JP MORGAN Chase increased its original bid for Bear Stearns five-fold to $10 a share yesterday after its initial offer for the beleaguered Wall Street bank was undone by legal snags and furious opposition from Bear shareholders who viewed it as far too low.
The new all-share offer, coupled with surprisingly strong home sales data, helped spark a broad market rally in the US when investors hoped the worst fallout from the subprime mortgage crisis might be at an end. The increase represents a remarkable turnaround for JP Morgan executives.
Late last week they suggested privately that they had no plans to increase their bid, which they said represented the best possible outcome for Bear Stearns. They said then that if the offer failed they would let Bear shareholders fend for themselves in bankruptcy court.
The new offer, which values Bear at about $1.2 billion, raises questions about the role of the Federal Reserve, which has been careful to avoid being seen as bailing out Bear's shareholders.
Jamie Dimon, JP Morgan chief executive, said he raised the offer for several reasons, including the need to close the deal more quickly. He said that would encourage Bear's best employees and clients to stay with the bank.
Mr Dimon said he listened to concerns from Bear shareholders that the initial offer was too low and wanted to improve the language of the merger agreement to eliminate several unwanted provisions, including one that would have made JP Morgan liable for Bear's trades for a year, even if the offer had failed.
"We wanted to get something more certain, more definitive. I don't mind being responsive to reasonable requests from the other side," he said in an interview.
Under the initial agreement, the Fed agreed to fund up to $30 billion of illiquid assets on Bear's balance sheet. Under the new agreement, JP Morgan is responsible for the first $1 billion of these assets with the Fed funding the remaining $29 billion. JP Morgan will guarantee Bear's borrowings from the Fed under a new facility extended to investment banks.
Bear will sell JP Morgan 95 million newly issued shares, representing 39.5 per cent of the bank's outstanding stock, at $10 a share. Bear's board, which controls about 5 per cent of the shares, has agreed to vote in favour of the deal. That leaves JP Morgan near the majority it will need to close the deal. The 95 million share purchase is to close on April 8th.
In theory, it could buy the rest of the shares it needs to close the deal on the open market, but the bank could face legal issues if it did so at a different level than the offer price. Bear shares, which rose last week on expectations of a higher offer, more than doubled yesterday to $11.98 in midday trade.
The new agreement came after JP Morgan discovered several errors in the initial merger agreement, which was completed early on the morning of March 17th after a frenetic weekend of talks.
Joe Lewis, the tycoon behind Tottenham Hotspur football club, was among those to oppose the initial $2 per share offer and was reported to have described it as "derisory". - ( Financial Times service )
