JP Morgan inks the deal of the year
US$236 million sounds like a lot of money, certainly a great deal more than the “$2/share” that JP Morgan (JPM:NYSE) is paying to acquire Bear Stearns (BSC:NYSE). The purchase price doesn’t sound stupendous when compared to the US$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.
Can you imagine the negotiations between JP Morgan and Lazard, acting on behalf of Bear’s Board of Directors?
Lazard: The stock closed at US$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 US$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 US$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 US$5? The stock was US$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 brokerage 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 US$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 US$2 a share?
Lazard: That’s just US$236 million for the entire business! Our client bought back US$1.6 billion of stock in 2007 alone. How about putting that US$5 figure back on the table?
JP Morgan: So much for the wisdom of share buybacks during declining credit markets. US$2, and the Bear board must support it.
Lazard: Done.
Here’s the math:
Bear Stearns’ HQ
383 Madison Avenue
1.2 million sq. feet
Value: US$1.2 billion
Bear Stearns’ Clearing Unit
2007 revenue: US$1.2 billion
2007 profit: US$566 million
Value: US$2.5 billion
Crane & Co.
Value: US$75 million
Wealth Management
2007 AUM: US$42.7 billion
Value: US$700 million
Investment Banking
2007 revenue: US$1.38 billion
Value: nil
Institutional Trading
2007 revenue: US$891 million
Value: nil
Principal Trading
2007 revenue: US$1.32 billion
Value: nil
Employee Compensation and benefit costs
2007: US$3.425 billion
Other non-interest expenses
2007: US$2.32 billion
CDOs, Mortgages, MBS and ABS
2007: US$46 billion of mortgages, mortgage backed and asset backed securities including approx. US$12 billion of floating rate commercial loans and approx. US$3 billion of fixed rate commercial loans. ABS CDO-Related Exposure US$755 million. U.S. Subprime Mortgage Exposure US$(582) million.
Value: Negative US$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. They’ve got themselves the “deal of the year”, and its only March. 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 US$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:NYSE), the shorts will be all over that ticker tomorrow morning. In the name of all things independent, let’s hope they can ward off the dark cloud that has engulfed Wall Street. Friday’s announcement of a new US$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.
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UPDATE 1: LEH shares are down 17.8% to US$32.25 as at 7:05 EDT in Monday pre-market trading.
UPDATE 2: LEH shares are down 28.3% to US$28.20 as at 7:58 EDT.
MRM
oh my… oh my, it can’t be more dramatic than this.
… let’s now ban mortgages to poor people and mortgage securitization, ok?
Good writeup Mark. Thanks for pointing out the RAROC aspect of this, it’s helpful for folks who don’t work in credit to understand how ratings can be so volatile.
Through the fall and winter, BS sounded like a great deal at $100/share, then a better value play at $80.
“The Fed has been playing the equivalent of Whack-a-Mole as financial turmoil keeps cropping up in new and unexpected places. Yet many of the problems facing us are beyond its reach.” – Alan Blinder, former Vice Chairman of the Federal Reserve
2007 Comp figures for an unnamed executive.
Total Annual Compensation — USD
16,487,150, Long-Term Incentive Plans — USD 0, All Other — USD 5,233,207, Fiscal Year Total — USD 35,734,422.
Estimated losses for that same individual: $115.7 million