Short-term bets on Bear stock reap rewards

By Megan Davies

NEW YORK (Reuters) - Traders who piled headlong into cheap Bear Stearns shares last week got rewarded on Monday with a windfall when JPMorgan Chase & Co lifted its buyout bid by a five-fold margin.

Bear's stock turned into a day trader's playground on March 14, when it announced a deterioration in its liquidity. On March 17, Bear agreed to a $2 a share deal to sell itself to JPMorgan. That was bumped up on Monday to $10 a share.

Hedge funds, arbitrage traders, Bear bondholders and those unwinding short positions were among those said to be buying Bear's stock last week as it traded between $2.84 and $8.50.

The average daily volume traded in Bear's stock over the last 10 days was 96.6 million shares -- nearly equal to Bear's free float of 110 million shares. March 14 saw the biggest spike in volume, with 187 million shares changing hands.

"It would seem those who ... stepped into those shares anywhere between $2 and $5 have obviously done very well," said John Augustine, chief investment strategist with Fifth Third investment advisors. "You now have a whole another set coming in at $10 to $13 a share that wants to do equally as well. Their chances of being equally rewarded are materially less, given the structure of the deal."

Of course, for every winner, there's a loser. It is quite possible that some Bear stockholders sold out last week, thinking that getting $3 or so was the best they could do.

They may have an opportunity to recover the difference, said class action lawyer Roger Kirby at Kirby McInerney & Squire. He said he has been approached by Bear shareholders, but not filed any litigation.

But to do that, it would have to be proven that someone at JPMorgan or Bear had known the initial bid was "just testing which way the market wind could blow and they had a backstop plan" to increase, he said.

JPMorgan Chase & Co on Monday increased its offer price to

$10.

Short-term traders are now likely to own a hefty amount of Bear's stock, although it is hard to say how much. The estimates are anecdotal: one trader said short-term traders could hold anywhere from 30 to 70 percent of the stock. Two other traders estimated more than 50 percent.

Accurate data about the shareholder base is only likely to be known when a shareholder vote is scheduled and a record date -- the cut-off date for investors to own shares if they want to vote on the deal -- is set.

UNUSUAL CROWD?

The buyers of Bear Stearns' stock over the past week were seen by some as an unusual mix.

Typically arbitragers, who make money trading the spread between a deal's offer price and the price the company's shares are trading, pile in.