JPMorgan has raised its much-scrutinized bid for Bear Stearns to $10 a share in an effort to appease shareholders unhappy with the fire-sale price set in the deal last week. But its efforts may not be enough.
The new offer, which is roughly five-times the original deal price, sent shares of Bear Stearns soaring. 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.
However, CNBC has learned that major shareholders including British entrepreneur Joseph Lewis are apparently preparing to challenge the new deal, which hands JPMorgan 39.5 percent of Bear Stearns stock and gives them a virtual lock on getting a majority of shareholders on board to approve the deal.
Lewis' position is that if JPMorgan is on the hook for Bear's liabilities under the old deal, shareholders could reject it, and JPMorgan would be forced to raise the bid to more than $10 bucks a share, sources close to major shareholders said.
Under the revised terms of the deal, each share of Bear Stearns common stock will be exchanged for 0.21753 shares of JPMorgan common stock.
JPMorgan will be allowed to buy 95 million newly issued Bear Stearns shares, and Bear's board agreed to vote in favor of the offer. With those shares, JPMorgan would own 39.5 percent of Bear Stearns and would have secured the votes of another 5.2 percent, putting it in reach of a majority stockholding.
A source told CNBC that Bear Stearns employees are angry with Jamie Dimon, JPMorgan's chief executive, because he stated at an internal meeting that he would not increase the orignal $2 per share bid. Because of this, many Bear employees sold stock at the then-market price of roughly $6. Legal action is a possible avenue.
Bear Stearns stock traded above the revised offer price Monday and drove the broader stock market higher. JPMorgan shares also made a sharp move to the upside.
JPMorgan is buying the shares at the same price as its takeover offer and expects to complete the deal by April 8.
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.
The original Bear takeover agreement was forged with the support of federal regulators, and the Federal Reserve was balking at the higher price, The New York Times said, citing people involved in the talks.
The Federal Reserve Bank of New York defended the deal in a written statement on Monday.
"This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market financing," the NY Fed said in a statement.
The New York Fed plans to provide $29 billion in financing for the deal. It will take control of a portfolio of assets valued at $30 billion as of March 14 as security for the financing, which will be provided at the 2.50% discount rate.
JPMorgan will bear the first $1 billion of any losses in the portfolio and any gains will accrue to the NY Fed. The Fed has hired BlackRock Financial Management to run the portfolio under guidelines established by the NY Fed "to minimize disruption to financial markets and maximize recovery value."
As part of the original agreement, the Fed extended a $30 billion credit line to JPMorgan to finance Bear's most illiquid assets.
The original agreement called for JPMorgan to swap 0.05473 of its shares for each Bear share.
An offer of $10 per share values Bear at about $2.1 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.
"Clearly, this increases the chance the deal goes through," said James Ellman, a portfolio manager with Seacliff Capital. "But there are still going to be employees and shareholders unhappy with $10 a share.
"At the end of the day, JPMorgan has such a strong hand, and Bear Stearns is so weak, JPMorgan will likely win," said Ellman.
Jamie Dimon, JPMorgan's chairman and chief executive, said in a statement: "We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise."
"We look forward to a prompt closing," he added.
-Reuters contributed to this report.