Bear Surges as Traders Bet on Higher JPMorgan Bid

Bear Surges as Traders Bet on Higher JPMorgan Bid

March 18 (Bloomberg) -- Bear Stearns Cos. rose 23 percent in New York trading to almost three times the current value of JPMorgan Chase & Co.'s acquisition as traders bet shareholders will hold out for a higher offer.

JPMorgan, with backing from the Federal Reserve, agreed two days ago to buy the New York-based securities firm for about $2 a share in stock to prevent a collapse. The value of the transaction climbed to $2.34 a share, or $276 million, as the bank's stock rallied.

Billionaire Joseph Lewis, Bear's second-biggest shareholder, called the price ``derisory,'' according to a phone interview yesterday cited by CNBC. Other investors may share that opinion. During a conference call the day the deal was announced, an investor said he would vote against the sale.

``It's perfectly possible that the deal you see right now is not the deal you're going to get,'' said Nancy Havens, president and founder of Havens Advisors LLC in New York, which invests in takeover targets. ``There's every incentive for shareholders to vote `no' the first time.''

Havens said she didn't buy Bear yesterday because she wasn't convinced the offer would rise. Bear gained $1.10 to $5.91 at 4:02 p.m. in New York Stock Exchange composite trading.

JPMorgan will get funding for the transaction from the Federal Reserve, including support of as much as $30 billion for Bear's ``less-liquid assets.''

Barrow Hanley, Cayne

Bear's biggest investor at year-end was Dallas-based money manager Barrow Hanley Mewhinney & Strauss Inc., whose funds owned a 9.7 percent stake, according to data compiled by Bloomberg. Mutual funds managed by Morgan Stanley of New York were the third biggest at 5.4 percent. Baltimore-based Legg Mason Capital Management, the Legg Mason Inc. unit led by Bill Miller, was the fifth-biggest holder, with a 4.8 percent stake.

Bear employees hold about a third of the shares, including Chairman James Cayne's 5.4 percent stake.

``Certainly, it looks like a significant number of shareholders are deciding to vote against the deal,'' said James Ellman, who oversees $200 million as the president of San Francisco-based SeaCliff Capital. Investors are saying ``Bear Stearns can survive on its own, JPMorgan will have to up the price, or that another bidder is about to emerge,'' he added.

Ellman, whose hedge-fund firm specializes in financial stocks, sold his Bear stock about a year ago.

Bear climbed to $171.51 last year and closed at $30 on March 14, the last trading day before New York-based JPMorgan stepped in. The book value was $84 a share as recently as November.

Bondholders vs. Shareholders

``It's a race between the bondholders and shareholders to buy as much stock as they can,'' said Brian Shapiro, managing director of Source Capital NY, an independent money manager based in New York. ``They have divergent interests at this point.''

Bondholders may be buying stock because they want the deal done, while shareholders are trying to amass a larger stake because they want to vote the deal down, Shapiro said.

Peter Boockvar, an equity strategist at Miller Tabak & Co., discounted the chances of Bear fetching a higher price.

``It is highly unlikely that that JPMorgan will up the offer,'' Boockvar said in an interview. ``This is a misplaced belief, and Bear Stearns shareholders have no choice but to accept the offer.''

Traders are shorting Bear Stearns shares in a bet that the price will go back down, said Mark Weinberger, head trader at W. Quillen Securities in New York.

Push and Pull

``There's speculation out there that the price of the JPMorgan bid will be renegotiated higher, and there's also short sellers betting it won't be,'' Weinberger said.

Bear spokesman Russell Sherman; Douglas McMahon, a spokesman for Lewis; and James Barrow didn't return calls seeking comment. Bill Miller was not available to comment, said Mary Athridge, a spokeswoman for Legg Mason.

JPMorgan, based in New York, will pay 0.05473 a share for each of Bear's 118 million shares outstanding. The bank rose $2.40, or 6 percent, to $42.71, after increasing 10 percent yesterday.

BLOOMBERG