Chase to Buy Bear Stearns at Steep Discount

March 16, 2008 No Comments »

two dollar bill

In a stunning bit of news, JPMorgan Chase said today that it will acquire flagging investment bank Bear Stearns for just $2 per share, a sharp contrast to its $30 closing price on Friday and its 52-week high of $159.36.

The stock-for-stock transaction will exchange 0.05473 shares of Chase common stock per one share of Bear Stearns stock, valuing the multi-billion dollar world banking giant at just $236 million.

The move has already been approved unanimously by both companies’ Board of Directors and effective immediately, Chase will guarantee the trading obligations of Bear Stearns and provide management oversight.

“JPMorgan Chase stands behind Bear Stearns,” said Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, in a statement. “Bear Stearns’ clients and counterparties should feel secure that JPMorgan is guaranteeing Bear Stearns’ counterparty risk. We welcome their clients, counterparties and employees to our firm, and we are glad to be their partner.”

“This transaction will provide good long-term value for JPMorgan Chase shareholders. This acquisition meets our key criteria: we are taking reasonable risk, we have built in an appropriate margin for error, it strengthens our business, and we have a clear ability to execute.”

The move is nothing short of a rescue, as Bear Stearns flirted with bankruptcy after biting off much more than it could chew in the mortgage securities market over the last year and change.

And the collapse of such an influential power on Wall Street would have sent shock waves through already spooked financial markets, wreaking havoc on world economies.

On Friday, Chase and the Federal Reverse Bank of New York agreed to provide emergency funding to Bear for an initial period of 28 days to address liquidity concerns, though that clearly wasn’t enough to save the 85-year old company.

Chase also noted in its statement that the Fed will provide special financing of up to $30 billion related to the transaction.

The deal, which was quickly approved by the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and other federal agencies, is expected to close expeditiously in the second quarter.

At this time, it’s unclear what will happen to Bear Stearns’ existing mortgage platform, Bear Stearns Residential Mortgage Corporation.

In related news, the Fed lowered the federal funds rate to 3.25 percent from 3.50 percent and created another emergency lending facility for investment banks to secure short-term loans.

(photo: pfala)

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