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The Scramble to Save Bear   The Price-to-Book League Table, Revi...
Mar 18 2008 9:35AM EDT

How Important is JP Morgan's Option to buy Bear Stock?

There's one detail of the WSJ's weekend narrative which is worth its own blog entry: the way in which the deal to buy Bear Stearns was structured. The lawyers seem to have tried very hard to make the deal airtight, with JP Morgan compelled to buy, and Bear Stearns all but compelled to sell. To that end:

In addition to its option to purchase Bear's headquarters building, J.P. Morgan has the option to purchase just under 20% of Bear Stearns's shares at a price of $2 each. That feature gives J.P. Morgan an ability to largely block a rival offer, says a person with knowledge of the contract.

How does a 20% stake block a rival offer? Bear's officers have a fiduciary duty to recommend the highest offer they get, so JP Morgan can't count on their support if - and it's a very big if - someone else comes along offering a double-digit price.

If I were Jamie Dimon, I would be taking a lot of solace right now in the Fed's strong support for this deal: it would take balls of steel for a potential rival bidder to risk angering Tim Geithner in the present market by threatening the acquisition. But I'm not clear on the usefulness of the option to buy less than 20% of Bear's stock.

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