There are plenty of unknowns about how the acquisition of Bear Stearns by JPMorgan Chase will play out. But one aspect that seems pretty clear is that JPMorgan has established itself as a major prime brokerage player.
JPMorgan gets a “credible business in fixed-income prime brokerage and niche areas of credit prime brokerage,” including Bear’s asset-based and mortgage-based businesses, according to Bradley Ziff, a partner and head of the hedge-fund practice at Oliver Wyman. The purchase of the 85-year-old bank also delivers a “solid sales force, good marketing and a respected front-office operation.”
Bear’s prime brokerage platform includes more than 1,000 hedge-fund clients, who have been drawn in by “a very good relationship shop that formed long-term, deep ties not just with small funds, but with large and mid-sized funds,” Ziff notes.
Neither brokers nor clients are expected to make any moves, says Ziff, who points out that clients stayed with Bear “through everything that happened in the past 10 to 11 months. ...They don’t need to make a move.” Moreover, given the strength of Bear’s broker-client relationships, no prime brokers will lose their jobs since these clients move with their brokers, he says.
Of course, JPMorgan Chase will be scrutinizing the risks as it integrates Bear over the next six to nine months, and Ziff predicts that “a lot of what they inherit will be reshaped and pared down.”
Credit Suisse research analyst Susan Roth Katzke, in a research note, says “the acquisition will prove accretive to JPMorgan’s 2008 and 2009” earnings-per-share,” although the “size of Bear Stearns will render the earnings accretion modest in the very near term” because of market conditions.
She agrees that the deal makes JPMorgan Chase a major player in the prime brokerage business, and that Bear’s clearing unit represents a strategic plus.
Also, the “adds to energy/commodities, asset and wealth management [businesses], and distressed mortgage operations are also a benefit,” Katzke writes.
Deutsche Bank research analyst Mike Mayo says that “the transaction could add $6 [billion] of value to JPM... albeit with additional operating, financial, and cultural risk,” according to a company alert. In another research note, he cautions that the “potential variability of outcomes seems extremely large, given the sensitivity to changes in the values of Bear’s liabilities.”
One of these unknowns is that some Bear employees, pensioners and beneficiaries confronting the sudden deflation of their stock are not bowing out quietly. In the wake of Bears’ collapse, several class-action lawsuits under the Employee Retirement Income Security Act, or ERISA, were filed. And pension funds across the country, which are also invested in the bank’s stock, had unsuccessfully asked various courts to block the sale. Nonetheless, the estimated $1.18 billion deal, which closed in early April, included a revised $10 share price; the original offer of $2 a share was raised after market outrage from shareholders and employees.
And that’s not all: The Department of Enforcement at the Securities and Exchange Commission is considering launching an investigation into Bear’s “conduct and statements” before the deal was announced. (c) 2008 U.S. Banker and SourceMedia, Inc. All Rights Reserved. http://www.us-banker.com http://www.sourcemedia.com
