Bear Stearns surges on deal jockeying

NEW YORK (Reuters) - Bear Stearns Cos Inc BSC.N shares surged 23 percent on Tuesday, as investors speculated on the outcome of JPMorgan Chase & Co's (JPM.N) bid to buy the storied investment bank.

The share gains were a glimmer of good news for investors in Wall Street's fifth-largest brokerage, whose shareholders were pummeled on Friday as Federal regulators were forced to provide financing to the troubled firm and on Monday after JPMorgan Chase agreed to buy it for just $2.30 a share at current prices.

Some investors said the buying could be bolstered by hopes -- which appeared to have little foundation -- that a rival bidder could emerge. Others said investors who wanted JPMorgan Chase to win the deal were amassing shares.

"You got your risk arbitrage traders that don't think this thing is going through, so they're bidding it up," said Jim Huguet, chief executive of Great Companies LLC, a Tampa, Florida, investment adviser. "That's purely speculation. It's not investing."

Bear Stearns, which JPMorgan agreed to buy for stock in a deal valued at about $2.30 a share at current prices, gained $1.10 to close at $5.91 on the New York Stock Exchange, where it earlier risen to as high as $8.50.

Bondholders and sellers of protection on Bear's debt were also thought to be behind the share rise, analysts said.

"Bondholders (or protection sellers) are buying stock to gain voting rights on the deal," said Tim Backshall, chief derivatives strategist at independent research firm Credit Derivatives Research.

The loss these investors may face on the stock is less than their potential loss on the bonds, if Bear Stearns were to fail, he said.

Bear Stearns shares also surged as the broader U.S. stock market notched its biggest one-day advance in more than five years, after a deep interest rate cut and solid results from Goldman Sachs Group Inc (GS.N) and Lehman Brothers Holdings Inc LEH.N.

JPMorgan agreed on Sunday to buy Bear Stearns, which had been slammed by a sudden cash crunch, in an all-stock deal that valued the company -- recently ranked as the No. 5 U.S. investment bank -- at about $275 million.

CREDIT PROTECTION

Credit default swap spreads on Bear Stearns surged as high as 1000 basis points on Friday as concerns over its liquidity grew and have since retraced to 385 basis points, according to broker Phoenix Partners Group.

Analysts expect the spreads to tighten further once the deal is completed, converging to the same level as JPMorgan, which is currently trading at 115 basis points, according to Phoenix.

Short interest in Bear Stearns stock appeared to be falling by the end of last week.

The amount of Bear Stearns shares loaned out to short sellers and others peaked on Thursday at about 54 percent of securities available to lend, but had fallen by about 4 percentage points Friday, according to Data Explorers, which tracks securities lending data.

Stock-lending figures are often viewed as a proxy for the interests of short sellers who are typically the biggest borrowers of stock.

But an investor whose firm has a "token" short position in Bear said the deal will likely go through as agreed, taking away the urgency to close out positions.

"I don't think there's any hurry to cover your shorts in that stock," said David Dreman, chief investment officer of Dreman Value Management LLC, a New Jersey fund manager that has over $18 billion under management.

SHAREHOLDER FIGHT

An equity strategist discounted the chances of Bear fetching a higher price.

"It's a very subjective assumption to assume that Bear is worth more than the $2 per share," said Peter Boockvar, of Miller Tabak & Co. "Don't tell me that the prime brokerage business was $2.5 billion because it would've been worth nothing on Monday if you didn't get this deal done."

But Rebecca Engmann Darst, an analyst at Interactive Brokers Group, said the theme in the options market was that shareholders were "not going down without a fight and may contest the $2 bid that some have called derisory."

That was the term used by reclusive British tycoon Joe Lewis, who has taken a roughly $1 billion loss on his stake in Bear Stearns.

(Reporting by Paritosh Bansal, Chris Reiter, Karen Brettell and Jennifer Ablan in New York and Doris Frankel in Chicago; Editing by Maureen Bavdek/Andre Grenon)