Bear Stearns Stock price above $2
(Senior Monkey, 94
Points)
on 3/17/08 at 11:23am
Can anyone explain to me why BS is not trading at $2 but at $4+ a share? Considering the settled price was $2/share, wouldn't it be logical for the price to drop to $2 when the market opened this morning? Thank!
I believe the market is
I believe the market is pricing in the fact that this may be a floor bid for BSC.
The higher prices comes from the fact that some traders believe BSC shareholders will reject the JPM bid and eventually receive something higher (projected around the neighborhood of $4).
- Capt K -
"Prestige is like a powerful magnet that warps even your beliefs about what you enjoy. If you want to make ambitious people waste their time on errands, bait the hook with prestige." - Paul Graham
It might be ignorant
It might be individuals believing that if Bear gets better over the next 60 days that the shareholders will vote down the bid. However, this is interesting because JPMorgan has rights to the building whether or not they win the bid; in addition they could pull the financing to bear and they will end up bankrupt. Flowers, etc. probably won't have a shot at getting them....so it doesn't make sense.
ahh
Ahhh i see. Thanks!
My guess is that people are
My guess is that people are either just being stubborn, or optimistically hoping for a slightly higher token price.
I find it funny that some shareholders are stammering about the fact that "orderly liquidation value" should be more like $20-30 per share. While this may well be true, the $2 token offer merely masks the fact that in a highly disorderly liquidation, which is what appears to be playing out, BSC is worth exactly $0 per share.
It's a stock swap
The JPM offer is a stock swap. Each Bear Stearns share will be swapped for a fixed number of JPM shares. The $2/share figure was based on JPM's stock price yesterday (JPM is up significantly today). One major reason for BSC shares to trade at ~$4 is that they offer a back-door way to buy into JPM.
JPM is up like 8% today, not
JPM is up like 8% today, not 100%. No way investors expect JPM to double pre-close.
re:
JPM is up like 8% today, not 100%. No way investors expect JPM to double pre-close.
In total agreement with you smuguy. Just mentioning it as one factor of many.
Looks like a pretty good
Looks like a pretty good shorting opportunity to me. Worst case is they get a higher bid, but I seriously doubt anyone has the knowledge of Bear or interest to swoop in and outbid JPM. Best case is the deal goes through at $2 or the company goes bankrupt and you gain $4 bucks a share. I wouldn't throw a ton of money into it, but I think it's a worthy gamble.
The range today was 2.84 -
The range today was 2.84 - 5.50. Would this reflect the range for the next few weeks or would the price converge to a higher or lower direction?
Your guess is as good as
Your guess is as good as anyone's on this board.
Speculation
In my opinion, there are a number of factors at work here. I caveat that these are only my personal beliefs.
The first is that there is a certain amount of denial at work. Bear has a significant employee ownership stake, and those are the ones who are least likely to look rationally upon the purchase price. Remember that they have watched their shares move down from (I think) the $170+ range to being virtually worthless. They are, in my view, putting too much credence in the stated book value that their management reaffirmed. They believe that by voting down a JPM deal they might see superior recovery in a bankruptcy restructuring or liquidation. I believe this is delusional.
Remember, their management also reaffirmed that there was no threat to Bear as a going concern as recently as Thursday. History has shown what we should make of that. The truth is that no one knows what Bear's book value is in reality. I do not believe that a distressed liquidation will yield much. Absent Fed action, Bear's business is like a patient in cardiac arrest - act quickly and you may save something (even if it is not the life you had before), otherwise you die.
The second issue is that many investors simply don't understand equity versus enterprise value. They read the Journal on Friday and think: "Jeez, my building alone is worth a billion five." Maybe. But there are many assets with value at Bear significantly in excess of the building. That's not the point. The point is to compare all the liabilities beside those assets. The difference is the equity value. And it is unclear to me (and to JPM) how much equity there really is in the business given the lock-up in the confidence in Bear.
The third is that normally, the arbs would drive the price closer to a risk adjusted equilibrium. But in this case, this is not a cash deal. It's a stock deal. So the normal arb action would be to short JPM and buy BSC to capture the cashless spread between the stock prices and the exchange ratio. Because BSC is trading above the ex rat, that relationship is inverted if you're an arb. You need to short Bear and buy JPM to capture the spread. But there's very little Bear stock available to short. So the arb pressure is (perversely) alleviated here. There's no counterbalance to the people who are irrationally holding the stock for a much higher price than the offer.
By the way, if you believe that $4 is the right trading level, you cannot believe that the real offer is $4. At $4, you'd have to look at the probabilities of each outcome, right? Basic statistics. If there's a 99% chance this goes to JPM at $2, you'd have to believe there's a 1% chance you'd get a $200 offer. Or say you think it's 80% JPM at $2. You'd have to think there's a 20% chance someone's coming in with a real, actionable deal at $10.
Does that sound like a likely outcome to you at this point?
Just think of it this way. On Friday, we all knew Bear was in trouble. The rumor was already out that they were done by the end of the weekend. For those of us who thought it out, you knew there was no standalone option for them. It was sell or die for them as a firm. But some people still held the stock, when the clear answer was to sell, and sell fast.
Humans aren't rational. Or at least entirely rational. That's what you're seeing here.
Out of the loop is a horrible place to be
Genghis, first of all, welcome back. It’s nice to have someone here who is able to use caveat as a transitive verb.
Whilst agreeing with your: “It was sell or die for them”, my question relates to your implicit assertion that there are no other viable alternatives available now to Bear’s shareholders save the JPM deal currently on the table. Looking at the practicalities of closing this transaction, the shareholder vote is unlikely to take place until the end of next month at the very earliest.
In your opinion, could this time be used by a rival to table another bid, whilst Bear is kept, shall we say, “afloat” by JPM’s guarantee? I guess the answer to this particular question is dependant on another one, so I will put this one to you too. Do you think that the $30bn sweetener, making Bear an easier pill for JPM to swallow, would be available to anyone else?
I’m thinking here of two parties which, perhaps rightly, hadn’t been caught up in the rumour mill prior to Sunday: MS, its mutual funds standing to lose $500m, or GS, standing to lose about $100m. Would the alternative of either of those two bidding for all of Bear (since that seems to be an unwritten caveat of FED’s sweetener) make strategic sense or even be viable at all?
I think you make a great
I think you make a great point endgame.
However, if I were Dimon, I'd argue that a Fed cushion down the road offered to other strategic buyers isn't really fair. Perhaps JPM could have come up with a higher bid over the course of 6 weeks worth of diligence, but given that they only had a couple days, they understandably had to discount things appropriately.
I certainly wouldn't rule out the idea that others may secure similar Fed backing, but it should be noted that without JPM's initial offer BS would no longer exist as a going concern.
Clarification
[...] it should be noted that without JPM's initial offer BS would no longer exist as a going concern.
Oh, no question about that, but here’s what I’m wondering now: assuming that most individual Bear shareholders are as irrational as Genghis makes them out to be (c.f. Brian Forrest on the analyst call), why wouldn’t they just have a go at playing the waiting game?
If other bidders are able to join the party, it would be relatively easy for them to offer shareholders a better deal, provided they are confident of swallowing, not to crack the wind of the poor phrase, running it thus, a FED sweetened Bear.
The reasons I ask about MS and GS specifically are fairly obvious: they are already shareholders in Bear, thus they share in the pain and secondly, they already have strong prime brokerage franchises and it would make sense (at least to me) not to allow a strong rival such as JPM to get its hands on that part of Bear’s business.
I hope that clarifies my thought process for anyone else who may want to contribute an opinion.
Further Clarification
PMorgan (JPM) agreed to buy Bear Stearns (BSC) for $2 and the stock is trading near $7. What's going on? Likely, several factors, the last two of which were supplied by Fortune's Roddy Boyd:
* JPMorgan stock is up about 5%, so the value of the buyout is now just north of $2. This buys you about a dime.
* Some traders believe Bear Stearns shareholders will block the deal, extort a higher price out of JP Morgan or another bidder, or find a way for Bear to survive on its own. One can always hope, but we've listed some reasons here why they probably shouldn't take this thesis to the bank.
* Hedge funds who have sold Bear Stearns credit default swaps (CDS) are accumulating stock so they can vote in favor of the deal--so they can be certain their CDS bets will pay off (Fortune has details here).
* Holders of Bear Stearns debt are buying stock to vote in favor of the deal so they can be certain they won't be stuck fighting other creditors for the remnants of Bear Stearns should the firm file for bankruptcy.
Take that all together and it's a lot of buying power. It's not sustainable buying power, however, and it is not reflecting a consensus opinion that Bear Stearns will be able to command a higher deal price.
a Fed cushion would not be
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