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Nye Lavalle

Bear Stearns Buzz Swirls
List of Possible Suitors Seems
To Fall Short of Rumors;
An Appealing Target?
August 23, 2007; Page C12
Who wants Bear Stearns? Wall Street is abuzz with talk the brokerage firm is seeking a buyer -- gossip the firm won't dignify with a response. It wouldn't be a big surprise if Bear did sell itself. The collapse of its two highly-indebted subprime-heavy hedge funds in June has tarnished its reputation. The investment bank's stock has plummeted 40% from its high.

With its market value hovering around $14 billion, Bear could make a tasty morsel for several firms. A new owner might even feel that a dose of hands-on management could help boost the bottom line -- perhaps by spotting new opportunities that golf and bridge-playing aficionados like Chairman James Cayne, and his now-departed heir apparent Warren Spector, overlooked.

The list of suitors could be shorter than the persistent rumors might suggest. HSBC Holdings is one name that keeps cropping up. The British megabank has deep pockets and a reputation for rather short arms. In theory that ought to make Bear Stearns an appealing target. Bear is trading today at about 1.2 times book value -- or assets minus liabilities -- the lowest such multiple in 12 years.

But HSBC has been scaling back its investment-banking ambitions again recently. Moreover, roping in Bear arguably wouldn't add enough heft in Europe or Asia. The truth is that HSBC can afford to wait for a more full-service Wall Street firm with a global footprint, such as Lehman Brothers or Merrill Lynch, to become available.

Deutsche Bank is about the only German financial institution with the wherewithal to buy another Wall Street firm. Yet it already has a large U.S. business that would duplicate much of Bear's fixed-income business, as do Swiss rivals Credit Suisse and UBS. As for the French banks, they've had little success buying their way in to the U.S. -- Société Générale's painful experience with Cowen is a case in point.

Barclays might be willing to try. Under boss Bob Diamond, Barclays Capital has become a powerful European force in the bond business. Snapping up Bear would transform the United Kingdom investment bank's U.S. presence in credit and mortgages, and hand it ready-made, if small, M&A and equities units relatively cheaply. And should its parent succeed in its bid for ABN Amro Holding, Barclays Capital would, on paper at least, have a formidable investment banking franchise around the world.

Closer to home, Bank of America and Wachovia might be potential bidders. The two Charlotte, N.C., banks have each spent several years, and several billion dollars, trying to build their own investment banks, with limited success. Folding in Bear's businesses could act as a fillip to their own efforts, although it wouldn't do much for their overseas ambitions. Still, both would probably find Bear's private-client business and its prime brokerage -- which serves hedge funds -- highly attractive.

There's always the possibility of a wild card offer from the likes of Spain's Banco Santander, Italy's Unicredito, or even one of the Canadian banks -- none of which have much of an investment-banking business outside of their home markets but have often intimated an interest in bulking up.

And China is taking an interest in America's financial system. A government-controlled investment company took a near 10% stake in buyout shop Blackstone Group earlier in the summer. Though a full takeover might raise hackles in Washington, talk of a Chinese bank buying a minority stake in Bear has persisted for more than a year.

Of course, potential buyers may have good reasons to hold off on any move. Bear's value could fall further. Because it is less diversified than its rivals, a prolonged downturn in mortgages, credit and servicing hedge funds would hurt the firm disproportionately. Finally, it could be hard getting Bear's largest block of investors -- its employees -- on board. They own 40% of the company, and are unlikely to be keen to sell out at what must already look to them like a fire-sale price.
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