]

If only they had saved a few more paper clips, this would never have happened.

[EC]

The stock is trading up because bond and CDS holders (which currently have massively more capital at risk than the equity shareholders, with only around $500mm) want to control the vote, and vote the equity however it would benefit their larger position (bull or bear on bonds). When the size of a comapany's equity gets this low, the tail can easily wag the dog. Right now, people are willing to lose $5+ in equity just to gain a vote. That is what the $7 price indicates. The market can do math, and recognises that 7>2.

[Dave]

Agreed.

[Anders]

Just ask the Robertson Stephens folks about the reality of a valuable investment banking franchise being worth $0 at the end of the day. Actually not "worth" zero, but certainly the value received by shareholders after a rejected MBO and botched spin-off. And that situation was a lot cleaner than BSC.

[Andy Swan]

Up to $7.00 today.....Roger...you short it here?

[Roger]

Dave, I am arguing from the vantage point of what I consider objective rationality. You are arguing from the perspective of buying a lottery ticket (likely NPV negative but hey, what the hell!). And lots of people buy lottery tickets who are in such an adverse economic state that ANY chance of a favorable outcome is worth hard cash today. So I am not saying that BSC shareholders WON'T vote against the deal; I am only saying that I think it is not economically rational. That's all. Thanks for commenting.

[Dave]

Roger, case in point:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/18/cnlewis118.xml
He is far better served rolling the dice, as are many shareholders. If you think there is positive value on the books your risk reward is quite favorable in voting against the deal. JPM price action says Jamie stole the business for song. Time will tell, but if you are long @ 100 why not roll the dice with the last 2 points?

[Yaser Anwar]

"Don't be silly, BSC is fine, it's just fine."

Listen to Cramer everyone and please don't be silly. It was at 60 when he said so, but why do you worry now? You've not sold still, so now you're really being silly.

Just watch this video and please don't be silly (everything is fine)!
http://www.youtube.com/watch?v=gUkbdjetlY8

[Andrew]

On the conference call, JPM stated that if they did not get shareholderr approval at the first vote, it would be resubmitted for a vote in the future (they said continually for a year, but that may have been a mistatement as section 6.10 of the merger agreeement as posted on Bear's website seems to only provide for one additional vote. See below). In any event, it sounds like the holders have a free call at $2, at least until a second vote.

6.10 Restructuring Efforts. 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.

[dave]

I agree, the stock can hit zero. So what? If someone is long at 80 or 120 the last two points means nothing. So they vote for the deal if deem it reasonable, fair. If the long was held last week I expect the trader/investor believed BSC's book valuation was in the ballpark. If the is the case they should vote no. This deal could have been structured to address those concerns, but it was not. In the end it is likely to be approved, as those who have vested interests in approval pile in to vote.