The big news at the end of last week was that JPMorgan Chase & Co. was somehow going to save Bear Sterns Cos. BSC. The details weren't yet known. But the deal was finalized over the weekend, and now everyone is analyzing the outcome. JPMorgan has agreed to acquire Bear Sterns for an amazingly low amount. This is great news for JPMorgan, they're getting quite a bargain; but why does this news worry Wall Street so much? Will this help or hurt the current credit crisis and economic fears?
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JPMorgan and Bear Sterns are both major investment houses. Bear Sterns was one of the companies that was hit the hardest with problems from the subprime mortgages, as they had a lot of exposure in the subprime area. Bear Sterns has been gradually declining ever since, and by last week it was pretty clear that they needed some major help if they were going to survive this fiasco. Last Friday, JPMorgan and the Federal Reserve agreed to work together to bailout Bear Sterns, with a cash infusion provided by JPMorgan and backed by the Federal Reserve.
Things moved quickly, and on Saturday, the two companies made an agreement for JPMorgan to purchase Bear Sterns, for the low price of only $2 per share, working out to only a $236 valuation for Bear Sterns. About a week ago, Bear Sterns shares were trading at $60, and even after its almost 50% drop on Friday was still trading at $30 a share. (Amazingly, before this whole crisis began, the shares were trading above $170 per share). Under normal circumstance, it would be surprising that Bear Sterns agreed to such a low value. The company still claims that their company is worth more than that, but it seems that they realize that this is their best option in order to keep the company alive.
Keeping the company alive isn't crucial just for the employees of Bear Sterns, but the whole country, to some degree. Bear Sterns is currently the fifth largest investment house in the nation. With over 14,000 employees, the company has many clients, such as many of the nation's banks. If the company failed, the clients would face financial loss; and if the banks struggled financially, so would their customers. The chain reaction would take its toll on many individuals, which would simply add to the current problems and fears the economy is already facing. On the other hand, news of a deal this major and this important is troublesome to investors; when the news of the cash infusion for Bear Sterns was announced on Friday, its stock fell almost 50%, as investors were worried to know that things were that bad for the major company. The news that the company was sold for such a paltry sum could be another indicator of tough times, pushing stocks down even further. In early trading today, the major indices each tumbled over 1%.
It is likely that JPMorgan will do well from this acquisition. They're acquiring a big company, which might be failing now, but many of the divisions of the company have a lot of promise. The board at Bear Sterns seems happy with the agreement, and is just waiting for the shareholders to approve the acquisition. It's the investors that have yet to figure out how to react. For now, it looks like worry will continue to be the most prevalent emotion. Due to this weekend's news, shares of Bear Sterns this morning have plummeted to around $3, falling about 90% from Friday's closing values. People are so concerned about the economy right now, no matter which way this situation worked out, it would have been another warning sign for investors. Although the Federal Reserve might have been trying to share some good news along with the bad when they dropped interest rates at the same time as this announcement, the good news once again has been overshadowed by fear. Looks like investors don't just need good news, they need bad news to stop being so pervasive, before their fears will diminish.
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