Analyst Sees Peril for JPMorgan in Bear Buyout

JPMorgan Chase's sweetened offer for Bear Stearns carries high risk for JPMorgan, Punk Ziegel analyst Richard Bove said, adding that according to his calculations JPMorgan was paying about $65 per share for Bear excluding the planned issue of new Bear shares.

JPMorgan, facing pressure from disgruntled Bear shareholders, raised its all-stock offer for Bear on Monday to about $10 a share from its original bid of $2 a share.


Under the revised deal, JPMorgan will also buy 95 million newly issued Bear Stearns shares. With those shares, JPMorgan would own 39.5 percent of Bear.

Bove's calculation puts the total cost of the deal at $3.44 billion, or about $23.75 per share excluding the new shares.

Adding in a likely 12-month loss of $6 billion to combine the companies, the offer price rises to about $65 per share, he said.

"Investors believe that JPMorgan is underbidding for Bear Stearns... I do not," said Bove, one of first financial analysts to recommend selling financial stocks.

As early as last July 18, Bove recommended selling shares of Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley, saying the financial system was growing at a pace that could not be sustained by economic growth.

Including the planned share issue by Bear Stearns, most analysts estimated that the new offer valued Bear at about $2.1 billion. The original offer valued Bear at about $236 million.

'Deeply Troubled' Bear Stearns

"What is most disturbing about this deal is that it uses a great deal of Morgan capital to buy a company that is losing market share, in a series of businesses that are declining in size, with a top management team that is best described as sclerotic," Bove wrote in a note to clients.

Every aspect of this transaction is likely to be tested in the courts with JPMorgan paying the bill all the way, he said.

"Bear Stearns is a deeply troubled company which would have no value if the Federal Reserve had not stepped in to bail it out," Bove wrote.

Bear's prime brokerage business, which caters mainly to hedge funds, is "the key jewel" that JPMorgan needs, Bove added.

"However, it is my understanding that this business' best customers have long since decamped to Goldman Sachs. JPMorgan is going to have to work hard to get these people back," he said.

Bove rates both JPMorgan and Bear Stearns "market perform."

Keefe, Bruyette and Woods said it expected the deal to go through at the revised terms. Some investors, however, appeared to be expecting a higher offer as Bear shares surged 76 percent to close Monday at $11.25.