Commentary: Bear Stearns: Worth Its Asking Price?by
Ask a Wall Street chief executive if he's willing to sell his firm and you'll usually get a stern brush-off. But when Salomon Smith Barney brokerage analyst Guy Moszkowski popped the question to The Bear, Stearns Companies Inc. CEO James E. Cayne on July 20, the answer was "yes"--for $120 a share.
It's a startling price. It means a potential suitor would have to pay more than double Bear Stearns' recent $52 stock price. Or, four times the firm's current book value. That's far more than any acquirers have been willing to pay for a sizable U.S. securities firm to date. So is it totally off-the-wall--or is there a glimmer of reality to such an asking price?
QUICK FIX. Sure, European banks like BNP Paribas, Societe Generale, Commerzbank, Dresdner Bank, and HSBC are all on the prowl for quick fixes to boost their investment banking clout in the U.S. as well as to gain entree to American retail and institutional investors. Meanwhile, only a handful of acquisition candidates remain independent among U.S. investment banking firms.
After all, the Swiss bank UBS just offered to pay 3.4 times book value to acquire PaineWebber. "At first blush it seems like an awful lot since Bear Stearns' stock is trading at 1.5 times" book value, says Moszkowski. "But on the basis of Wall Street's consensus forecast for next year [the price] would be 18 times earnings. PaineWebber is going for around that multiple."
But Bear Stearns' business lines, on the other hand, make it one of Wall Street's less attractive potential partners. It has dwindling shares in the global underwriting of initial public offerings and U.S. debt and equity issuances. And analysts say that it doesn't have a sterling list of institutional clients or the investment banking muscle in hot areas such as mergers and acquisitions.
Instead, Bear Stearns' strengths are its trading and clearing capabilities. But even its clearinghouse has been stung by criticism for its alleged involvement in a securities fraud scheme with A.R. Baron & Co. "European banks are interested in purchasing investment banks in the U.S.," says Chris Ellerton, a banking analyst at UBS Warburg in London. "But Bear Stearns wouldn't be a transformational deal for any of them."
European banks would also find it difficult to integrate the firm's quirky culture. While the firm is known to generously reward star employees, Bear Stearns' management has also been known to pay attention to every cost, right down to the paper clips. "The culture would be hard to tolerate," says Steven Eisman, banking analyst at CIBC World Markets. "It's a bit of a wild place."
NOT TOP TIER. Of course, buying may be better than trying to build from scratch. No European firm has succeeded in building up a serious presence in American investment banking on its own. Hence, Credit Suisse picked up First Boston and Deutsche Bank has snatched up Bankers Trust. And although its divisions aren't in the top tier of their respective segments, Bear Stearns does have sales, research, trading, and investment banking capabilities. "That's not easy to replicate," points out Dean Eberling, analyst at Keefe, Bruyette & Woods.
In the end, Bear Stearns may get closest to its asking price by biding its time. True, the firm is not the ideal choice for European banks. And Cayne's asking price may be too high. But Europe's financial giants better hurry to choose their dance partners. Otherwise, they may find there's no one left at the ball.