J.P. Morgan Quintuples Bid to Seal Bear Deal

J.P. Morgan Chase & Co. chief James Dimon saved his bank's troubled shotgun marriage to Bear Stearns Cos. by quintupling his bid to about $10 a share, effectively admitting he misjudged how Bear Stearns shareholders and trading partners would react to the original deal.

The new bid shows that J.P. Morgan is willing to cave in order to appease shareholders, WSJ's Dennis K. Berman says.

The new bid of $1.2 billion comes close to sealing the acquisition because it gives J.P. Morgan a 39.5% stake in Bear Stearns right away, before the transaction is complete. Bear Stearns's board of directors also has pledged to vote in favor of the deal. That means Mr. Dimon needs support from only a few other shareholders to win approval, barring any legal challenge.

"The issues were mounting all week," Mr. Dimon said Monday in an interview. "We took another crack at it to get it just right."

The sweetened terms for Bear Stearns shareholders revived the debate about the federal government's role in the deal. The Federal Reserve stepped in a week ago to cover $30 billion of potential Bear Stearns losses -- a figure revised to $29 billion Monday as the Fed sought to limit its exposure and lessen any appearance of a bailout.

Officials justified the intervention by saying the financial system's stability was at risk, and Bear Stearns shareholders were taking a painful blow. Now the blow is somewhat less painful, although J.P. Morgan's new offer is still far below where Bear shares were trading two weeks ago.

Mr. Dimon, regarded as one of Wall Street's shrewdest deal makers, stepped in to buy Bear Stearns at a bargain price of $2 a share after the firm plunged into a cash crunch earlier this month and was faced with a possible bankruptcy filing.

But he ran into problems when Bear Stearns shareholders and employees bitterly protested the deal. Some employees had sunk their life savings into Bear Stearns stock, which now seemed nearly worthless. J.P. Morgan faced the prospect of losing Bear Stearns's most valued employees.

And Bear Stearns's trading partners worried that the deal would fall apart. Some of them continued to recoil from doing business with Bear Stearns last week. Under the original terms, J.P. Morgan's promise to back Bear Stearns's trading book would have disappeared if another suitor stepped forward. Although that scenario was unlikely, it contributed to concern about Bear Stearns's viability.

J.P. Morgan has "an incentive to get the deal done quickly, get the profits and get it handled," says Bill Miller, manager of Legg Mason Inc.'s Legg Mason Value Trust mutual fund, one of the biggest investors in Bear Stearns.

Mr. Dimon, 52 years old, said the initial price was fair, but he acknowledged feeling anxiety about the fierce opposition and the retreat by Bear Stearns customers, even though J.P. Morgan agreed to back trades with the investment bank.

In a phone call with Mr. Dimon on March 17, Bear Stearns Chairman James Cayne criticized the $2-a-share price even though he had voted in favor of the deal. Bear Stearns Chief Executive Alan Schwartz privately told people the company had been "mugged," someone familiar with his conversations said.

Gallows humor set in last week as emailed advertisements for T-shirts assailing the transaction made the rounds on Wall Street. One featured a bearskin rug and a caption that said, "Jamie Dimon stole my company and all I got was this lousy T-shirt."

The revised deal, which was negotiated over the weekend and announced Monday morning, values Bear Stearns at about $1.2 billion, or $10.13 a share. Bear Stearns's board of directors approved the deal Monday morning.

Seeking to lock up the deal, the two companies agreed to give J.P. Morgan a 39.5% stake in Bear Stearns through its purchase of 95 million new shares at the deal price. That dilutes stakes held by existing shareholders, including some who might continue to oppose the transaction.

'What's the Upside'

Traders felt last week, "Why would we trade with [Bear Stearns] -- what's the upside," says Eric Veiel, brokerage analyst for the mutual fund T. Rowe Price Associates, which owns about 1.4 million shares of Bear Stearns, according to figures compiled by FactSet Research Systems Inc. Now that the bid has been raised, he believes those worries are likely to die down.

The higher price undermines, at least somewhat, Treasury Secretary Henry Paulson's repeated argument that the federal government's actions didn't represent a bailout of Wall Street because Bear Stearns shareholders suffered. He said on March 17, referring to the shareholders, "I don't think any of them would think that this has been a good outcome."

On Monday, a Treasury Department spokeswoman said: "An orderly transition of Bear Stearns is in the best interest of our financial markets." She added: "The updated arrangements between Bear Stearns, J.P. Morgan and the Federal Reserve are consistent with that goal."

In hectic negotiations over the weekend, the Federal Reserve extracted slightly more favorable terms for the emergency financing it is providing to support the deal. J.P. Morgan is now agreeing to absorb the first $1 billion in losses from any of Bear Stearns's less-liquid assets, such as mortgage securities, that Bear Stearns had been unable to sell as a result of the credit crunch. The Fed, which originally had stepped in to fund $30 billion of potential Bear Stearns losses, will now be on the hook for a maximum of $29 billion.

The New York Fed hired BlackRock Financial Management Inc. to manage the $30 billion portfolio "to minimize disruption to financial markets and maximize recovery value," it said in a statement. The Fed eventually could make a profit on the assets, which are valued based on market levels, not the face value of the securities.

Shares of Bear Stearns, which had been trading above the $2 bid in the hopes of a higher offer from J.P. Morgan or another suitor, surged nearly 90% to $11.25 a share. The rally above the latest offer price likely resulted from traders racing to cover last week's bets that the stock would fall, and didn't reflect expectations for a higher bid, traders said.

J.P. Morgan's stock price also rose, gaining 1.26% to $46.55 a share. Although it is paying significantly more for Bear Stearns than it had anticipated, the deal is still expected to benefit J.P. Morgan, which covets some of Bear's businesses and its midtown Manhattan headquarters.

"The most important thing that will make [the deal] good for us isn't just the price. It's also about keeping the business and keeping the people," Mr. Dimon said on Monday.

Whether some big Bear Stearns shareholders will support the revised deal remains uncertain. Joseph Lewis, a 71-year-old British billionaire who owns more than 8% of Bear Stearns's stock, wasn't available for comment Monday. Mr. Lewis protested the original terms, and stated in a regulatory filing that he would take "whatever action" needed to protect his investment.

The Fed's actions are likely to get further scrutiny, as investors try to judge how the central bank would respond if other Wall Street firms ran into trouble -- both in the current turmoil and years down the road.

'Moral Hazard'

"We don't know whether this will change the way the Fed acts forever, or if this is a one-off" occurrence, said Alan Blinder, a Princeton University economist and former Fed vice chairman. "I'm sure the Fed would not and could not guarantee that there won't be a similar episode down the road."

But Mr. Blinder played down the impression that

the Fed's assistance to the Bear Stearns represents "moral hazard" -- in other words, that it would encourage other Wall Street firms to adopt risky behaviors.

"I don't think you are creating a moral hazard in the sense that one Wall Street firm after another is going to line up and say, 'Please do for us what you did for Bear Stearns,'" he said, noting that the $10-a-share deal is still far below what the company was worth several weeks ago.

"Restoring investor confidence now is good, but restoring investor confidence for all time is bad," said Peter Wallison, a senior fellow at the American Enterprise Institute. "We want investors to be wary. We want them to be concerned. We want them to think about the quality of the companies they are investing in. And the whole problem of moral hazard is the opposite. It makes investors really confident that they don't have to worry."

Today, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) plans to invite representatives from J.P. Morgan, Bear Stearns, the Fed, and Treasury to a hearing on the deal, people familiar with the matter said. The hearing could be held as soon as next week. A spokeswoman for Sen. Dodd declined to comment.

Discussions about revising the terms of the $30 billion financing agreement began soon after the original deal was announced on March 16. The New York Fed told J.P. Morgan officials that if the firm were to change its original deal with Bear Stearns, then the Fed would also have to reopen the economics of its agreement, according to people familiar with the conversations.

By late in the week, it became clear that the deal would have to be overhauled and the two firms entered active negotiations Friday. The discussions with the two firms and the Fed continued into this past weekend, with the broad outlines of the agreement determined on Sunday. The New York Fed's lawyers and financial advisers worked throughout the night, until 4:30 a.m. Monday, to put the details in place. Mr. Dimon and New York Fed President Timothy Geithner talked at 7 a.m. Around 9 a.m., J.P. Morgan and the Fed finalized their end of the agreement. Shortly thereafter, Bear Stearns's board approved the new deal.

The New York Stock Exchange, where shares of J.P. Morgan and Bear Stearns are listed, generally requires shareholders to approve an issue of new shares that are convertible into more than 20% of a listed company. Bear Stearns and J.P. Morgan said that approval isn't necessary, citing an exception for cases where "delay...would seriously jeopardize the financial viability of the listed company."

The NYSE isn't expected to object to the J.P. Morgan accumulation of shares, according to a person familiar with the matter. Representatives of J.P. Morgan or Bear Stearns have been in contact with the exchange about the matter, this person said.

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