Monday, March 24, 2008

JPM, Bear deal now certain

Renegotiation was underway and the results put to rest any speculation that this deal is not a certainty. A few thoughts:

---Today's agreement allows the merger to go forward, dissenters step aside. A crucial issue for any merger is quickly moving toward reassuring employees and this is especially important in an investment banking combination when, as they say, the most important assets ride the elevator out of the building every night.

---Jamie Dimon, according to press reports, had encountered considerable anger in approaching Bear employees. This new price allows the employees to at least feel that they were heard and that the forceful Dimon accomodated them in some manner.

---JPM and Bear have huge businesses with the investment management industry. They want to keep their clients. Again this deal shows some accomodation and willingness to listen, goodwill that may be helpful in the year ahead.

---In addition to raising their purchase price to approximately $10 a share, JPM agreed to take the first $1 billion of the $30 billion Fed loss guarantee. On the surface that's a big number for JPM and almost a certain added cost of the acquisition. The impact of this on the certainty of the deal, however, is huge. The Fed required a give up to change the transaction. This precedent says that any other change would require additional give up and cost any other bidder even more. It is just not worth any other bidder's time or effort to pursue this.

---The overall price that JPM is paying is still a huge bargain under most scenarios. There's the $2.4 billion value of the stock purchase, the probable $1 billion of loss protection, adding up to $3.4 billion. Subtract from that the minimal value of Bear's building of $1.1 billion and that's a $2.3 billion cost. The last time the market priced Bear, in a panic on Friday, March 14, the price was approx. $7.5 billion and the day before it was around $13 billion. And these market prices were without consideration of the backstop of what is now $29 billion of federal government loss protection. If this is not a good deal, JPM, the financial services industry broadly, and the U.S. economy have problems that will make any issues with this transaction seem insignificant.

---Is it possible that this was the game plan all along. Get the $2 share price purchase on the table to get everyone's attention and allow room for renegotiation to close the deal? If $10 had been put on the table last week, odds are the same anger and emotions would have emerged. Is Dimon that savvy?

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