There are roughly 7,500 reasons, to paraphrase
Charles Barkley, why
is unlikely to get taken over for $120 a share, and each reason is a broker.
offered a 47% premium over the market price for broker-heavy
two weeks ago, Bear is in a very different business, one that may not be ripe to attract the kind of cash its executives might expect.
According to a research report released Monday by Guy Moszkowski of
Salomon Smith Barney
, Bear executives would consider acquisition offers in the range of four times the firm's book value, which equals about $120 a share. And while the willingness to give up the company's independence is a change of heart for Bear executives -- often regarded as the Street's best -- they're just as famous for their bravado, which could be leading them to believe they can get a deal as juicy as PaineWebber's.
"Bear Stearns is a different animal than PaineWebber; it's a completely different situation," says John Garrity, the associate research director at the
brokerage firm in New York. (The firm hasn't done any underwriting for Bear.)
PaineWebber has about 8,000 brokers, which was the big draw for UBS. Bear has just 500 or so, catering exclusively to wealthy individuals and small institutions, such as hedge funds. So the firm lacks the scale of PaineWebber or
to gather funds into asset-management accounts that generate that steady, predictable stream of fees that shareholders love.
Not Quite $120 a Share
Bear's business is different in other ways, too. It makes more of its money trading stocks and bonds for clients and for its own accounts than many other brokerage firms. It also has the largest correspondent clearing division in the nation, an operation that executes and processes trades for smaller brokerage firms.
Those businesses are notoriously cyclical in an era in which brokerage firms are learning more and more to live off recurring revenue from investor accounts.
Meanwhile, Bear's investment banking business, which underwrites stock and bond offerings, hasn't kept up with the likes of
Morgan Stanley Dean Witter
. In fact, Morgan Stanley is probably the best example of the combination of a top-flight investment banking and trading shop with a retail-brokerage unit that generates tons of recurring asset-management fees.
"The stock is trading at a low multiple, but it doesn't have a strong asset-management division to generate the fees that Merrill and Morgan do," says one hedge fund trader whose fund is long Bear. (Bear is trading at a price-to-earnings ratio, commonly called a multiple, of 7.9 times its trailing earnings, while the
Standard & Poor's 500
is trading at a P/E of 27.8.)
And a Wall Street well aware of Bear's business mix was skeptical about a takeover bid. If the Street really thought Bear could fetch a triple-digit offer, its shares would have rallied more than the 7.4% (to 49 3/4) they did Monday, says the trader.
The $120 a share Bear executives are said to be seeking is "definitely an extreme valuation," says the trader. "They have a good core investment-banking business in the U.S. and in Latin America, but I don't see a valuation that high on the stock. Maybe 75 or 80."
According to Moszkowski's report, Bear CEO Jimmy Cayne "made it quite clear that an acquisition isn't out of the question," but a buyer would have to be able to broaden Bear's business, either geographically or through products, and "would have to be willing to pay at least four
times book value."
A Bear spokeswoman declined to comment on the report.
In his report, Moszkowski mentions potential suitors that may have some synergy with Bear. Among them, British banking giant
, U.S. insurance leader
American International Group
, French bank
The hedge fund trader says a similar gang of suitors could sidle up to Bear, but he cautions that major insurance companies aren't trading at high multiples, either, making a stock deal more difficult. And paying $120 a share in cash would equal roughly $12.9 billion, a big chunk of change.
"They could settle for less," the trader says. "As a shareholder, I'd be pretty happy to get a $30 premium."