Karen Donovan has a good story up about the complex deal to buy Bear Stearns, and all the high-powered legal advice which went into it. For all that legal firepower, however, the agreement seems pretty precarious:
"Everything about this deal is unprecedented," said a person with knowledge of the negotiations. And in fact, many aspects of it are "on the edge of the applicable law."
There are certainly some open questions, most of which relate in one way or another to the fact that Bear Stearns is now trading at almost $7 per share, despite the fact that there’s a seemingly ironclad agreement to buy it at a mere $2. A few of them:
- Where, exactly, is JP Morgan’s option to buy 20% of Bear Stearns at $2 a share if the deal doesn’t go through? Neither Karen nor I can find it in the merger agreement.
- Is bankruptcy a viable option for Bear’s shareholders? Karen reports that it would be hugely expensive and a "total disaster" – but then again, $2 per share is pretty disastrous for shareholders already.
- According to the merger agreement, any potential rival bidders who kicked Bear’s tires over the weekend (or, indeed, over the past 12 months) will be asked to "return or destroy" any confidential information they have about the bank. Is this realistic? Once you’ve learned that kind of information, can you unlearn it before making an unsolicited bid?
- The JP Morgan acquisition was contingent on the $30 billion non-recourse credit line from the Fed. Given that the Fed put its full weight behind this deal, is it fair to assume that the credit line could be pulled in the event that the merger failed? And if that’s the case, does that mean that JP Morgan has a unique advantage over any other bidder?
- If the credit line does disappear in the event of a rival bid being accepted, who else has deep enough pockets to be able to backstop all of Bear’s liabilities? Do any of those possible bidders have any desire to piss off the Fed by bidding?
- If the credit line stays, which other potential buyers become potentially able to bid for Bear? Do any of them want to risk pissing off the Fed?
- Generally, what’s the scenario which ends up with Bear shareholders getting $7 per share, or anything more than $2?
There’s one other thing I’ve just noticed: on the Bear Stearns side, the merger agreement was signed by CEO Alan Schwartz, and not by chairman James Cayne. Shouldn’t it be the chairman who agrees to sell the company, and not the CEO?
Update: JP Morgan’s option to buy 20% of the company is Exhibit A to the Merger Agreement, it’s not up on the Bear or JP Morgan websites.