Bear Stearns may be attractive for JPM, BofA, HSBC

Banks including JPMorgan Chase, Bank of America and HSBC might be interested in buying Bear Stearns Cos at the right price, but there would be real obstacles to a deal happening anytime soon, analysts said.

Bear Stearns, the fifth largest Wall Street broker dealer by market value, has been cited as a potential takeover target after its leading position in mortgage trading has proven to be a liability as the subprime home loan market suffers from big delinquencies. Bear's shares have fallen 30 percent this year.

But Bear Stearns would likely prefer not to sell itself when its shares trade at such a low valuation, and there are few obvious buyers that would be a perfect cultural or business fit, analysts said.

With the company's stock down ... and liquidity concerns swirling around it, the senior management and board of directors could be contemplating how to quickly stabilize the situation, wrote CreditSights analyst David Hendler in a note. Selling could be an option, Hendler added.

Wachovia Corp would probably jump at this opportunity, Hendler wrote, yet it is tied up with its acquisition of mid-sized brokerage AG Edwards Inc, which is slated to close in the fourth quarter, and California thrift Golden West, which closed in October.

JPMorgan Chase & Co and Bank of America Corp might also be interested, analysts said. JPMorgan Chase might be interested in Bear Stearns' global clearing business, which includes one of the top-ranked prime brokerage businesses in the United States.

JPMorgan is much smaller in the prime brokerage business -- or financing and clearing trades for hedge funds -- than many of its peers and acquiring the Bear Stearns unit could be a way to quickly boost that business, said Lee Delaporte, analyst at Dreman Value Management, which has $22 billion of assets under management.

Bank of America might also be interested in bolstering its investment banking operations, which are less robust than Citigroup's or JPMorgan Chase's, said an investor who asked not to be named.

Spokesmen for JPMorgan, Bank of America and Wachovia declined to comment.

Two Bear-managed hedge funds that invested in subprime- linked securities have shut down and a third had to close redemptions from investors.

The company held a conference call on Friday to assure investors of its viability, but said the shock waves hitting lending markets were the worst in more than 20 years. Bear also announced the departure of its co-president Warren Spector, on Sunday.

WATCHING EVERY CLIP

Internationally, HSBC might be a good cultural fit for Bear, because both are run by managers keen on cost control.

You're talking about two companies where management saves every paper clip, said James Ellman, a portfolio manager at financial services hedge fund Seacliff Capital.

But HSBC is also wrestling with its own exposure to the U.S. subprime market. The bank took a charge for bad debts of $6.35 billion in the first half of the year, up 63 percent. A spokeswoman for HSBC declined comment.

Bear Stearns has spoken to China-based investors about buying an equity stake or setting up a joint venture, according to the Wall Street Journal. But multiple U.S. banks are pursuing that avenue now, and Bear may not be the most attractive to the Chinese, the paper added.

Concerns about Bear's subprime exposure will likely keep most U.S. investment banks away and may keep everyone away until more clarity emerges about the full cost of Bear's exposure to subprime mortgages, analysts said.

Selling at this juncture also might be difficult for Bear's managers to stomach. As of March, Chairman and Chief Executive James Cayne owned about 6 percent of the company.

The company's shares rose 5 percent on Monday to close at $113.81, or about 1.2 times their May 31 book value.

Why would they sell at one times book if they can wait a few years and sell at two times book? Ellman said.

But Dreman's Delaporte noted that book values may be declining if Bear writes down subprime assets, making price-to-book ratios higher than they appear now.

The unknown right now is, what is their book value? Delaporte said.