Wall Street loves a knight in shining armor, be it the
or Warren Buffett.
For now, the Fed is the only guy riding through town. The rumor that
Warren Buffett would buy a stake in
wasn't even a full day old before it was debunked by a report on
that said Bear isn't talking with anyone.
The rumor was good while it lasted, though. Bear Stearns shares rose sharply Wednesday afternoon, and risk premiums narrowed on its bonds and derivatives that offer protection from default. While the pondering and wrangling lasted, the firm organized the sale of $2.5 billion of investment-grade bonds at a price nearly 75 basis points below its prior bond sale in August.
Now, assuming a Buffett investment is finally off the table, the Bear story turns to just who might be interested in buying into a rather troubled and opaque but still storied Wall Street name -- and what form such an investment might take.
Investment pros say that any real interest in a Bear stake would likely come from overseas, and that the structure of the deal could take the form of a convertible security.
Like any of the vultures circling the mortgage industry or the remains of the leveraged buyout boom, an investor in Bear Stearns would have to want entree into the U.S. market. At the same time, Bear Stearns' chief executive James Cayne would have to retain control of the firm, which is nearly 30% owned by its employees.
"It might become evident that Bear Stearns needs a new deep pockets partner," writes Punk Ziegel analyst Richard Bove. He adds that he assumes management and the 7% stakeholder Joe Lewis are looking for such an opportunity to get funds to stabilize Bear's balance sheet, products to use excess capacity and geographic diversity to expand the firm's markets.
The New York Times
article that started the Buffett rumor, other interested investors include
Bank of America
and Chinese banks the Citic Group and China Construction Bank.
"The Chinese banks have amassed huge market caps due to massive stock market investment in China, and they are at a scale that could absorb U.S. brokerage firms," says Winston Ma, China expert and author of
Investing in China: New Opportunities in a Transforming Stock Market
. "Their high stock prices provide them with an attractive merger currency."
It's not new that Chinese banks and institutions have been courting U.S. financial assets. Earlier this spring, China's state-run investment unit agreed to take a $3 billion stake in
prior to its initial public offering. The state-run investment fund will officially launch on Saturday, according to reports, and it will put $200 billion of the nation's $1.3 trillion currency reserves to work in the global marketplace.
Chinese banks, which face their own reputation-oriented problems, may also be able to look past Bear Stearns' fall from grace. Observers have said China needs as many foreign financial assets and relationships as possible to help grow its own banking system and legitimize its capital markets development. Bear acknowledged on its third-quarter earnings conference call last week that it lost business relationships in the wake of the summer's credit crunch.
The firm also reported a 61% decline in its third-quarter profit.
The collapse of two of Bear Stearns' hedge funds were a critical point in this summer's credit crunch. Their near-worthlessness sparked more questions about the value of mortgage-related structured products on the balance sheets of many institutions around the world. And Bear's emphasis on the mortgage securitization business puts the broker most at risk of further calamity.
Like Chinese banks, Middle Eastern investors could also be potential buyers. Flush with cash from years of rising oil prices, these deep pockets could be attracted to a U.S. stake. These nations have been avid buyers of U.S. assets to capitalize on the favorable exchange rate as the value of the U.S. dollar has declined over the past several years.
Bear has reportedly been courting a Chinese investment for some time.
The Wall Street Journal
reported in April 2006 that chief executive James Cayne met with China Construction Bank to sell the firm a $2 billion to $4 billion stake via a convertible bond offering.
The paper reported then that because the arrangement was a convertible bond, as opposed to a direct equity investment, the structure of the deal allowed the Chinese bank to avoid regulatory hurdles.
Indeed, convertible sales are convenient ways for investors to amass stakes in companies while avoiding shareholder votes and occasionally regulatory hurdles. They are sold directly to investors in private placements. Convertibles are hybrid securities that rest on the capital markets spectrum somewhere between debt and equity.
Convertibles come in a variety of stripes, but they offer investors a dividend or interest payment while they wait to be allowed to convert the security into regular common shares at a later date, and under certain conditions -- usually a percentage appreciation in the stock price.
Carl Icahn used a convertible exchangeable note in 2006 to amass a greater sway over his activist target at the time,
, via the government of Dubai. The deal allowed him to control more of Time Warner's shares without having to technically pass the 5% threshold that would have required him to file his intentions with the
Securities and Exchange Commission
Bank of America's recent convertible deal with troubled mortgage lender
gives the bank a hefty coupon to wait 18 months to convert the stock into Countrywide shares. But the key to the deal is that it gives Bank of America the first right to buy the whole company if any other buyer emerges -- which sounds like a lot of control in the end.
Lastly, for Bear, the convertible allows Cayne to get a capital infusion that the firm is clearly desperate for without giving up any immediate control, as a straight stake sale might require.
Since reports emerged that Buffett was not interested in a deal, Bear Stearns credit default swaps widened out by about 20 basis points, and its stock fell back 1.67% from Wednesday's closing levels.
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In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
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