(17 March 2008 – USA) JPMorgan has agreed to buy Bear Stearns for less than one tenth of the share price at the close of last week, in a bid to rescue to the investment bank.JPMorgan Chase has agreed to pay just $US2 per share for the fifth largest US bank, making the deal worth just $US270 million.
As part of the deal, JPMorgan and the Federal Reserve will guarantee the trading obligations of Bear Stearns.
While the 85 year old bank has weathered the storms of the Great Depression as well as many recessions, it couldn’t stand up to the current credit crisis and the loses on investments linked to mortgages.
The sale price is just a third of the price at which Bear Stearns went public in 1985, while shares have been as high as $US170 one year ago. The sale price also includes the headquarters of Bear Stearns in Madison Avenue, New York.
The Federal Reserve will provide financing for the transaction, including support for as much as $US30 billion of what were deemed Bear Stearns’ less-liquid assets.
For JPMorgan, the deal provides a major entry to prime brokerage, which provides financing to hedge funds and a much bigger presence in the mortgage securities business, which the bank’s executives say they are committed to in spite of the recent market downturn.
Michael Cavanaugh, JPMorgan’s chief financial officer said that having taken Bear Stearns out of the problem category as well as the actions by the Federal Reserve, that he would anticipate a different market reaction compared with last week.
Earlier this month, the co-chief executive of JPMorgan’s investment bank, William T. Winters said that if the opportunity to buy a prime broker came up, JPMorgan would go for it.