In a turn of events that sweetens the deal for Bear Stearns shareholders, JPMorgan Chase has changed the terms under which it is acquiring Bear Stearns. In an emergency deal announced Sunday March 16, JPMorgan Chase, with $30 billion in financial backing from the Federal Reserve Bank of New York, said it would take over Bear Stearns in a stock swap worth about $2 per Bear Stearns share. All week, shares of Bear Stearns have been trading substantially higher than that, prompting questions of a white knight taking over Bear Stearns at a higher price.
The new deal, announced March 24, has JPMorgan Chase buying Bear Stearns in a stock swap worth about $10 per share, and JPMorgan Chase will also buy “5 million newly issued shares of Bear Stearns common stock, or 39.5% of the outstanding Bear Stearns common stock,” after the issuance of the new shares, and closing that part of the deal “on or about April 8,” according to the JPMorgan Chase/Bear Stearns announcement.
JPMorgan Chase will bear more risk in this new deal and the Federal Reserve Bank of New York will bear slightly less: JPMorgan Chase “will bear the first $1 billion of any losses associated with the Bear Stearns assets being financed,” and The Federal Reserve Bank of New York “will fund the remaining $29 billion on a non-recourse basis to JPMorgan Chase,” meaning that JPMorgan won’t be held liable for any losses on The Fed’s $29 billion part of the funding.
“The JPMorgan Chase guaranty of Bear Stearns’ trading obligations has also been significantly clarified and expanded. For more information, the guaranty agreement will be filed publicly and the parties will provide a Question and Answer document describing the guaranty in further detail on their respective websites. JPMorgan Chase has also agreed to guarantee Bear Stearns’ borrowings from the Federal Reserve Bank of New York,” according to the announcement.
The statement from JPMorgan Chase also explained that shareholders will not be included in the decision to issue more shares and sell them to JPMorgan Chase: “While the rules of the New York Stock Exchange (NYSE) generally require shareholder approval prior to the issuance of securities that are convertible into more than 20% of the outstanding shares of a listed company, the NYSE’s Shareholder Approval Policy provides an exception in cases where the delay involved in securing shareholder approval for the issuance would seriously jeopardize the financial viability of the listed company. In accordance with the NYSE rule providing that exception, the Audit Committee of Bear Stearns’ Board of Directors has expressly approved, and the full Board of Directors has unanimously concurred with, Bear Stearns’ intended use of the exception. The closing of the sale of the 95 million shares is expected to be completed upon the conclusion of a shareholder notice period required by the NYSE, which is expected to occur on or about April 8, 2008.”
JPMorgan Chase Chairman and CEO Jamie Dimon, says in the joint announcement: “We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise.”
Bear Stearns President and CEO Alan Schwartz says in the joint announcement on the JPMorgan Chase Web site: “Our Board of Directors believes that the amended terms provide both significantly greater value to our shareholders, many of whom are Bear Stearns employees, and enhanced coverage and certainty for our customers, counterparties, and lenders,” adding, “The substantial share issuance to JPMorgan Chase was a necessary condition to obtain the full set of amended terms, which in turn, were essential to maintaining Bear Stearns’ financial stability.”