Bear Stearns to Cash Out

Bear Stearns, JPMorgan Strive for Sale, People Say (Update2)

By Yalman Onaran and Elizabeth Hester

March 16 (Bloomberg) -- Bear Stearns Cos. executives were striving today to strike an agreement to sell the crippled securities firm to JPMorgan Chase & Co. before financial markets open in Asia, people with knowledge of the talks said.

The companies may announce an agreement in principle as soon as this evening in New York, giving a range of potential sale prices and leaving details of the transaction unresolved, said the people, who declined to be identified because the talks are private. Negotiations were ongoing, including with other potential bidders, and it was unclear whether a deal would be completed, they said.

The Wall Street Journal reported that the sale price may be about $2.2 billion, less than $20 a share and about half of the firm's $4.08 billion stock market value. Bear Stearns, led by Chief Executive Officer Alan Schwartz, was also preparing to file for bankruptcy protection if no deal is reached, the newspaper reported, citing a person familiar with the situation.

JPMorgan, backed by the Federal Reserve, provided emergency funding to Bear Stearns on March 14 when the fifth-largest U.S. securities firm ran out of cash after speculation about its financial soundness prompted customers and creditors to withdraw $17 billion of assets. Bear Stearns plummeted a record 47 percent to $30 in New York trading, pulling down financial stocks and sparking concern that other Wall Street firms could be affected.

`Do What It Takes'

``Right now it's a very potent short-term problem,'' said Brian Barish, who manages about $8 billion as president of Denver-based Cambiar Investors LLC. ``If Bear fails you're going to augment this liquidity problem materially because all kinds of trades are going to fail and people are going to be stuck with Bear as a counterparty. So it's better to find a way to handle Bear.''

Russell Sherman, a spokesman for Bear Stearns, declined to comment. JPMorgan spokeswoman Kristin Lemkau didn't return phone calls seeking comment.

``None of these things is done until they're done,'' Treasury Department spokeswoman Michele Davis said today, adding that Treasury Secretary Henry Paulson was involved in the discussions.

``The government is prepared to do what it takes to maintain the stability of our financial system,'' Paulson told the ``Fox News Sunday'' television program in Washington today. ``Our focus, our No. 1 priority, is the stability of our financial system.''

Teams of Bankers

J.C. Flowers & Co., the New York-based private equity firm, is among the other potential bidders that have been in contact with Bear Stearns since its cash shortage surfaced, according to people familiar with the matter. Ed Grebow, a spokesman for J.C. Flowers, didn't return a call seeking comment. Kohlberg Kravis Roberts & Co. was also involved alongside Flowers, the Journal reported today on its Web site, citing a person familiar with the discussions.

Hundreds of Bear Stearns employees worked yesterday to help with the process along with teams of bankers from JPMorgan who descended on Bear Stearns's 45-story headquarters on Madison Avenue in midtown Manhattan, people with knowledge of the matter said.

A sale for $2.2 billion, or less than $20 per share, would mean that Bear Stearns's value has fallen more than 88 percent from its peak of $171.51 in January 2007. The 85 year-old firm paid employees $3.43 billion last year.

Prime Asset

Bear Stearns's prime brokerage, which provides loans and processes trades for hedge funds, is a potentially desirable asset for JPMorgan, which has said it wants to buy such a business. The Bear Stearns unit generated $1.2 billion in revenue last year. Talks between the two New York-based firms have moved beyond that business and an outright acquisition of Bear Stearns is under discussion, the people familiar with the talks said.

JPMorgan and rival banks and securities firms are trying to find additional revenue streams after the collapse of the subprime mortgage market forced them to absorb more than $195 billion of writedowns and losses since the start of last year.

Bear Stearns's prime brokerage was the third-largest behind Goldman Sachs Group Inc. and Morgan Stanley as of April 2007, according to Sanford C. Bernstein & Co. analyst Bradley Hintz.

``Prime brokerage is a fee-based business that has a fairly steady revenue and income through all market cycles,'' said Glen Dailey, head of Jefferies Group Inc.'s prime brokerage in New York. ``As long as people buy or sell it makes money.'' Dailey ran Bank of America Corp.'s prime brokerage from 1997 until 2006.

`Too Late'

JPMorgan, led by Chief Executive Officer Jamie Dimon, was tapped March 14 for the bailout, after Bear Stearns's cash position had ``significantly deteriorated'' the previous day, company officials said. JPMorgan agreed to help the New York Fed provide financing for up to 28 days.

Steven Black, co-CEO of JPMorgan's investment bank, said Feb. 27 that the firm was considering an opportunity to buy a prime brokerage from an unnamed seller. Bank of America, based in Charlotte, North Carolina, said on Jan. 15 that it planned to sell its prime brokerage.

Dimon said three years ago that he didn't see the point of trying to compete with the likes of Morgan Stanley or Goldman in prime brokerage for stock trades. It's ``just too late,'' he said on a January 2005 conference call. Instead, he said he would focus on serving hedge funds in debt trading.

Customer Defections

Buying a business with a damaged reputation carries its own risks. Prime brokerage customers have been leaving Bear Stearns since last summer, said Bob Sloan, managing partner of S3 Partners, a New York-based company that serves as an outside financing desk for hedge funds.

There's little incentive to return once they've departed, said Sloan, whose clients have withdrawn a total of $25 billion from Bear Stearns.

``When Bear passed around a circular in July saying everything was safe and secure and funding was not a problem, we recommended to all our clients to pull,'' said Sloan, who ran Credit Suisse First Boston's prime brokerage for six years until 2002.

Bear Stearns, which first sold shares to the public in 1985, helped trigger a crash in the market for home loans to borrowers with blemished credit histories after two of its hedge funds collapsed in July. The failure of the funds, which invested in securities linked to subprime mortgages, prompted a sell-off of the assets, which led investors to shun other high- yield debt.

Hintz, the Sanford Bernstein analyst, said a takeover by JPMorgan may not revive the securities firm.

``Unfortunately it's easy to concoct a scenario that says this becomes a run-off strategy,'' Bernstein's Hintz said. ``It doesn't mean the assets aren't worth anything, it doesn't mean the franchise isn't worth anything, but I'm not at all certain how you put the defibrillators on and jumpstart the company again.''

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net;
Last Updated: March 16, 2008 18:00 EDT

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