JP Morgan (JPM) agreed to buy Bear Stearns (BSC) for $2 and the stock is trading near $7. What’s going on? Likely, several factors, the last two of which were supplied by Fortune’s Roddy Boyd:
- JP Morgan stock is up about 5%, so the value of the buyout is now just north of $2. This buys you about a dime
- Some traders believe Bear Stearns shareholders will block the deal, extort a higher price out of JP Morgan or another bidder, or find a way for Bear to survive on its own. One can always hope, but we’ve listed some reasons here why they probably shouldn’t take this thesis to the bank.
- Hedge funds who have sold Bear Stearns credit default swaps (CDS) are accumulating stock so they can vote in favour of the deal–so they can be certain their CDS bets will pay off (Fortune has details here)
- Holders of Bear Stearns debt are buying stock to vote in favour of the deal so they can be certain they won’t be stuck fighting other creditors for the remnants of Bear Stearns should the firm file for bankruptcy.
Take that all together and it’s a lot of buying power. It’s not sustainable buying power, however, and it is not reflecting a consensus opinion that Bear Stearns will be able to command a higher deal price.