Investors Growl at Bear's Sale Price

Bear Stearns ( BSC) shareholders are up in arms over the $2-a-share price tag the firm is fetching in its federally funded bailout by JPMorgan Chase ( JPM).

Expectations are that a raft of lawsuits will be filed by angry shareholders, employees and other market participants, who are witnessing a $236 million buyout deal that values the 85-year-old firm's shares at a 90% discount to its closing price on Friday. The offer includes a $30 billion financing package by the Federal Reserve.

Billionaire investor Joe Lewis, a large Bear shareholder who has plowed money into the New York-based investment bank amid its trouble the past few months, referred to JPMorgan's buyout offer as "derisory" to CNBC on Monday. Lewis could look to lose about $1 billion in Bear Stearns since investing in the company over the past several months for prices as high as $177 a share in January.

Already, an investor group known Eastside Holding, has filed a complaint today in Manhattan federal court alleging that Bear misrepresented to investors its financial condition, according to Bloomberg. The complaint was filed by San Diego-based law firm Coughlin Stoia Geller Rudman & Robbins and represents shareholders who have acquired the firms stock from Dec. 14, 2006, through March 14, 2008.

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Hashed out over the weekend, Bear Stearns' deal hurts the most for its 14,000 employees who have been paid bonuses via options. About one-third of Bear Stearns is employee owned -- a fact that had been a source of pride for former CEOs Jimmy Cayne and Alan "Ace" Greenberg. According to CNBC, half Bear's employees may be handed pink slips should the deal be consummated, which is expected in June.

Now that pride must be turning into angst and anger for some of the rank-and-file, as well as senior management.

Cayne, Greenberg and current CEO Alan Schwartz also have a significant chunk of their net worth tied up in Bear.

At this point, investors are fundamentally trying to get their arms around the sudden and stunning capitulation by Bear, which had made adamant public declarations of its health. On Wednesday, Schwartz appeared on CNBC in a failed attempt to placate a jittery Wall Street, which had seen Bear's shares getting crushed by rumors of illiquidity.

Sources tell that Bear employees are distressed by the buyout news and that counselors have been made available for staffers to discuss the uncertainty surrounding the firm and their jobs. Employees are expected to continue working, although managers say that it's very difficult to keep people focused, the sources say.

During a conference call following the buyout announcement held by JPMorgan, executives tried to emphasize that Bear is still open for business despite the unsettled news.

Schwartz's comments on Wednesday were followed, stunningly, by Friday's news of a bailout. JPMorgan offered to provide a backstop credit facility funded through the Fed's discount window -- the lender of last resort -- for the troubled investment bank, as clients withdrew money from it at a rapid clip. The move at the time seemed like the prelude to a kiss, but no one could have imagined that a weekend-long round of negotiations involving the Fed would result in a sale of the company to JPMorgan for a song.

It's still unclear what measure has been applied to valuing Bear at such a deep discount, when many observers point out that headquarter building at 383 Madison is worth the equivalent of about $8 a share. Most analysts estimate that Bear's assets place the company's worth at nearly $8 billion.

Some, however, suggest that given the liability and all the funky mortgage securities that JPMorgan is assuming on its books, $2 a share might even be too rich. Oppenheimer & Co. analyst Meredith Whitney today on CNBC said that the deal worked out to be a dollar more than she would have expected would have been struck for embattled Bear.

Sorting out what Bear might truly be worth, however, may be a much more complicated process. JPMorgan execs, who were pushed to work out a deal at breakneck pace, admit that due diligence of the firm is meant to be completed over the next two years and that the price that it paid reflected what it viewed as a lot of risk that could be embedded in Bear's portfolio.

For all the risk, JPMorgan CEO Jaime Dimon scores what Could be a blockbuster deal that boosts the bank's asset management unit and adds Bears prime brokerage platform to its plate of offerings. This windfall also comes with the financial backing of the Fed, which will help protect JPMorgan against problems in Bear's portfolio.

In the end, not everyone with a vested interest in Bear wants a deal restructured, notes Kathleen Shanley, a financial analyst at Gimme Credit.

"Bondholders would prefer not to see the deal challenged by shareholders, because for bondholders the best outcome will be for the highly-rated JPMorgan Chase to close the deal as soon as possible and assume Bear Stearns' debt," she writes in an emailed comment.

Still, trading action in Bear Stearns' shares, which closed on Monday at $4.81, suggests that investors are still holding out hope that a relatively richer deal might still be struck.

Know What You Own: JPMorgan operates in the financial services industry, and some of the other stocks in its field include Citigroup ( C), Goldman Sachs ( GS), Morgan Stanley ( MS) and Bank of America ( BAC). For more on the value of knowing what you own, visit's Investing A-to-Z section.

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