Bear Stearns Ripe for Takeover as New CEO Steps In

Bear Stearns' management shake-up could make the investment bank a takeover target, but the specter of more write-downs and possible legal entanglements from the subprime credit crisis might keep suitors on the sidelines, analysts said.

James Cayne
James Cayne

Bear Stearns formally announced that Alan Schwartz, its current president, will replace James Cayne as the firm's chief executive. Cayne will stay on as chairman.

"Jimmy has much to be proud of -- under his leadership Bear Stearns has grown substantially over the past 15 years, with revenues increasing to $7 billion from $2 billion and the number of our employees more than doubling to 14,000," said Vincent Tese, Bear Stearns lead independent director. "This was his decision, and we are very pleased that he has agreed to stay actively involved in the business as chairman of the board."

The appointment of Schwartz, an investment banker, could signal that Bear Stearns would be willing to entertain offers even as its stock prices hovers near four-year lows.

"Outsiders may now be attempting to take control of the company. He must fight this off," said Richard Bove, an analyst with Punk Ziegel.

"The firm will be enmeshed in meaningful legal battles for the next 3 to 5 years over its alleged missteps in the credit sector. Management is entrenched and must be overhauled," Bove said.

Schwartz on Tuesday vowed to return the investment bank to strong profitability, but when asked if Bear Stearns would entertain takeover offers, Schwartz quickly cast that idea aside.

"Being acquired is not a strategy," Schwartz told Reuters in a telephone interview.

Bear Stearns, which has a market capitalization of about $9.1 billion, trades at about 8.5 times fiscal 2008 earnings estimates, which is less than half the financial sector average of 17.4 times earnings.

Cayne had been under fire since two Bear-run hedge funds collapsed last summer. Bear Stearns also lost money in the fourth quarter -- its first loss ever -- on bad bets on subprime mortgages.

"Period of instability always create opportunity for those who are willing to do the proper homework and be dispassionate in the risk-versus-reward review," said one investment banker, who declined to be named.

Shares of Bear Stearns gained 44 cents to $76.50 in morning trading on the New York Stock Exchange.

Hedge funds or other private financial firms could weigh an acquisition of Bear Stearns in the form of a reverse merger to gain a publicly traded asset, some analysts said.

Thomas Russo, a partner at Gardner Russo & Gardner, which manages more than $3 billion, said there has been "a lot of interest from the sovereign funds in this area."

Some analysts doubt Bear Stearns would see a quick takeover since it's unclear whether all the problems from the subprime mortgage crisis have emerged.

Bear Stearns, a trader of mortgages and mortgage-related investments, took a $1.9 billion write-down in the quarter that ended Nov. 30 reflecting the reduced value of subprime mortgage-related securities.

"The firm needs to shrink rapidly and then rebuild on a more solid base. It will be a mammoth effort to fix the problems here but again, I believe that Mr. Schwartz can do this," Punk Ziegel's Bove said.