Bear Stearns May Become Takeover Target Amid Unrest
By Jessica Hall
PHILADELPHIA (Reuters) - Bear Stearns Cos Inc's (BSC.N: Quote, Profile, Research) 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 is expected to replace James Cayne as chief executive, but Cayne would remain chairman, according to media reports. Bear Stearns could not be reached for comment.
Appointing 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.
Cayne has been under fire since two Bear-run hedge funds collapsed last summer. Bear Stearns also had 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 would follow other heavyweight casualties on Wall Street, including former Citigroup Inc Chairman Charles Prince and Merrill Lynch & Co's Stanley O'Neal, who were forced out 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.
Schwartz joined Bear Stearns in 1976 after an injury prevented him from becoming a professional baseball player with the Cincinnati Reds, according to media reports.
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 Nov. 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 were down $2.42, or 3.17 percent, to $73.83 in afternoon trading on the New York Stock Exchange.
(Additional reporting by Ed Leefeldt, Jonathan Stempel and Joseph A. Giannone in New York; Editing by Derek Caney, Phil Berlowitz, Toni Reinhold)