Bear Stearns: The Deal is Still at Play, Shareholders Fight Back

New York, NYThe day after the Bear Stearns bailout was announced at the fire sale price of $2 a share, some longtime Bear Stearns employees were seen in the hallways crying. A third of Bear Stearns employees are also shareholders, and suddenly faced losing their life savings if Bear Stearns fails, or is actually sold at such a low price.

Imagine—one day your financial nest egg is secure, and the next day it's all but gone.

However, the Bear Stearns saga is far from over, after angry investors spent the week fighting back. Late last night JP Morgan, the white knight that has ridden in with help from the Fed in an attempt to acquire the beleaguered trader, was in 11th hour negotiations to raise the acquisition price to $10 per share, up from the fire sale price of $2.

As much as the share value of Bear Stearns stock has dropped in recent months—it was trading at $170 a year ago, but only $67 at the start of March—the $2 stock price offer was still one-fifteenth the trading value at the time of the offer last weekend.

On March 15th, after Bear Stearns appeared poised to go over the precipice, JP Morgan Chase offered to acquire the suddenly troubled company with help from the Fed, which agreed to cover $30 billion of Bear Stearns most toxic liabilities. While the move would save Bear Stearns from bankruptcy, the terms were an affront to shareholders, many of whom are well heeled and would incur substantial losses.

One of them is identified as Joe Lewis, a British billionaire who had reportedly invested $1.26 billion over the last year at an average cost-per-share of $104. Lewis is singularly the largest shareholder of Bear, and could be forgiven for sounding like one when he reportedly telephoned JP Morgan head James Dimon to voice his displeasure with the deal. And there were others.

In fact, even though the white knight has already taken effective control of the company and is on-site in spite of the fact the deal has yet to be consummated, shareholder revolt is reported to be one of the primary reasons why JP Morgan Chase re-opened talks.

However, it is reported that the Fed, JP Morgan's partner in all of this, is having difficulty with the new pact. For its part the Fed, as part of its agreement to partner with JP Morgan, directed the company to offer no more than $2 a share, which it did last weekend. Anything higher breeds concern that the rescue might be viewed as a taxpayer-funded bailout.

As it happens, it appears that JP Morgan Chase may be required to fund the first $1 billion of Bear losses before the Fed takes over the funding of liabilities. The Fed has since hinted that it may insist that figure be raised above $1 billion.

While the negotiations continue, the Bear Stearns saga is far from over. While the Bear Stearns Board of Directors has yet to vote to sell the company to JP Morgan Chase, those close to the negotiations reveal in comments published in this morning's edition of the New York Times that the Board is mulling over the prospect of authorizing a sale of 39.5 per cent of the firm. In Delaware, the state where both companies were incorporated, state law allows for up to 40 per cent of a company to be sold without shareholder approval.

Such a decision would move JP Morgan Chase closer to majority ownership. That would leave JP Morgan only requiring slightly more than 10.5 per cent shareholder support to gain majority ownership, and given that Bear Stearns Board members demonstrating support of the strategy own five per cent of outstanding stock themselves, that would leave JP Morgan only needing slightly more than 5.5 per cent of additional shareholder support to gain the coveted majority interest.

But that could be easier said than done, as some have suggested disgruntled shareholders could file lawsuits to block the move, citing coercion on the part of the Board.

It appears that JP Morgan's motivation to sweeten the pot is two-fold. The need to placate disgruntled shareholders and avoid a shareholder revolt has been complicated by rumors of rival bids orchestrated by some of the Bear's more well heeled investors.

Then there's the confidence issue. The 'C' word is what makes the world go 'round on Wall Street, and confidence is key. The sweetened deal was viewed as necessary to convince Bear Stearns clients that the Bear was still open for business and still viable, but it remains to be seen if skittish traders will come back.

The various posturing, together with certain language in the proposed agreement that would require JP Morgan Chase to guarantee Bear trades even if shareholders voted down the purchase agreement, suggests that the saga is far from over.

And while the talks continue, shareholders have signaled that they will not let Bear Stearns go for a song without a fight—even if they have to wage that fight in court.