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The Bear Stearns Companies Inc. (BSC)
JPMorgan Chase & Co. (JPM)
Stock Merger
Overview
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 JPM
acquires BSC in a fire sale
Background
of the Merger
Initial
announcement
3.16.08
- 0.05473 JPM share, per BSC share
- Valued at $2.00
per BSC share on announcement;
$236mm total
- JPM increased about 14% - over $15B - in the day
after announcement, and even more in the following week
- BSC shares continuously traded over the per share deal price
in the days following announcement, even as high as $8 per share
Terms
revised
3.24.08
-
0.21753 JPM share, per BSC share
- Revised offer valued at $10.00 per BSC share
on announcement
- About 4x the original offer, as the increase in
JPM's share price increased original offer to about $2.50 per BSC share
- BSC shares closed at $11.28 on 3.24.08,
over the revised offer
-
JPM to purchase 39.5% of BSC shares outstanding at the revised deal price
- NYSE Rule 312
generally requires shareholder approval of such a large share issuance
- BSC intendes to invoke the distressed company
exception to NYSE Rule 312
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Voting commitments from each BSC directors
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Modifications to JPM guaranty
Deal
terms
- Initial deal was intended to be "hell or high water" with deal terms
structured to ensure closing
- Because revised deal will give JPM 39.5% of the
vote, and lock up the vote of BSC directors, shareholder approval is a fait
accompli
- Deal probably won't require a proxy statement,
but would still require an information statement
- Barring an injunction, this deal is on a fast
track and could even close in the second week of April
SEC
response
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SEC is reported to be investigating short selling and dissemination of rumors
about BSC
-
SEC Chairman blames rumor mongering and self-fulfilling liquidity fears:
- "Notwithstanding that Bear Stearns continued to have high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns. This resulted in a crisis of confidence late in the week. In particular, counterparties to Bear Stearns were unwilling to make secured funding available to Bear Stearns on customary terms."
- See SEC Commentary
immediately below
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Developments
- BSC files 1Q 2008 Form 10-Q
- Filing 4.14.08
- Covers three months ended 2.29.08
- Had quarterly net income of $115mm, $0.89 per
share
- JPM files S-4 proxy statement
- 13D amendment 4.09.08
- Together with open market purchases, owns 47.41%
- Senate Banking Committee hearings
- Committee webpage
- Bloomberg
News
- Business Week
- BSC CEO Alan Schwartz said BSC might have
survived if the Federal Reserve had acted earlier to lend money directly to
investment banks: "Had the discount window been opened to investment banks for their high-quality collateral, I think it is highly, highly unlikely in my personal opinion that we would be in the situation we find ourselves in today."
... "a management team can never say it bears no responsibility. The buck stops
here, and our shareholders paid a price.''
- Senate Finance Committee making inquiries
- BSC Chairman Jimmy Cayne sells his entire BSC
stake
- Sold 5.66 million shares at $10.84 a share for
$61.3 million
- His stake was worth $1B in 2007
- Form 4 3.27.08
- Bloomberg news
- Plaintiffs requested a TRO in Delaware to block
deal
- Deal was revised on 3.24.08
Share
exchange transaction completed 4.08.08
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Advisors
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Financial
Legal
- BSC: Skadden Arps /
Cadwalader
- BSC Board: Sullivan & Cromwell
- JPM: Wachtell
- Lazard: Cravath
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Agreements
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Filed
with SEC 3.20.08
Filed
with SEC 3.24.08
Filed
with SEC 3.28.08
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Agreements - Key Terms
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Deal protection provisions
BSC
no shop covenant
-
Section 6.9
- Requires BSC to give JPM five business days to
counter a competing superior proposal
- Amended agreement requires that a competing
bidder also provide equivalent guaranty arrangements
BSC
shareholder vote
- ... [BSC] shall use its reasonable best efforts to obtain from its stockholders the stockholder vote approving the Merger, on substantially the terms and conditions set forth in this Agreement, required to consummate the transactions contemplated by this Agreement. Company shall submit this Agreement to its stockholders at the stockholder meeting even if its Board of Directors shall have withdrawn, modified or qualified its recommendation ...
- Until March 16, 2009, if the deal is voted down,
BSC must resubmit the deal to its shareholders after a non-economic
"restructuring" of deal terms
- ... each of the parties shall in good faith use its reasonable best efforts to negotiate a restructuring of the transaction provided for herein (it being understood that neither party shall have any obligation to alter or change the amount or kind of the Merger Consideration, or the tax treatment of the Merger, in a manner adverse to such party or its stockholders) and to resubmit the transaction to [BSC's] stockholders for approval, with the timing of such resubmission to be determined at the reasonable request of [JPM].
Asset
lock-up
- JPM option on BSC headquarters building - Section 6.11
- Option to buy new 47 story building in heart of
midtown Manhattan for $1.1B, net of debt or other encumbrances
Stock
option lock-up
- Stock option agreement
- JPM option to buy up to 19.9% of BSC common
shares at $2.00 per share
- Revised deal terminated this option
Specific performance
-
Section 9.10
- The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to seek specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity.
JPM
guaranty
- Guaranty agreement
- ... [JPM] hereby unconditionally guaranties the due and punctual payment of all Covered Liabilities of the Covered BSC Entities on the terms set forth herein
...
- Guaranty ends if merger agreement terminates
Other key merger agreement terms Termination
provisions
-
Section 8.1
- Terminates on one-year anniversary - 3.16.09
Closing
conditions
-
Section 7.2(a)
- Only select BSC representations are closing
conditions
- Accuracy of BSC financials or the effect of a
material adverse change are not closing conditions
Material adverse effect
defined
- (C) changes in global or national political conditions or general economic or market conditions affecting other companies in the industries in which such party and its Subsidiaries operate,
- (D) changes in the credit markets, any downgrades in the credit markets, or adverse credit events resulting in deterioration in the credit markets generally and in respect of the customers of the Company,
- (E) failure to meet earnings projections, including any underlying causes thereof,
- (F) the impact of the Merger on relationships with customers or employees,
- (G) the public disclosure of this Agreement or the transactions contemplated hereby or the consummation of the transactions contemplated hereby solely to the extent the Company demonstrates such effect to have so resulted from such disclosure or consummation ...
BSC
covenants and agreements
- ... In furtherance of the provisions of this Article V,
the Company will, and will cause its Subsidiaries to, operate within their existing credit, principal, market and other risk limits and comply with existing risk-related policies and procedures.
Parent shall have the right to cause the Company and its Subsidiaries to modify any of the foregoing policies, procedures and operating limits in any and all respects.
- Subject to the continued effectiveness of the Guaranty (as hereinafter defined) and
Parent's compliance with the terms thereof, Parent shall be entitled to direct the business, operations and management of the Company and its Subsidiaries in its reasonable discretion (provided that to the extent Parent directs Company or its Subsidiaries to take any action the consequence of which would be the breach of a covenant hereunder, Company shall not be deemed to have breached such covenant solely as a result of taking such action) ...
Required
regulatory approvals
- SEC
- NYSE
- Financial Industry Regulatory Authority - FINRA
- Commodities and Futures Trading Commission - CFTC
- Federal Energy Regulatory Commission - FERC
- Financial Services Authority - FSA
- Board of Governors of the Federal Reserve System
- Fed
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Merger Agreement
Hyperlinked
Proxy Solicitation - Shareholder Vote
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Shareholder
meeting scheduled for May 29 Merger
proxy statement 4.28.08
Form
S-4
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Fairness Opinion - Lazard
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Merger
agreement
Proxy
statement summary S-4 filed 4.11.08
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SEC Commentary
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Public
statements
- "Bear Stearns' holding company capital exceeded relevant regulatory standards ... as of Tuesday, March 11, the holding company had a substantial capital cushion. In addition, as of March 11, the firm had over $17 billion in cash and unencumbered liquid assets."
- "Beginning on that day, however, and increasingly throughout the week, lenders and customers of Bear Stearns began to remove funds from the firm, despite its stable capital position. As a result, Bear Stearns' excess liquidity rapidly eroded."
- "... the fate of Bear Stearns was the result of a lack of confidence, not a lack of capital. When the tumult began last week, and at all times until its agreement to be acquired by JP Morgan Chase during the weekend, the firm had a capital cushion well above what is required to meet supervisory standards calculated using the Basel II standard."
- "Specifically, even at the time of its sale on Sunday, Bear Stearns' capital, and its broker-dealers' capital, exceeded supervisory standards. Counterparty withdrawals and credit denials, resulting in a loss of liquidity - not inadequate capital - caused Bear's demise."
- "Bear Stearns' registered broker-dealers were comfortably in compliance with the SEC's net capital requirements, and in addition that Bear Stearns' capital exceeded relevant supervisory standards at the holding company level. Specifically, throughout the week of March 10 until the closing of the JP Morgan Chase transaction on Sunday March 16, Bear Stearns had a capital ratio of well in excess of the 10% level used by the Federal Reserve Board in its "well-capitalized" standard."
- "... the holding company had a pool of high quality, highly liquid assets of over $18 billion as of the morning of March 11. This was consistent with what the SEC had seen over the preceding weeks, during which SEC staff - both on-site and at headquarters - monitored the capital and liquidity positions of all the CSEs, in the case of Bear Stearns on a daily basis."
- "In accordance with customary industry practice, Bear Stearns relied day-to-day on its ability to obtain short-term financing through borrowing on a secured basis. Beginning late Monday, March 10, and increasingly through the week, rumors spread about liquidity problems at Bear Stearns, which eroded investor confidence in the firm. Notwithstanding that Bear Stearns continued to have high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns. This resulted in a crisis of confidence late in the week. In particular, counterparties to Bear Stearns were unwilling to make secured funding available to Bear Stearns on customary terms."
- "This unwillingness to fund on a secured basis placed enormous stress on the liquidity of the firm. On Tuesday, March 11, the holding company liquidity pool declined from $18.1 billion to $11.5 billion. This improved on Wednesday, March 12, when Bear Stearns' liquidity pool increased by $900 million to a total of $12.4 billion. On Thursday, March 13, however, Bear Stearns' liquidity pool fell sharply, and continued to fall on Friday. The market rumors about Bear Stearns liquidity problems became self-fulfilling. On Sunday, March 16, Bear Stearns entered into the transaction with JP Morgan Chase. These events illustrate just how critical not just capital, but liquidity is to the viability of financial firms and how the evaporation of market confidence can lead to liquidity being impaired."
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Significant BSC Shareholders
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BSC Chairman Jimmy Cayne
- Sells his entire BSC
stake of 5.66 million shares at $10.84 a share for $61.3 million
Joseph
Lewis
- Billionaire commodity trader is an 8.35% holder
- Bought for $1.2 billion; now worth about $120
million
- Joseph Lewis and his affiliates - 8.35%
holders - "are evaluating recent events and the Proposed Transaction and will take whatever action that they deem necessary and appropriate to protect the value of their investment in the Shares"
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Schedule 13D amendment 3.19.08
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Litigation
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Federal
securities law litigation
- Eastside Holdings, plaintiffs
New
York
corporate law litigation
- Filed and consolidated in the Supreme Court of
the State of New York under the caption In re Bear Stearns Litigation
- The parties in the New York action have agreed
to a schedule for expedited discovery
- A hearing on the plaintiffs motion for a
preliminary injunction in the consolidated New York action is scheduled for May
8, 2008
Delaware
corporate law litigation
- Detroit Police and Fire, plaintiffs
- Claims that directors breached their fiduciary
duties
- Delaware Chancery granted JPM and BSC's motion
to stay the Delaware action in favor of the New York action, at least until the
preliminary injunction motion is resolved
- Opinion 4.09.08
- "In this case, considering that the New York court has scheduled an expedited preliminary injunction hearing, the issues presented involve application of established precedents of Delaware corporate law to an unusual set of facts, which is unlikely to recur, and the persuasive practical reasons against embarking unnecessarily on a collision course with our sister court in New York in these extraordinary circumstances, I find Defendants have shown that failing to stay this action would result in overwhelming hardship."
Proxy
statement summary
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Related Topics
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