Why It's Safe to Bet Against Joe Lewis

Are you tantalized by the prospect of Slate's new business site? Well, the editor, Jim Ledbetter, is guest-blogging over at Fortune today, so maybe that will give you an idea of what to expect. This morning, talking about the Bear Stearns share price, he lays out the good arguments why Bear shares won't end up being worth any more than $2 a share, despite the fact that Joe Lewis and others are unhappy about that deal. But then he suddenly reverses himself:

Even if their plan is a long shot, you could lose a lot of money betting against furious billionaires hellbent on protecting their assets.

I don't see why or how you could lose a lot of money betting on Bear stock going down; after all, betting against these furious billionaires has been stunningly successful up until now.

Ledbetter seems to think that Lewis can find common cause with Bear employees, who own 30% of the stock. But those employees have one overriding concern right now, and that's their jobs. Jamie Dimon is offering cash and stock to Bear employees if they support the takeover: that's an offer which isn't being extended to Joe Lewis, but is pretty attractive when the alternative is hoping that a bankruptcy will end up with some residual value for shareholders. Even employees who get fired will make out better than Lewis:

Bear Stearns employees not offered a job by JPMorgan will receive cash payouts of 25 percent to 35 percent of their 2006 compensation provided they stay until the deal is completed, Dimon said, according to the two people. JPMorgan hasn't decided how many employees it will retain.

So it's far from obvious that Lewis has Bear's employees on his side, even putting aside the fact that Bear's executives, who own extremely large chunks of stock, will also receive hugely valuable indemnification against lawsuits if the acquisition goes through.

Ledbetter also seems to think that there's some small hope of shareholders getting money at the end of a bankruptcy proceeding:

My understanding is that, in order to shun the JPMorgan offer, the company would have to declare bankruptcy, and in bankruptcy the shareholders have to get in line behind other creditors, thus by no means guaranteeing a better outcome than $2 a share.

By no means guaranteeing a better outcome? Bankruptcy guarantees a worse outcome. If Bear goes into bankruptcy, there wouldn't be some nice indefinite Chapter 11 proceeding where the company can be operated as a going concern and eventually sold for a large sum of money. No, broker-dealers have to file for Chapter 7 liquidation, where Bear's assets would be dumped unceremoniously onto a market which clearly has no capacity to buy them all. That's what the Fed was trying to avoid, and that's why bankruptcy would result in no money at all for shareholders. (Matt Miller and John Blakeley explained this in the Deal on Monday, in an article which unfortunately isn't online.)

The best hope for Lewis is not bankruptcy, but rather that he can somehow put together a credible better offer for Bear himself - one which would be accepted by a majority of shareholders even if JP Morgan exercises its option to buy 20% of the company at $2 a share, and one which would somehow manage to get the blessing of the Fed, which is solidly in Jamie Dimon's camp. Even Ledbetter doesn't see that happening; for all the gory details of why it won't happen, see Heidi Moore.

I see only one conceivable way in which Bear gets taken over for much more than $2 a share (or a bit more than that now, as the offer is in stock, and JP Morgan's stock has risen since the offer was made). And that's if Jamie Dimon unilaterally decides to raise his offer, deciding that spending a couple of hundred million dollars more on the acquisition is worth it if it avoids months of legal headaches. And Dimon's said quite explicitly that he won't do that. In this deal, Dimon's the winner, and Lewis is the loser. If you want to bet on the loser, feel free. But don't expect to make any money doing so.