Why Bear Stearns Might Be Sold

Thanks to Helen Thomas for reminding me that I reckon a Bear Stearns takeover ain't going to happen – or at least that I thought that a month ago. But since the FT is revisiting the issue, it's worth taking another look.

There's no doubt that the chart of the Bear Stearns stock price is pretty ugly. Earlier this year, the stock was at an all-time high of more than $170 per share; it's now just over $114. That equates to more than $8 billion in value being obliterated – a drop which really can be blamed on subprime.

Remember, that's a reason for Jimmy Cayne not to sell. If he wasn't willing to take $24 billion for his company in January, why should he take $16 billion now? And have no doubt – whether or not a deal gets done is entirely a function of what Jimmy Cayne ultimately decides. The won't be any hostile takeover of Bear Stearns: the road to its acquisition starts and ends in his office.

But Cayne might now be realizing the value of being a big bank, and not a small one. JP Morgan is down only 16% from its highs, not 34%; Barclays today announced a healthy rise in net income and said that its subprime exposures are really not a big deal at all.

Cayne is 73, and, as Ken Houghton commented on my earlier post, it's not clear how much faith he has in his potential successors. He won't be running Bear Stearns forever, and he might not like to take the risk that his billions could be wiped out by future mismanagement or some other black swan. If he starts thinking along those lines, then he might be more minded to accept a large chunk of Barclays shares in exchange for his own stake in Bear. Similarly, if Barclays fails to snag ABN Amro, then a Bear Stearns acquisition would serve the rather handy dual purpose of beefing up its capital-markets operation while also making the whole bank that much harder to acquire itself.

At that point, however, it's hard to see how Cayne could come to an agreement as to price with any potential acquirer. As Lex notes today, Bear's current price-to-book ratio of 1.2 is "below trough valuations earlier this decade". I'm quite sure that Cayne doesn't want to be the guy who sold off his investment bank at some small premium over a low valuation like that. But if a big bank somewhere offers him a whopping great big premium over where the shares are currently trading, he might start to think twice.

Bear Stearns might just be sold, then, although the obstacles to a sale remain formidable. Just don't expect it to be sold cheap.