Bear Stearns deal proponents, including bondholders, push stock beyond JP Morgan's $10 offer

By Paul A. Harris

St. Louis, March 24 - The week got underway with JPMorgan Chase & Co. quintupling its bid for Bear Stearns Cos. Inc. to $10 per share from $2.

In a Monday morning press release, JPMorgan Chase spelled out an amended merger agreement which, according to an equities analyst who covers the financial sector, appears sufficient to get the deal across the finish line.

Under the revised terms, each share of Bear Stearns common stock would be exchanged for 0.21753 shares of JPMorgan Chase common stock, up from last week's offer of 0.05473 shares.

The implied value is approximately $10 per share based on the closing price of JPMorgan Chase common stock last Thursday.

In addition JPMorgan Chase will purchase 95 million newly issued shares of Bear Stearns common stock, or 39.5% of the outstanding common stock after that issuance, at the same price as provided in the amended merger agreement. The deal is expected to be completed on April 8.

Both boards of directors have signed off on the amended deal and will vote their Bear Stearns shares accordingly, according the Monday press release.

The analyst who covers stocks in the financial sector said that with JPMorgan Chase acquiring a 39.5% stake, and Bear Stearns bondholders presently owning a "considerable chunk" of Bear Stearns shares, JPMorgan appears to have the deal locked in.

Notwithstanding JPMorgan's $10 revised bid, Bear Stearns shares (NYSE: BSC) closed the Monday session at $11.25, higher by $5.29, or 88.76%, on the day.

Meanwhile a hedge fund source, noting that Bear Stearns shares peaked around $13.20 in Monday intraday trading, said that parties to the deal, as well as Bear Stearns bondholders, are likely buying shares to push the pro-JPMorgan Chase deal stake over the 50% threshold.

The hedge fund source pointed out that the amended deal announced Monday gives JP Morgan Chase a 39.5% stake, and board members control another 5%, leaving the proponents of the JP Morgan bid 5.5% short of the 50% mark.

"You can bet that the bondholders want to see the JP Morgan deal succeed," the hedge fund source said, adding that it could mean as much as 500 basis points to those bondholders in the face of a competing bid from a party that harbors less magnanimity toward Bear Stearns' lenders.

Once the proponents of the JP Morgan deal top the 50% mark, the hedge fund source looks for Bear Stearns shares to settle back toward $10.

JPMorgan Chase, shares, meanwhile, (NYSE: JPM) closed Monday at $46.55, up $0.58 or 1.26%.

The Bear Stearns news sparked a rally in U.S. stocks on Monday.

Share prices were seen higher throughout much of the financial sector.

Bank of America Corp. (NYSE: BAC) gained $0.60, or 1.43%, to close at $42.46.

Citigroup Inc. (NYSE: C) gained $0.77, or 3.42%, to close at $23.27.

An exception was Lehman Brothers Holdings Inc., which saw its share prices drop by 4.13%, or $2.01, to close at $46.64.

Icahn sues Motorola, proposes slate

Elsewhere Monday, Carl Icahn urged stockholders of Motorola, Inc. (NYSE: MOT) to elect his slate to the company's board of directors.

Icahn's slate includes Frank Biondi, Jr., William R. Hambrecht, Lionel C. Kimerling and Keith Meister.

According to a special situations equities analyst the company previously offered Icahn two seats - a move that Icahn rejected.

In addition, Icahn filed a lawsuit on Monday in the Court of Chancery of the State of Delaware seeking a court order requiring Motorola to make certain materials available for inspection.

In a press release he stated: "Over the past 12 months the statements and predictions of Motorola's management and the board about mobile devices business have too often proven to be wrong. We want to ascertain what the board could have done in the exercise of its fiduciary duty to assure Motorola stockholders that Motorola's statements and predictions were not incorrect and would not provide Motorola stockholders with an inaccurate perspective on the prospects for the mobile devices business.

"We demanded these materials for the purposes of enabling us to investigate whether and to what extent the board of directors of Motorola failed in their duties as directors in supervising management and setting policy and direction of Motorola. We intend to share with Motorola's stockholders information obtained pursuant to the request as part of our proxy battle with Motorola. Motorola has responded that they will not comply with our demand."

Icahn requested, among other items, board and committee minutes and documents relating to the service and selection of Motorola's senior officers. The investor also requested information about the prospects or strategy of Motorola's mobile devices business as well as the potential spinoff of the mobile devices business.

An analyst who covers the wireless space recounted that Icahn has been in and out of Motorola stock, beginning with a 1% position in and gradually building to 6 ½%.

The analyst commented that Icahn initially directed his ire toward former Motorola CEO Ed Zander. However lately Icahn's ire extends to the entire board.

"He would first of all like to see the stock price bump up," the analyst said.

"But he would also like to see enough disgust among shareholders so that they would actually throw in their lot with him."

The analyst also contended that the plans which present management is contemplating don't differ all that much from Icahn's apparent wishes.

"He wants the handset business to be spun off, with an independent CEO in place," the analyst said. "Management has said they are contemplating that."

Motorola shares (NYSE: MOT) gained 4.76%, or $0.44, to close at $9.69 on Monday.

The analyst pointed out that in October 2006 those shares traded above $26.

"This is a great brand," the analyst said.

"Until recently this company was number two globally in the cell phone market. At one point Motorola was shipping 65 million handsets per quarter. Then a few quarters later they were shipping 35 million.

"It went downhill very fast."

Much of the wireless sector enjoyed the Monday stock market rally.

Research In Motion Ltd. (USA) (Nasdaq: RIMM) outperformed the index by advancing 6.57% to close at $111.83, up $6.89.

The Nasdaq gained 3.04% on Monday, up 68.64 points to close at 2,326.75.

Meanwhile Nokia Corp. (NYSE: NOK) gained 3.41%, or $1, to close at $30.30.

And Alcatel-Lucent (NYSE: ALU) gained 3.78%, or $0.20 per share, to close $5.49.

Capital Senior Living forms special committee

Elsewhere on Monday Dallas-based Capital Senior Living Corp. (NYSE: CSU) announced it will expand its board to nine members from seven members in order to add two new directors proposed by company shareholders.

The company will also form a special committee to explore strategic alternatives.

The senior living communities operator announced that the new directors will be Harvey Hanerfeld, who will serve a term expiring in 2010, and Peter Martin, who will serve a term expiring at the 2008 annual meeting. Mr. Martin will also be included in the company's slate of board nominees to stand for election at the 2008 annual meeting, together with Lawrence A. Cohen, chief executive officer, and Craig F. Hartberg.

Hanerfeld is a co-founder of West Creek Capital, LLC which reported on March 11 that it owns 1,706,650 shares, or 6.4%, of Capital Senior's outstanding shares.

Martin is currently a portfolio manager at Matthes Capital Management which owns 444,600 Capital Senior shares, or 1.7%.

The special committee, meanwhile, will consider strategic alternatives including a sale of the company for cash or stock, a going private transaction, a restructuring of Capital Senior's portfolio which may include sales and/or acquisitions of assets, a merger with a private company in which Capital Senior's stockholders may or may not retain a majority equity interest in the surviving entity, and/or a share buyback or dividend.

The special committee will be comprised of the two new directors along with James A. Stroud, Lawrence A. Cohen, and James A. Moore, an independent director.

Capital Senior Living (NYSE: CSU) shares gained 5.17%, or $0.43, to close Monday at $8.74.

Less than a year ago those shares traded well above $12.

An analyst who covers health care and senior housing commented that during 2007 Capital Senior acquired assets financed with short-term capital, and has encountered the customary challenges as it attempts to refinance that short term debt in the present credit markets.

Elsewhere in the senior housing sector Brookdale Senior Living, Inc. (NYSE: BDK) saw its shares advance 8.71%, or $1.97, to close at $24.60.

Meanwhile Sunrise Senior Living, Inc. (NYSE: SRZ) shares were up 11.88%, or $2.43, to close at $22.88.

L-1 to acquire Digimarc ID business

L-1 Identity Solutions, Inc. (NYSE: ID - News), announced Monday it will acquire the ID systems business of Digimarc Corp. in a stock and cash transaction valued at approximately $250 million.

The deal, which is expected to close during the second half of 2008, has been approved by the boards of each company.

Digimarc stockholders will receive approximately 50% of the purchase consideration in shares of L-1 stock and 50% in cash. Digimarc stockholders will also receive shares in a new company called Digimarc that will holding its digital watermarking business. The cash consideration is approximately $120 million. The number of L-1 shares to be issued will be based on the average price of the stock over the 20 consecutive trading days ending five days prior to closing of the transaction, and will be fixed at approximately 10.3 million shares if the average trading price of L-1's stock is between $11 and $14. If the price of L-1 shares exceeds $14 per share, the number of shares to be issued will be reduced. Under the definitive agreement, the maximum number of L-1 shares that can be issued is 11.3 million.

Digimarc shares (Nasdaq: DMRC) closed Monday at $11.13, up $2.67 or 31.56%.

In the press release Robert V. LaPenta, chairman and CEO of L-1, commented: "The synergies between our secure credentialing businesses make this a natural combination and one that will deliver great benefit to our customers and the industry."

Meanwhile L-1 Identity Solutions shares (NYSE: ID) gained 3.87% to close the Monday session at $13.15, up $0.49.

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