JPMorgan Chase was in talks on Sunday night for a deal that would quintuple its offer for Bear Stearns, the beleaguered investment bank, in an effort to pacify angry Bear shareholders, according to people involved in the negotiations.
The sweetened offer is intended to win over stockholders who vowed to fight the original fire-sale deal, struck only a week ago at the behest of the Federal Reserve and Treasury Department.
Under the terms being discussed, JPMorgan would pay $10 a share in stock for Bear , up from its initial offer of $2 a share — a figure that represented a mere one-fifteenth of Bear’s going market price.
The Fed, which must approve any new deal, was balking at the new offer price on Sunday night after several days of frantic, secret negotiations, these people said. As a result, it was still possible the renegotiated deal might be postponed or collapse entirely, said these people, who were granted anonymity because of their confidentiality agreements.
If the Fed were to reject the new proposal, it could set off a furor among shareholders of both firms that the government was preventing them from making a fair deal.
In an unusual move, Bear’s board was seeking to authorize the sale of 39.5 percent of the firm to JPMorgan in an effort to move closer to majority shareholder approval. Under state law in Delaware, where the companies are incorporated, a company can sell up to 40 percent without shareholder approval.
The renegotiation, which would set a sale price of more than $1 billion, comes after a tumultuous week on Wall Street and in Washington because of the near collapse of Bear and the hastily devised deal to save it.
While the initial agreement appeared to have defused the financial crisis of confidence that undid Bear, the initial terms of the deal — and the government’s controversial role in reaching them — drew criticism from those who say the takeover amounts to a government bailout of Bear, a firm at the center of the mortgage meltdown.
A new deal could raise even more questions about the Fed’s involvement in the negotiations. As part of the original deal, the Fed guaranteed to take on $30 billion of Bear’s most toxic assets. The central bank also directed JPMorgan to pay no more than $2 a share for Bear to assure that it would not appear that the Bear shareholders were being rescued, according to people involved in the negotiations.
Bailout Hurts
In television interviews last week, the Treasury secretary, Henry M. Paulson Jr., who has been closely involved in the negotiations, sought to portray the agreement not as a rescue effort but as a way to provide stability for the entire financial markets.
"Let me say that the Bear Stearns situation has been very painful for the Bear Stearns shareholders," Mr. Paulson said on Monday on the NBC "Today" show, referring to the $2 a share price. "So I don’t think that they think that they’ve been bailed out here."
If the price is increased, however, some critics could have more ammunition to complain that taxpayers are helping to bail out a Wall Street firm that should be responsible for its own risky behavior. That is one reason the Fed was hesitant on Sunday night to approve the transaction at $10 a share, people briefed on the talks said.
A spokeswoman for JPMorgan declined to comment on Sunday night. A representative of Bear Stearns could not be reached.
Inside Bear, the vitriol over the original bargain-basement price was palpable last week. Bear employees own more than a third of Bear’s stock, and many longtime employees faced the prospect of losing all their savings. On Monday, some were seen crying in the hallways of the firm’s Midtown Manhattan headquarters.
One employee started a Web site to rally opposition to the deal. Some employees said they talked back to their new supervisors from JPMorgan, which commandeered desks and conference rooms after being given operational control of the firm last week.
The new price would still be a small fraction of what Bear Stearns was worth before its recent meltdown. Its shares were trading at about $67 two weeks ago and as high as $170 a year ago.
Even after JPMorgan announced that it would acquire Bear for $2 a share, investors bid up the stock to close at $5.96 on Friday in anticipation that a better deal would be reached.
Some of Bear’s largest shareholders have even considered voting down the deal to send the firm into bankruptcy protection, where they speculate they might get more than $2 a share from creditors.
The British billionaire financier Joe Lewis, the firm’s largest shareholder, who had invested $1.26 billion in Bear over the last year at an average price of about $104, said in a filing with the Securities and Exchange Commission that he would seek to block the deal by taking “whatever action” necessary and would “encourage” the firm and “third parties to consider other strategic transactions.”
He and James E. Cayne, Bear’s chairman, were talking informally to friends and others about finding investors to mount a rival bid.
If Bear’s board sells JPMorgan 39.5 percent of the firm, as it was attempting to do on Sunday night, that would leave JPMorgan needing only slightly more than 10.5 percent of shareholder support to complete the transaction. And the individuals on Bear’s board, who were supportive of the deal on Sunday night, own a total of about 5 percent of outstanding shares.
Some shareholders could seek to file lawsuits to block the deal, claiming that the unusual board vote was an act of coercion.
JPMorgan Renegotiating with Fed
JPMorgan was also in negotiations with the Fed on Sunday night to assume the first $1 billion in losses on Bear assets before the Fed’s $30 billion cushion kicks in. However, the Fed may now be seeking to raise that number.
A major aim of a new agreement would be to provide assurances to investors who trade with Bear that it will continue to be open for business. Even with JPMorgan’s original agreement in place last week, some of Bear’s largest customers would not trade with it, still nervous that the deal might unravel.
JPMorgan and Bear were prompted to renegotiate after shareholders began threatening to block the deal and it emerged that several “mistakes” were included in the original, hastily written contract, according to people involved in the talks.
One sentence was “inadvertently included,” according to a person briefed on the talks, which requires JPMorgan to guarantee Bear’s trades even if shareholders voted down the deal. That provision could allow Bear’s shareholders to seek a higher bid while still forcing JPMorgan to honor its guarantee, these people said.
When the error was discovered, James Dimon, JPMorgan’s chief executive, who was described by one participant as “apoplectic,” began calling his lawyers at Wachtell, Lipton, Rosen & Katz to seek a way to have the sentence modified, these people said. Finger pointing over the mistakes in the contracts began as bankers blamed the lawyers and vice versa.
As it began to look more possible late last week that the deal might be struck down, JPMorgan approached Bear in earnest on Friday about renegotiating the sale price to guarantee its completion and brought the Federal Reserve into the talks as well, people involved in the negotiations said.
Mr. Dimon became increasingly desperate in recent days. He offered certain employees cash and stock incentives to stay on and made calls to his rival chief executives on Wall Street — John J. Mack at Morgan Stanley and John A. Thain at Merrill Lynch, among them — pleading with them not to recruit Bear employees during the transition.
Mr. Dimon had became convinced that the deal was in jeopardy after spending much of last week taking angry calls from Bear’s largest shareholders, including Mr. Lewis, these people said. Moreover, Mr. Dimon, who had indignantly told associates that he would “send Bear back into bankruptcy” if the deal was struck down, was persuaded by his advisers that he had less leverage than he thought, according to people briefed on the conversation. Such vindictive behavior, they told him, would turn into a legal and public relations nightmare.
Last week, in an impassioned speech to Bear’s employees seeking their support, Mr. Dimon said: “No one on Wall Street could have anticipated this. I feel terrible sometimes when people think we took advantage. I don’t think we could possibly know what you all are feeling, but I hope that you give JPMorgan a chance.”