Money-Rx Blog

JPMorgan Chase: Obvious choice, since they, and the Fed, are already have a stake in keeping Bear from going belly up. According to this initial AP report on Bear's problems, they have been working with investment bank Lazard Ltd. to explore the choices, including an outright sale of Bear Stearns to JPMorgan, something top executives from both banks were discussing, according to a person familiar with the talks who was not authorized to speak on the record. JPMorgan is considered to have one of the strongest balance sheets among Wall Street banks, and is not already involved in a rescue like Bank of America's purchase of Countrywide Financial Corp., the nation's largest mortgage lender.

That makes them the forerunners to acquire Bear Stearns, especially since they got involved in the initial bailout. If they weren't interested in a full sale, they would not have got involved in the emergency loan.

Wachovia: Two other banks who had expressed a prior interest in acquiring a stake in Bear Stearns are Bank of America and Wachovia. I'd rule out Bank of America because they have their hands full with the still pending, and still very messy, Countrywide Corp merger. And then some. As for Wachovia, that again is unlikely, due to different reasons. As this post by Dana Cimilluca in the Deal Journal shows, they're already suffering from 'deal fatigue'. Charlotte, N.C.-based Wachovia has made two major acquisitions in the past year: the $25 billion purchase of mortgage lender Golden West Financial last October and the $6.8 billion purchase of regional brokerage firm A.G. Edwards

Foreign Funds: Next up on the rumour list of possible suitors is an unnamed China fund. I'd rate their chances as just below that of JPMorgan, especially since two Chinese institutions - the Citic Group and the China Construction Bank, have last year expressed an interest in Bear. And the trend among US investment banks since late year, and early this year, has been to run to foreign funds at the first sign of liquidity problems.

Funding from abroad is especially attractive because these funds are not really interested in the day-to-day nitty gritty of running the bank, or access to US customers. They just want to park their excess dollars and reserve a place on the table. So I wouldn't rule out a consortium of buyers which includes a foreign fund and a local bank working in tandem with the existing management at Bear and just keeping things on an even keel until things cool down a bit. The only problem with this scenario is that it takes time to hammer out a deal like this. And a weekend is certainly not enough. But still, you never know. If everyone wants it bad enough....

Warren Buffett: His name inevitably pops whenever there's talk of a big company going down. But in this case, the circumstances and past history seem to indicate good reasons for Buffett to step in. Buffett, it seems had broached discussions with James E. Cayne, former Chief Executive of Bear Stearns, in August last year, after the initial collape of two of its hedge funds. That went no-where fast, mostly because Cayne seems to have had an unrealistic assesment of Bear's value and the depth of its problems, as became evident this week.

The plus points favoring a renewal of negotiations between Buffett and Bear Stearns is that while Cayne retired late last year, he still holds a substantial share of 4.9 percent. And he and Buffett share the same age group (70+) and geographical roots (midwest), which makes them a lot more compatible for initiating a discussion. If indeed Buffett is interested, I'll wager he's already chatting about this with Cayne.

So there you have it. All the possible suitors lined up. That leaves one thing to discuss - Price. How much is Bear Stearns worth today? And Tomorrow, and the day after? And how much will a buyer have to pay? All these are not necessarily the same thing, and most likely will have a major impact on who the final buyer will be. Warren Buffett, for one, will never get into a deal if he feels the company has very fundamental problems, instead of being undervalued due to temporary problems. If he does express interest, he'll pay much less than what its worth. The foreign funds have no such hesitancies, and will pay whatever is necessary to get a stake. JPMorgan is probably the best suited to make a fair assesment of Bear's value and Bear will likely have no real say or bargaining power if they deal with JPMorgan.

Whoever ends up with Bear Stearns, their newly appointed CEO, Alan D. Schwartz, will need to use all of his considerable merger expertise to save his own company. Maybe it's an irony, or maybe a very far-sighted choice, that Schwartz, who boasts of a resume which includes being enlisted to help with mergers and hostile takevers for companies like Microsoft, Time-Warner and Disney, was appointed just in time to help engineer a takeover to keep Bear Stearns afloat.