JPMorgan to buy Bear Stearns for $2 a share

By Megan Davies and Joseph Giannone

NEW YORK (Reuters) - JPMorgan Chase & Co said on Sunday it would buy stricken rival Bear Stearns for just $2 a share in an all-stock deal that values the U.S. investment bank at the centre of the credit crisis at about $236 million.

The takeover, which has the backing of the U.S. Federal Reserve and the Treasury, underlines the risks banks and financial companies are facing as the U.S. mortgage crisis deepens, while the rock-bottom price -- more than 90 percent below its Friday close -- raises questions over valuations in the banking sector.

Minutes after the deal was announced, the U.S. central bank made an emergency interest rate cut and opened direct lending to Wall Street, but the moves failed to soothe panicked investors.

The U.S. dollar fell to a new record low against the euro and Asian stock markets were pummeled in early Monday trade.

Bear's stock closed on Friday at $30.85, valuing it at $3.5 billion, after tumbling 46 percent that day. Shares in the fifth largest U.S. investment bank, which employs more than 14,000 people, hit a record high of more than $171 in January 2007.

"The fact that the Bear Stearn's board is letting these assets go at such a deep discount brings into question the value of assets on a lot of corporate balance sheets," said Timothy Ghriskey, chief investment officer at Solaris Asset Management in New York.

"The main concern is what other financial institutions are worth in the current environment, given the discount that JP Morgan is acquiring Bear at."

Bear Stearns' cash reserves were drained by fleeing customers on Thursday, and on Friday the bank secured emergency funding from the Federal Reserve, extended through JPMorgan.

Under the deal, the Federal Reserve will provide special financing and has agreed to fund up to $30 billion of Bear Stearns' less liquid assets.

"In doing our due diligence, that was an area we needed to get comfort upon, some of the more illiquid assets on the balance sheet," JPMorgan chief financial officer Michael Cavanaugh said on a conference call late on Sunday. "We couldn't be in stronger hands than to be arranged for financing through the Federal Reserve, with no recourse to JPM Chase."

In a statement, JPMorgan said it would exchange 0.05473 shares of its stock for one share of Bear Stearns' stock. It is guaranteeing the trading obligations of Bear Stearns and its subsidiaries.

Asked how JPMorgan reconciled the $2 a share it was paying with the book value Bear Stearns gave on Friday of mid-80 cents per share, an executive said on the call: "It's an art not a science. There are a thousand moving pieces... that got reflected in the final price that JPMorgan agreed to pay."

The deal has to go to shareholder vote.

JPMorgan said on the call it had every expectation shareholders will approve this deal and that it would "be surprised if a better alternative came along".

But one person who phoned into the call identifying himself as an individual investor said he wouldn't be voting for it.