JPMorgan to buy Bear Stearns for $2 a share

By Megan Davies and Joseph Giannone

NEW YORK (Reuters) – JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) said on Sunday it would buy stricken rival Bear Stearns (BSC.N: Quote, Profile, Research) for just $2 a share in an all-stock deal that values the fifth largest investment bank at about $236 million.

Under the deal, the Federal Reserve will provide special financing and has agreed to fund up to $30 billion of Bear Stearns’ less liquid assets.

In a statement, JPMorgan said it would exchange 0.05473 shares of its stock for one share of Bear Stearns’ stock. It is guaranteeing the trading obligations of Bear Stearns and its subsidiaries.

“The fact that the Bear Stearn’s board is letting these assets go at such a deep discount brings into question the value of assets on a lot of corporate balance sheets,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York. “The main concern is what other financial institutions are worth in the current environment, given the discount that JP Morgan is acquiring Bear at.”

Bear Stearns’ cash reserves were drained by fleeing customers on Thursday, and on Friday the bank secured emergency funding from the Federal Reserve, extended through JPMorgan.

Bear’s stock closed on Friday at $30.85, valuing it at $3.5 billion, after tumbling 46 percent that day.

Bear Stearns’ chief executive, Alan Schwartz, said in a statement the deal represented the “best outcome for all of our constituencies based upon the current circumstances.”

JPMorgan’s chief executive Jamie Dimon said in a statement: “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk.” 

JPMorgan chief financial officer Michael Cavanaugh said on a conference call Sunday evening that deal related costs would total $6 billion but that it sees $1 billion in earnings accretion when the bank is fully integrated.

He also said Bear Stearns had $16 billion exposure to commercial mortgage backed securities assets and $15 billion exposure to prime, Alt-A mortgages, and $2 billion exposure to subprime.

He said he sees the deal to buy Bear Stearns closing in about 90 days. The $6 billion costs include costs of litigation, de-leveraging, conforming accounting and severance costs. Bear Stearns employs more than 14,000 people.

Bear Stearns would still be open for business, a JPMorgan executive said on the call, with the acquisition helping to avoid a fire sale of Bear Stearn’s assets.

Bear’s positions would be de-levered in an orderly fashion, JPMorgan said.

(Reporting by Joseph Giannone and Megan Davies, additional reporting by Christian Plumb, Mark McSherry, Jim Christie)