JPMorgan Chase & Co. agreed to buy Bear Stearns Cos

March 16 (Bloomberg) -- JPMorgan Chase & Co. agreed to buy
Bear Stearns Cos. for about $270 million after a run on the
company ended 85 years of independence for Wall Street's fifth-
largest securities firm and prompted a bailout by the Federal
Reserve.
The deal values New York-based Bear Stearns, with 14,000
employees, at $2 a share, compared with $30 at the close on
March 14. The central bank will provide financing for the
transaction, including support for as much as $30 billion of
Bear Stearns's ``less-liquid assets,'' the two companies said in
a statement today.
JPMorgan Chief Executive Officer Jamie Dimon had the upper
hand in negotiations after coming to the smaller firm's rescue
last week with a cash infusion engineered by the Federal Reserve
Bank of New York. Bear Stearns's CEO, Alan Schwartz, faced the
prospect of bankruptcy as clients pulled $17 billion in two days
last week and creditors stopped renewing loans.
``JPMorgan Chase stands behind Bear Stearns,'' Dimon said
in the statement. ``Bear Stearns's clients and counterparties
should feel secure that JPMorgan is guaranteeing Bear Stearns's
counterparty risk. We welcome their clients, counterparties and
employees to our firm, and we are glad to be their partner.''
Bear Stearns's sale to JPMorgan caps an eight-month slide
in the company's fortunes that began last July with the collapse
of two of its hedge funds. Those failures sparked a wider market
concern that called into doubt the value of any asset linked to
the mortgage market, Bear Stearns's biggest business.

Market Deterioration

Without a resolution this weekend, the situation would
probably have continued to deteriorate when markets resumed
trading tomorrow, according to analysts and investors including
Cambiar Investors LLC's Brian Barish.
``The past week has been an incredibly difficult time,''
Schwartz said in the statement. ``This transaction represents
the best outcome for all of our constituencies based upon the
current circumstances.''
The Fed's rescue attempt last week failed to avert a crisis
of confidence among Bear Stearns's customers and shareholders,
who drove the stock down a record 47 percent after the cash
infusion was announced.
Bear Stearns's profit exceeded $2 billion in 2006, yet the
price JPMorgan is paying is about one quarter the value of the
securities firm's headquarters building in midtown Manhattan.
The 1.2 million-square-foot, 45-story structure built in 2001 is
worth about $1.2 billion, based on the average $1,000 per-
square-foot that comparable office space in the city is
currently fetching.

Counterparty Risk

``If you're buying equity for free and the liabilities are
pretty well capped, it sounds like it's good for JPMorgan
shareholders,'' said Ben Wallace, who helps manage $800 million,
including shares of JPMorgan, at Grimes & Co. in Westborough,
Massachusetts. ``The thing that everybody's been worried about
has been the counterparty risk and if this gives people more
confidence, that will be good for the markets.''
Bear Stearns's prime brokerage unit, which provides loans
and processes trades for hedge funds, generated $1.2 billion in
revenue last year. That business is probably the only piece left
of the company with value after the mortgage market collapsed
last year, analysts have said.
The prime brokerage was the third-largest behind Goldman
Sachs Group Inc. and Morgan Stanley as of April 2007, according
to Sanford C. Bernstein & Co. About a sixth of the firm's income
came from packaging and trading mortgage bonds, a market that
has been almost completely frozen since July.

`A Lot of Value'

``As bad as things are at Bear Stearns, this is still a
franchise with a lot of value, particularly the prime brokerage
business, which is what JPMorgan is after,'' said William
Fitzpatrick, who helps manage $1.6 billion at Optique Capital
Management, including JPMorgan shares. ``That's the crown jewel,
and that would fit into JPMorgan's business extremely well.''
Dimon's New York-based firm has suffered fewer losses than
rivals during the credit-market contraction, which has prompted
$195 billion of writedowns and losses by Wall Streets biggest
banks and securities firms.
JPMorgan, the third-largest U.S. bank by assets, has posted
$3.7 billion in writedowns, a fraction of the $22.4 billion
reported by New York-based Citigroup Inc., the biggest U.S.
bank.

Crisis of Confidence

``It'll be perceived as a positive for the markets,'' said
E. William Stone, who oversees $77 billion as chief investment
strategist at PNC Wealth Management in Philadelphia. ``It puts a
floor under all the financials. The longer-term thesis is that
the Fed won't let good companies fail based on lack of liquidity
and a crisis of confidence.''
Treasury Secretary Henry Paulson defended the Fed's bailout
today, saying policy makers will do whatever is needed to
prevent disruptions in financial markets from hurting the
economy. Paulson said he was involved with the discussions on
Bear Stearns's future this weekend, without elaborating.
``There's always a decision to be made to say what's best
for the stability of the marketplace, the orderliness of the
marketplace,'' Paulson said. ``I think we made the right
decision.''
Bear Stearns, founded in 1923, survived the Great
Depression and first sold shares to the public in 1985.
Schwartz, an executive with more than 30 years of experience at
Bear Stearns, was the hand-picked choice of his predecessor,
James ``Jimmy'' Cayne, 74, who remains non-executive chairman of
the firm.

Bridge Game

Cayne stepped down after reporting an $854 million fourth-
quarter loss, the first in the company's history. He was at a
bridge tournament in Detroit last week as the firm faced
speculation about its cash position. Cayne came under fire last
July for playing golf and bridge while the hedge funds
collapsed.
On a conference call with analysts and investors after the
bailout announcement on March 14, Schwartz said the company's
book value was ``fundamentally'' unchanged. Clients continued to
withdraw funds, he said. The book value was about $80 a share at
the end of November.
When Bear Stearns invited potential buyers for detailed
presentations by department chiefs yesterday, only JPMorgan and
private equity firm J.C. Flowers & Co. showed up, according to
people familiar with the talks.

Other Buyers

Other potential buyers, such as Royal Bank of Scotland
Group Plc and HSBC Holdings Plc, which had expressed interest in
the past, didn't send representatives. Hundreds of Bear Stearns
employees went to work yesterday to help with the sale process
and the presentations.
Bear Stearns has offices in cities including London, Tokyo,
Hong Kong, Beijing, Shanghai, Singapore, Milan and Sao Paulo,
according to its Web site.
Joseph Lewis, the second-largest shareholder in Bear
Stearns Cos., wasn't planning to reduce his stake, a person
close to him said March 11. Lewis, a 71-year-old billionaire,
has put in more than $1 billion into the firm since September,
paying as much as $150 for a share.
JPMorgan's participation in the bailout follows a long
tradition at the bank of stepping in to rescue financial markets
from crisis, according to Charles Geisst, the author of ``100
Years on Wall Street.''
The bank has also profited from others' crises. JPMorgan
got at least $725 million of revenue for taking on half the
energy trades from collapsed hedge fund Amaranth Advisors LLC in
2006.