Betting against Bear: short sellers profit

Mar 19, 2008 @ 10:58 am

By Aaron Elstein

Shares in Bear Stearns Cos. continued to rise Tuesday, moving well beyond the $2-per-share price set by JPMorgan Chase & Co. to acquire the stricken brokerage firm, according to Crain's New York Business.

Bear shares rose by 33% in mid-afternoon trading Tuesday, to $6.36 a share. They traded as high as $8.50 earlier in the day.

When stocks in takeover situations trade above the deal price, it ordinarily means investors are anticipating a higher bid.

But in the case of Bear, itís probably more a case of investors closing their books after successfully betting on the firmís demise.

While itís not impossible that another firm could attempt to trump J.P. Morganís bargain sub-basement bid for Bear, the list of candidates is awfully short.

Louis Meyer, a merger arbitrage specialist at brokerage firm Oscar Gruss & Son, believes that Wachovia Corp. could make a run at Bear, though he says the North Carolina-based bank is still digesting its recent acquisition of brokerage house A.G. Edwards and would be a poor cultural fit with Bear.

Mr. Meyer says Citigroup is also unlikely to bid, considering that a new management team has its hands full trying to turn around the big bank.

He adds that itís unlikely the federal government would agree to a foreign buyer acquiring Bear.

ďI just donít see any alternative to the J.P. Morgan offer,Ē Mr. Meyer says. ďIím sure plenty of people at Bear are hoping for one.Ē

J.P. Morganís merger agreement gives it the right to buy up to 20% of Bearís shares at $2 each, a stake large enough to allow it to block other potential bidders. In addition, J.P. Morgan has the right to acquire the firmís Madison Avenue headquarters if the deal falls through.

Given those terms, not to mention the fact that the federal government has already blessed the J.P. Morgan offer, the odds of another bidder materializing are remote.

Instead, the rise in Bearís share price may be related to short sellers, or investors who profit when stocks fall in price.

Short sellers profit by selling shares borrowed from a broker, which they hope to replace later with stock at a lower price.

To close out their position, short-sellers need to buy shares to repay their broker loans.

About 19% of Bearís 115 million available shares were in the hands of short sellers as of the end of the last month, according to Yahoo data, suggesting plenty of investors bet big against the firm and profited enormously from Bearís misery.

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