JPMorgan Sweetens the Pot

I won’t say I predicted it, but I did, in fact, predict it.
Yesterday, JPMorgan Chase (JPM) announced that it will increase its bid for Bear Stearns (BSC) from $2 a share to $10 a share.
Last Wednesday, I wrote.

I would say that the most likely outcome is that JP Morgan will sweeten the offer. To add some context, it’s really not that much for JPM. The company’s market value has already increased by $20 billion this week. The offer for Bear will cost JPM $236 million. What’s the big deal if it doubles or even triples the offer? Plus, it could win JPM some goodwill.

Actually, they quintupled it. Before you go thinking that a newfound spirit of generosity and altruism has broken out on Wall Street, I should remind you that self-interest may be playing a part.
That $20 billion figure I mentioned was on Wednesday morning. By the end of the week, shares of JPM tacked on 25.8% which is an increase of $32 billion. I swear, Jamie Dimon must be some sort of financial Jedi. How did he pull this off? That $32 billion is far more than Bear was ever worth.
At any rate, even after raising its bit, JPMorgan is really just kicking a couple of pennies Bear’s way.
John Carney at DealBreaker said the real reason for the sweetened bid was to hold off a potential second run at Bear. That could be. Either way, JPMorgan Chase basically got one of the best deals imaginable. This will go down in Wall Street annals as a legendary deal.
Think of it this way, thanks to the folks at the Federal Reserve, this was the most harmonious cooperation between the public sector and free enterprise since Eliot Spitzer and Kristen (or was it Ashley?). Except now, the roles are reversed.
In the end, the Bear Stearns was done in by questionable liquidity. Unfortunately, the liquid in question was Kool-Aid and there was plenty to go around. Bear’s mismangement is simply staggering. While the deal was being worked out, Jimmy Cayne, Bear’s chairman, was at a bridge tournament in Detroit.
What’s scary is, this wasn’t the first time. Over the summer, when two of Bear’s hedge funds rammed the iceberg, Cayne, who was then CEO, was at a bridge tournament in Nashville. Not only that, but according to the Wall Street Journal, he was “without a cellphone or an email device.”
Sheesh. How does that happen?
(Less importantly, there are bridge tournaments in Nashville??)
The WSJ article also noted: “Attendees say Mr. Cayne has sometimes smoked marijuana at the end of the day during bridge tournaments. He also has used pot in more private settings, according to people who say they witnessed him doing so or participated with him.”
Thank you, Rupert. Now that’s reporting! So while Bear’s stock was making new lows, management was making new highs. Not surprisingly, BSC shareholders aren’t too pleased with their shares vaporizing into thin air. On Sunday, The New York Post reported, “Cayne’s armed hulk of a bodyguard trailed him everywhere and parked himself outside Cayne’s office all day, sources said.”
How much you want to bet that that source owns more than a few shares of BSC? Also, at what point, exactly, did the world of high finance start taking the form of the movie My Bodyguard? This can’t be a good development.
Ironically, 101 years ago, J.P. Morgan, the man, helped bailout the financial system during the Panic of 1907. It was at this time that people realize that it might not be a great idea to have our entire financial system dependent on one man. So, to make a long story short, Congress eventually passed the Federal Reserve Act of 1913.
Which leads us to last Tuesday. That’s when the Federal Reserve lowered interest rates by 75 basis points to just 2.25%. All told, rates have dropped by 300 points in just over six months. Until recently, Treasury Inflation Protected Securities (or TIPS) maturing as late at 2012 carried a negative yield.
What I find interesting is that the financial media refuses to discuss the possibility of a bond bubble. Everyone assumes the bond market is correct—it never suffers from exuberance, rational or otherwise. Another interesting note is that this Fed decision was the first time since 2001 that there were two dissenting votes.
Nevertheless, the market roared its approval and surged—perhaps in homage to Mr. Cayne—420 points. The two best days of the past five years came exactly one week apart.
The course of events has probably left you feeling a bit rattled. That’s understandable. Standard & Poor’s recently said that the stock market’s volatility has reached its greatest point in 70 years. At one point last week, the yield on the three-month T-bill hit 0.2%.
But I should remind you that times like these are often great buying opportunities. Since 1950, the entire capital gain of the S&P 500 has come when the yield spread between the three-month and the 10-year Treasury is over 65 basis points. Today, that spread is over 230 basis points.
Not every stock is reeling from the credit crises. Many of the best companies aren’t overly leveraged and they see a bright year ahead. A great example is Donaldson (DCI) of Minneapolis, Minn.
I have to warn you, Donaldson is about as dull as they come. The company makes…hold on to something…filtration systems! Woo!
Yeah, I know, it’s pretty boring. But consider a few facts. Donaldson has reported record earnings for 18 straight years. Does that grab your attention?
Last month, the company reported earnings of 42 cents a share, which was in line with the Street’s consensus. That was for the second quarter of their fiscal year, so for the first half, sales were up 14% and EPS was up 17%. That kinda beats the 0.2% from T-bills.
On top of that, Donaldson increased its 2008 projection to $2 to $2.10 a share. That’s higher than what they first projected in November when they forecast $1.97 to $2.07. Not only that, this is actually the second time Donaldson has increased its projection. In September, the company expected EPS of $1.92 to $2.01.
Always pay attention when companies warn or increase estimates. They’re a lot like cockroaches: For every one you see, there are five more scurrying around the woodworks.
This credit crisis, too, shall pass. Ten years ago, when the financial system was heading for the cliffs, frightened investors left high-quality stocks. Shares of Donaldson dropped in half. But the stock is up over five-fold since.

Posted by on March 25th, 2008 at 12:55 pm

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