Bear Stearns may become takeover target

By Jessica Hall PHILADELPHIA (Reuters) - Bear Stearns Cos Inc's (BSC) management shake-up could make the investment bank a takeover target, but the possibility of more write-downs and chance of legal entanglements from the subprime mortgage crisis could sideline suitors for now, analysts said on Tuesday. Bear Stearns' president Alan Schwartz on Tuesday became the company's new chief executive, replacing James Cayne, who was under fire for the company's big mortgage losses and the collapse of two hedge funds. The appointment of Schwartz, a 57-year-old investment banker, could signal Bear Stearns' willingness to entertain offers, even as its shares hover near four-year lows, some analysts said. But Schwartz told Reuters he plans to return the company to strong profitability and he's not waiting around for a takeover bid to materialize. "Being acquired is not a strategy," Schwartz told Reuters in a telephone interview. Bear Stearns, however, is reeling after recording its first loss ever in the fourth quarter because of subprime mortgages. "Periods of instability always create opportunity for those who are willing to do the proper homework and be dispassionate in the risk-versus-reward review," said one investment banker, who declined to be named. Cayne, who will remain chairman, is yet another heavyweight casualty of the subprime mortgage crisis. Former Citigroup Inc © Chairman Charles Prince and Merrill Lynch & Co Chairman (MER) Stanley O'Neal lost their jobs after their companies had large subprime write-downs. Bear Stearns, with market capitalization of about $9.1 billion, trades at about 8.5 times fiscal 2008 earnings estimates, less than half the financial sector average of 17.4 times earnings. "Outsiders may now be attempting to take control of the company. He must fight this off," said Richard Bove, an analyst with Punk Ziegel & Co. "The firm will be enmeshed in meaningful legal battles for the next 3 to 5 years over its alleged missteps in the credit sector. Management is entrenched and must be overhauled," Bove said. METHODICAL, PROFESSIONAL Schwartz joined Bear Stearns in 1976 after an injury ended his career as a star college pitcher at Duke University. He has served in various roles at the company, including investment strategist and head of investment banking. He became co-president in 2001, then president when co-president Warren Spector stepped down last summer. "He's a very methodical leader. He's the type of guy who will work with every unit to have it going in the right direction," said James O'Shaughnessy, chairman and CEO of O'Shaughnessy Asset Management in Greenwich, Conn. "Alan is a consummate professional," said O'Shaughnessy, who recently left Bear Stearns Asset Management. "He is extremely erudite. His connections within the industry are incredible. He has a lightning-quick mind." Bernstein Research analyst Brad Hintz said he did not view Cayne's changing role as a radical strategic shift by the investment bank. Bear Stearns "is conservative and the company has largely stayed in its comfort zone. We expect that to continue," Hintz said. Banking has not been a big part of Bear Stearns' business. The company has ranked No. 12 among top advisers of U.S. mergers for the past two years, according to research firm Dealogic. In 2007, it was adviser on 55 deals valued at $83.5 billion, Dealogic said. The company's banking business has concentrated on a "narrowly defined group of industries and product lines. But this niche strategy is not winning," Hintz said. "Bear Stearns has lost market share in equity underwriting, investment grade debt, high yield and M&A advisory over the last decade." FOREIGN OR PRIVATE SUITOR? Hedge funds or other private financial companies could consider acquiring Bear Stearns in the form of a reverse merger to gain a publicly traded asset, some analysts said. Thomas Russo, a partner at Gardner Russo & Gardner, which manages more than $3 billion, said there has been "a lot of interest from the sovereign funds in this area." A foreign bank or investor could want Bear Stearns in order to gain a U.S. presence, analysts said. In October, Bear Stearns sold a 6 percent stake to China's government-controlled Citic Securities. Last year, British billionaire Joseph Lewis began accumulating Bear Stearns stock and amassed a roughly 9.6 percent stake by the end of 2007. Some analysts doubt there would be a quick takeover of Bear Stearns since it is unclear if all problems from the subprime mortgage crisis have emerged. Bear Stearns, a trader of mortgages and mortgage-related investments, took a $1.9 billion write-down in the quarter that ended November 30, reflecting the reduced value of subprime mortgage-related securities. "The firm needs to shrink rapidly and then rebuild on a more solid base. It will be a mammoth effort to fix the problems here but again, I believe that Mr. Schwartz can do this," Punk Ziegel's Bove said. Shares of Bear Stearns closed down 7 percent at $71.01 in Tuesday trading on the New York Stock Exchange.

As you may recall sky, the market ran up back in August (maybe Sept.) on the rumor that Buffett was considering buying Bear. Of course, it turned out it was Jimmy Buffett and it was while he was binging on margaritas. (I cut a deal with my writers RD)

Edited by milbank, 09 January 2008 - 01:02 PM.

Well one probably has to be in some state of drunkness to buy these.