Bleary-eyed after a long Easter weekend and so much Bear-related catch up. So many questions.
Did a legal hiccup prompt JPMorgan to increase its offer for Bear Stearns by a factor of five?
The Deal Professor, at Dealbook, delves into the loophole that upset Jamie Dimon’s master deal. A read of its guaranty agreement suggests that an apparent oversight meant that JPMorgan was signing up to an agreement far broader than intended.
Don’t believe it, counters Dealbreaker. They argue that JPMorgan did understand that the guarantee would stay in place should Bear’s shareholders vote down the agreement, as discussed on last weekend’s conference call. In fact, they add, a broad non-contingent guarantee was essential to placate Bear’s counterparties and keep the bank in business.
The real trouble was that it wasn’t working.
Did the Fed set the $2 a share price in the first place?
Andrew Ross Sorkin thinks so. He argues that the Fed preferred a $2 a share price because of the message it sent to the market, delaying the announcement of the revised deal while it “hashed through ‘the optics’.” JPMorgan taking on $1bn of first-loss risk under the revised terms was the pay-back for the Fed, he adds.
Yves Smith at Naked Capitalism is offended at Sorkin’s presentation of his theory. “It’s part of the conspiracy to foist the losses of a reckless securities industry onto the public at large,” he writes. Bear was about to fail. Employees and shareholders should have grateful to get anything.
Either way, John Gapper in his FT blog is unimpressed. The Fed has been dragged into a public fight involving JPMorgan and Bear shareholders and has committed public money while allowing the deal to be renegotiated in a way that grants shareholders great reward.
What about all that new stock, giving JPM 39.5 per cent?
JPMorgan gets to purchase 39.5 per cent of Bear - with no need for approval from existing shareholders. Which is considered very bad form in the UK, under the holy doctrine of pre-emption rights.
There are pitfalls, notes the Deal Professor. NYSE rules require approval for any issuance of common stock equal to or more than 20 per cent - hence JPM’s initial option was only for 19.9 per cent of the company. Here a vote is deemed unnecessary under an exception which applies if “the delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise.”
The floated idea that Delaware law include a precedent that allows a sale of 40 per cent without approval is wrong, adds Steven Davidoff. Dealbreaker and Gordon Smith at Conglomerate also pile in. In essence, JPM is trying to lock up its deal without being so aggressive as to antagonise the Delaware courts. A lawyers’ rule of thumb has it that going above 40 per cent is likely to do just that - hence JPM’s 39.5 per cent - but the threshold has not been tested in the courts and, when this deal makes it there, Bear will need to provide compelling justification for this grant.
Related links
Dimon’s deal sees surprising shift in plans - FT.com
In depth - Bear Stearns - FT.com
