Monday, March 24, 2008

Will $10 Really Get the Bear Deal Done?

(WSJ MarketBeat) Two weeks ago, speculators went bananas in the options market, betting on an incipient disaster at Bear Stearns Cos. They were proven right, as it turned out. Now, the options market is suggesting that J.P. Morgan Chase & Co.’s revised offer of $10 a share might not be the final offer.

But some investment bankers say they wouldn’t bet on J.P. Morgan CEO Jamie Dimon sweetening the pot again, or another buyer swooping in to take over beleaguered Bear. “I think, personally, that this deal is going to be done at this offer that J.P. Morgan put on the table,” says Marino Marin, managing director at investment bank Gruppo, Levey & Co.

Those trading options see it differently. Monday, more than 30,000 call options contracts (a call option is an option to buy a stock at a certain price at a later date) at a $15 strike price were traded. The volume in these options, which expire in mid-April, represents an increase of 17,000 in new positions, suggesting active speculation that the stock price will continue to go up, for one reason or another. Bear shares rose 88% today at $11.99 a share.

Notable Bear Shareholders
Holder Shares Value (mil), 2/29/08 Value (mil), Orig. Deal ($2) Value (mil), New Deal ($10)
Joseph Lewis 12,136,724 $969.24 $24.27 $121.37
Bill Miller (Legg Mason Cap. Mgt) 5,732,794 $457.82 $11.47 $57.33
James Cayne, Chairman 5,612,922 $448.25 $11.23 $56.13
Alan Schwartz, CEO 1,026,680 $81.99 $2.05 $10.27
Sam Molinaro, CFO 38,022 $3.04 $0.076 $0.38

All dates as of 12/07 except Mr. Lewis (3/19/08). Sources: Thomson,, SEC

“They’re speculating that Bear Stearns is not dead,” says Michael Schwartz, chief options strategist at Oppenheimer & Co. “There’s more life in this Bear, and the Bear may come back to bite a lot of the shorts.”

However, additional provisions in the re-negotiated agreement makes it less likely that J.P. Morgan is going to re-negotiate this deal. After all, the agreement now allows the company to buy 39.5% of the outstanding Bear shares without shareholder approval – making it even more unlikely that opponents of the deal will vote it down. “That certainly raises the probability that the deal will go through,” says Len Blum, managing director at investment bank Westwood Capital LLC.

The activity in the stock as a result of the speculation has restored a bit of luster to the net worth of the various top dogs at Bear Stearns. For instance, Bear Stearns Chairman James Cayne, whose 5.6 million in shares was worth about $448.2 million as of Feb. 29, 2008, saw his stake’s value fall to $11.2 million if valued at $2 a share. Now, it is worth $56.1 million (see table).

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