Rejecting their rescue
JPMorgan Chase & Co.’s $2-a-share fire-sale grab of once mighty Bear Stearns Cos. provoked anger, bewilderment and fear Monday among Bear’s shareholders and employees. In many cases, they are one and the same.
The investment bank’s 14,000 employees own about 30% of the company’s shares, and perhaps half of them could lose their jobs in the proposed merger, analysts estimated.
Those who land on the sidewalk will find themselves job hunting in one of the worst Wall Street environments in the last 15 years, a time when the economy appears to be sliding into recession, if it isn’t already there, and much banking activity has ground to a halt.
Many Bear Stearns employees, especially those who joined the firm in the last few years, already have seen their wealth decimated as the company’s stock -- which stood at about $170 in January 2007 -- was crushed by a run on the bank last week.
Lawsuits were threatened, and at least one was filed, after a weekend rescue effort in which the Federal Reserve provided financing and arm-twisting to get the deal done at a price that values the company at $236 million. That is less than one-quarter of the estimated market value of the firm’s signature Madison Avenue headquarters.
Joseph C. Lewis, the London-based soccer buff who is Bear Stearns’ largest individual shareholder, attacked the deal Monday in an interview with CNBC.
“I think it’s a derisory offer, and I don’t think they will get shareholder approval,” he said.
Lewis, a billionaire who owned 9.4% of the company as of Dec. 31, suffered paper losses of just under $300 million on Friday, when the shares plunged $27 to $30, and an additional $275 million Monday, when they sank to $4.81.
Another high-profile victim was the Legg Mason Value Trust, run by celebrated money manager Bill Miller. The widely held mutual fund lost 6% of its value in the last two trading days, thanks to the Bear Stearns collapse and heavy losses throughout the financial-services sector.
Banc of America Securities analyst Michael Hecht said in a note to investors that the sale price should have been more like $40 a share. He said the low price gave JPMorgan a “considerable cushion” even if it wildly underestimated the costs of unwinding Bear’s portfolio of mortgage-related securities and other difficult-to-value assets.
But Hecht also acknowledged that the deal was being driven by factors other than the best interests of shareholders.
With Bear Stearns fighting to survive, Federal Reserve officials wanted the deal because they feared the crisis of confidence that had led some banks and big investors to pull money out of Bear last week would spread throughout the financial sector.
JPMorgan executives liked the deal because they thought the risk was manageable and the potential payoff enormous. Bear’s board members, under pressure from the Fed and the Treasury, backed the merger because they thought the likely alternative was filing for bankruptcy protection.
“This deal had little to do with maximizing shareholder value for shareholders and more with stemming a potential financial crisis and the cascade effect that could ensue,” Hecht wrote.
Still, Monday’s closing price of $4.81 for Bear shares reflected investors’ view that another bidder could emerge for all or part of the company or that shareholders could pressure JPMorgan to raise its price. A lot will depend on whether the feared financial contagion that prompted federal officials to push for the takeover actually comes to pass.
A New York investor who filed a fraud suit Monday argued that Bear Stearns misled the public by not disclosing the extent of the firm’s risk from now-toxic sub-prime mortgage investments, said David Rosenfeld, a partner with Coughlin Stoia Geller Rudman & Robbins, which represents the plaintiff. Rosenfeld said he expected many more plaintiffs to surface.
The scene at Bear Stearns headquarters, a distinctive octagonal skyscraper just across 47th Street from JPMorgan Chase headquarters, was surreal at midday on a cold and clear Monday.
Camera crews were stationed near the building’s exits so that reporters could try for interviews with stunned employees. But from just a block away on Fifth Avenue came the raucous noise of Manhattan’s St. Patrick’s Day parade. Revelers in green plastic hats or shamrock-spotted scarves drifted through the somber groups of Bear Stearns workers on cigarette breaks.
Most workers declined to comment. Some said they had been warned by superiors not to speak to the press.
“People are shocked,” said Parthan Mehta, a consultant for a Mumbai, India-based company who has worked at Bear for five months. “Eighty-five years of history vanishing in two or three days is difficult to fathom.”
A Bear Stearns employee who requested anonymity for fear of retribution called the proposed takeover “an amazing deal” for JPMorgan, noting that the bank had been planning to build a new building downtown but now could simply move into Bear’s midtown headquarters.
The man said he had been accumulating Bear Stearns stock since the mid-1980s. “It’s basically all gone now,” he said.
Bear Stearns also has a regional office on the 25th and 26th floors of a Century City high-rise. Most employees had no comment as they left the building for coffee or lunch Monday, citing a company policy against talking to the news media. One worker described a tense atmosphere in the office but said no one had been told about possible layoffs.
Bear’s aggressive, risk-embracing culture led some to say that the firm got what it deserved, but Wall Street headhunter Michael Karp disagreed.
“Nobody deserves this,” he said. “Remember, they were feeding 14,000 families.”
Karp, chief executive of executive search firm Options Group, said resumes had come flooding in from Bear Stearns. “There’s a sense of disgust and betrayal” among some employees, he said.
As with any Wall Street layoff, “ ‘A’ players always end up with offers,” but the offers will be smaller than usual this time, Karp said.
Investment bankers who jump firms typically can count on a buyout, in which their new employer compensates them for the value of the stock they’re leaving behind at their old company.
“But now a guy who was worth $10 million in stock is worth $200,000,” Karp said. “It’s not much of a buyout.”
--
Times staff writers Ken Bensinger and Ronald D. White contributed to this report.
