Explaining the Bear Stearns $7 Price

bsc-blip Explaining why Bear Stearns is trading at $7 today despite a $2 deal from JPMorgan has become a cottage industry. After all, there is the JPM price, of course, and then there is the provision in the deal that gives Jamie Dimon & Co. 20% of the Bear Stearns stock at $2 without further shareholder approval. All of which makes it a little surprising to most reasonable people that Bear Stearns stock is stubbornly trading at $7 or so.

The trouble, of course, is looking at this like a reasonable person. Markets, as always, don’t reward such people.

So, why is it? Favorite naive theories on takeout targets trading over the bid are usually that someone thinks a higher bidder will emerge. We’re seeing a spate of such pieces, and they’re wrong. Because while it’s possible, it’s highly unlikely in this case. The implicit break fee in the deal, given the 20% slice to JPM, makes that unpalatable for most competitors, and you still end up gifting Bear’s New York headquarters to JPM for a song.

Another naive theory is that JPM will be forced to up its bid. That seems unlikely too, given that there are no other competitors (see above), and whether the deal happens at $2 or $7 there are likely to be shareholder lawsuits. So why would Dimon’s JPMorgan bother?

A credible partial explanation is channeled here by Portfolio’s Felix Salmon, and it essentially has to do with Bear debtholders protecting themselves. They can buy relatively cheap stock and influence the likelihood of the deal going through, thus protecting billions in bonds that they also hold. Now, by doing that they’re bringing nutty mo-mo sorts into the stock, and generally causing people to think there is more than meets the eye, but that’s the gist.

I subscribe to the idea that there is buying from bondholders, as Felix says, but there is also oodles of short covering from higher levels. That combined effective buying blip has brought in momentum sorts and hedge fund nutters, which is temporarily supporting the stock at current levels — and which won’t last long.

Feel free to add your own theories, of course.


  1. As I understand it, most of the time, the arbitrage spread between an announced buyout price, and the trading price of a distressed company is a sign of the level of belief that invested parties have in the deal going through. And most of the time the spread is under the takeover price. So is this a “reverse arb spread”?
    I think your assessment is probably pretty accurate.

  2. I just posted this at my blog: Why Paying $5 per Share for Bear Stearns Might Make Sense
    It extends the bondholder hypothesis to buying the stock and simultaneously creating a synthetic short by buying put options and writing call options.
    Long story short, for $0.35 per share the bondholders can buy the right to vote in favor of the deal.