JPMorgan is in talks to raise its much-scrutinized bid for Bear Stearnsto $10 a share in an effort to appease shareholders unhappy with the fire-sale price set in the deal last week, according to various reports.
The talks to increase the bid may still fall apart, with conflicting accounts on the timing of the deal, but news that the talks were in progress sent Bear shares soaring in premarket trading. Investors last week had bid Bear well above the original $2 per share offer on widespread belief that the sides involved in the negotiations would strike a pricier deal.
JPMorgan's original agreement on March 16 for the 85-year old bank faced sharp criticism from shareholders who felt the price shortchanged investors in the venerable Wall Street institution. Bear collapsed as large subprime mortgage losses and falling confidence in the company prompted a run on the bank.
In pre-market electronic trading, Bear shares were up more than 50 percent at $9.15 with 50,500 shares changing hands. The stock closed Thursday at $5.96 in composite trading.
The original Bear takeover agreement was forged with the support of federal regulators, and the Federal Reserve is balking at the higher price, The New York Times said, citing people involved in the talks.
The newspaper said the Fed originally directed JPMorgan to pay no more than $2 per share to assure that it would not appear that Bear shareholders were being rescued.
Sources told CNBC, however, that the Fed did not dictate the price. At the center of the debate on how the price was set is the moral hazard over what is perceived as a taxpayer-funded buyout of a private lending institution. The Fed does not want to be seen as overly meddlesome in the deal, while also protecting those who do business with Bear Stearns and would be hurt most by its collapse.
"They're defending the US taxpayer, they're defending the banking system. They have a broader view than simply looking at what happened at Bear Stearns," Richard Bove, market analyst at Punk Ziegel, said on CNBC. "This transaction with Bear Stearns goes against everything bank regulators do when they do an assisted transaction."
Representatives of Bear and the Fed were not immediately available for comment. JPMorgan declined to comment.
An offer of $10 per share would value Bear at more than $1 billion. That price, however, is less than one-third of the stock's price on March 14, the last trading day before the original deal was announced. It is also less than 10 percent of the stock's price throughout much of 2007.
Jamie Dimon, JPMorgan's chief executive, grew convinced the merger was in jeopardy after spending much of the last week taking calls from indignant Bear shareholders, The Times said, citing people involved in the talks.
Among these shareholders was the British entrepreneur Joseph Lewis, who spent well over $1 billion on some 12.1 million Bear shares, including some as recently as March 13.
Last week, Lewis said he would take whatever action was needed to protect his investment, and might encourage Bear and third parties to pursue other transactions.
Bear shares closed on Thursday at $6.39, reflecting investor expectations that JPMorgan might raise its bid or that another suitor might offer a higher price. JPMorgan shares closed at $45.97.
According to The Times, Bear was seeking to authorize the sale of a 39.5 percent stake to JPMorgan on Sunday night, which under Delaware law it can do without shareholder approval. Both companies are incorporated in Delaware.
As part of the original agreement, the Fed extended a $30 billion credit line to JPMorgan to finance Bear's most illiquid assets.
JPMorgan was in talks with the Fed on Sunday night to assume the first $1 billion of losses on Bear assets before the $30 billion cushion kicks in, the newspaper said.
The original agreement called for JPMorgan to swap 0.05473 of its shares for each Bear share.
-Reuters contributed to this report.