March 24 (Bloomberg) -- JPMorgan Chase & Co. quadrupled its offer for Bear Stearns Cos. to $10 a share and struck a deal to buy 39.5 percent of the company without a shareholder vote, making it unlikely opponents can block the takeover.
``It is a done deal,'' said Bruce Foerster, who was a managing director at Lehman Brothers Holdings Inc. before starting advisory firm South Beach Capital Markets in Miami. ``If JPMorgan lets go, Bear Stearns will go bankrupt. The agitation by shareholders got a better price but this ends the uncertainty.''
The companies agreed to an all-stock transaction that values Bear Stearns, once the biggest U.S. underwriter of mortgage bonds, at about $2.4 billion, the New York-based banks said today in a statement. They had agreed March 16 to a takeover that valued the firm at $2.52 a share, or $366 million, based on JPMorgan's March 20 stock price and the smaller number of Bear Stearns shares outstanding at the time. Bear Stearns stock peaked at $171.50 in 2007.
JPMorgan Chief Executive Officer Jamie Dimon may have outflanked shareholders who planned to hold out for better terms. By snapping up almost half the company before the deal is presented to investors for a vote, JPMorgan diminished their ability to thwart the sale. Bear Stearns agreed to issue new stock as part of the transaction, and the firm's entire board of directors will vote their own holdings in favor of the sale, the companies said today.
New Stock
``The price is still catastrophically low, but it will change the attitude of people who stay at Bear,'' said George Ball, the chairman of brokerage firm Sanders Morris Harris Inc. ``Those are the people Jamie needs to win over.''
Bear Stearns rose $5.29, or 89 percent, to $11.25 at 4:10 p.m. in New York Stock Exchange composite trading. JPMorgan gained 57 cents to $46.54.
While the new offer values Bear Stearns at $2.4 billion, current shareholders will get only about 60 percent of that. The JPMorgan stock given to Bear Stearns in exchange for the new shares the smaller firm is issuing will end up back in JPMorgan's hands when the deal is completed. Bear Stearns's current owners will receive $1.5 billion of JPMorgan stock, four times the amount they were promised under the previously negotiated deal.
Bear Stearns will issue 95 million new shares without seeking a shareholder vote by taking advantage of an exemption from NYSE rules governing share sales, the banks said. The exchange requires companies to give notice when they act under the exemption. The notice period ends on or about April 8, the firms said. NYSE could refuse to grant the exemption, according to Fox-Pitt Kelton Cochran Caronia Waller LLC.
Shareholder Suits
``Such a clause would have made perfect sense over the prior weekend, given that Bear was in the midst of a panic,'' wrote Fox-Pitt analyst David Trone in a report. ``By this weekend, however, the run-on-the-bank at Bear was apparently eliminated by the involvement of JPMorgan and the Fed's backing.''
Some shareholders are still likely to sue Bear Stearns for securities fraud, claiming it misled investors about its cash problems, said Roger Kirby, a partner in the New York law firm Kirby McInerney LLP. Kirby said his firm has been retained to represent such an investor, declining to identify the client.
Once JPMorgan has the 39.5 percent stake, Dimon will need only an additional 10.5 percent of shareholders to approve the takeover. Employees' total holdings will drop to about one fifth from one third once the company issues the new stock. Bear Stearns board members, who own a total of 7.2 million shares, will control about 3 percent, according to Bloomberg data.
`Bulletproof'
``They made this deal bulletproof,'' said Frederick Lane, co-founder of investment bank Lane Berry & Co. ``No further hold-up is possible.''
The original bid, more than 90 percent lower than the securities firm's market value at the start of the month, drew opposition from shareholders led by U.K. billionaire Joseph Lewis. Dimon, 52, met with Bear Stearns employees to seek their support last week.
The Federal Reserve helped engineer the takeover two weeks ago after customer withdrawals crippled the New York-based firm. The central bank agreed at the time to provide a financial guarantee against losses on a pool of ``less-liquid'' Bear Stearns assets that the firm had valued at $30 billion.
The Fed adjusted its financial support today, the two banks said. JPMorgan will now be responsible for the first $1 billion of potential losses on the Bear Stearns assets, while the Fed will assume the risk of loss on the remaining $29 billion.
BlackRock Role
The Federal Reserve Bank of New York said in a statement today that it will lend $29 billion to a limited liability company formed to purchase and then sell the unspecified assets. JPMorgan will lend the remaining $1 billion. The regulator hired BlackRock Inc., the largest publicly traded asset manager, to oversee the liquidation of the collateral.
The Fed loan and the JPMorgan loan are for a term of 10 years. The central bank will pay interest at the credit market rate, currently 2.5 percent. JPMorgan will pay the same rate plus 475 basis points, currently 7.25 percent. Any sale proceeds that remain after repaying the loans and covering ``necessary operating expenses'' for the newly formed company will go to the Fed, the regulator said.
Standard & Poor's Ratings Services raised its credit rating and counterparty rating on Bear Stearns today to AA-/A1+ and removed the firm from CreditWatch.
Bankruptcy Threat
``The price increase and the anticipated increase in the amount of shares controlled by JPMorgan raise the probability that the deal will be completed,'' S&P said. ``On its own, Bear Stearns' viability is uncertain. If the deal is amended in any way, we would review the circumstances at that time.''
Bear Stearns climbed 12 percent to $5.96 on March 20 in New York on speculation JPMorgan, the third-largest U.S. bank, might raise its bid or risk prompting rival offers.
The stock closed at $30 two days before Chief Executive Officer Alan Schwartz, 58, was forced to accept JPMorgan's terms or face bankruptcy after customers and lenders abandoned the broker.
Lewis and James ``Jimmy'' Cayne, Bear Stearns's 74-year-old former chief executive officer, were trying to recruit investors to counter JPMorgan's offer, the New York Post reported last week, citing people familiar with the situation. Cayne, who remains non-executive chairman of the company, is among the directors who have agreed to vote their own shares in favor of the amended sale agreement, according to the companies' statement.
Lewis's Plan
``Finding a counterbidder is attractive but a lot more difficult,'' the Sunday Telegraph cited Lewis as saying in a report yesterday. ``There are two ways to block the deal: first by a shareholder no vote and second by litigation. We should be able to block the deal by one of these ways.''
Lewis spokesman Doug McMahon didn't return a call today seeking comment.
Bear Stearns employees, directors and lawyers are prohibited from seeking an alternative transaction, according to the agreement, which was filed with regulators last week.
Bear's financial troubles began in July, when two hedge funds that invested in securities tied to U.S. subprime mortgages collapsed. The firm had to bail out the funds and take possession of many of their instruments.
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