JP Morgan Buys Bear Stearns For Pennies On The Dollar; What's It Mean For Tech?

from the bubble-bursting-or-economic-collapse? dept

Mon, Mar 17th 2008 12:13am — Mike Masnick

While not strictly a technology story, JPMorgan's buyout of Bear Stearns on Sunday is worth looking at in the larger context of the tech industry. As you hopefully know by now, JPMorgan picked up Bear Stearns for $2/share, a total of $236 million, which is (quite literally) pennies on the dollar for a firm that not so long ago was valued at $170/share and on Friday alone had tumbled from about $55/share to $30/share. On Friday, of course, the Fed stepped in to keep Bear Stearns alive (through JPMorgan) and the weekend was spent trying to figure out options before the Asian markets could open late Sunday night (US time). There will be plenty of Monday-morning quarterbacking on this deal (so it's fitting that it all played out on a Sunday), but the discussions about the impact on the tech world has been mixed if anything. It would be great to get the perspective of some readers on how this is likely to play out for tech companies (both big and small). While many may be somewhat isolated from a meltdown on Wall Street, there certainly are some important indirect connections. From what I've seen, it doesn't seem like there will be much short-term impact, but the longer-term issues could be worth watching out for.

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Filed Under: bailouts, failures, financial services, panic, wall street
Companies: bear stearns, jp morgan

25 Comments

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Ethan Bauley, 17 Mar 2008 @ 12:56am

Lesson for Tech People:
To me, the lesson is:

Start focusing on solving real problems (not just finding a new flavor of advertising, fixing the music industry, or some lame office productivity app).

The Street is only one area where opacity, moral hazard, and other industrial-age hallmarks of unsustainable capitalism continue to fester...
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Anonymous Coward, 17 Mar 2008 @ 1:05am

Bear needed to cut it's exposure to the sub-prime mortgage market. Things must be real grim.

I wonder about Lehman.
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Guy McEvoy, 17 Mar 2008 @ 1:12am

Impact on Techs
A few good and bad impacts of this end of the current business cycle if you work in IT:

- Good: Credit is a whole heap harder to get. There are an army of IT workers out there who are currently 'between jobs' as a result of either some cowboy buying their parent company on a leveraged deal (i.e. a loan) and extracting the value by outsourcing/offshoring/downsizing 'non-core' activity - OR from the existing board doing precisley that to themselves before someone else comes in and does it to them. Only sovereign wealth funds will be able to play that game now (and there are fewer of them) so people will be able to make strategic investments that play over the longer term again without obsessing about quarter to quarter margins. Heck, they may even be willing to invest in their 'own' IT guys again rather than seeing them as an outrageous luxury.

Bad:

- If you're an entreupreneur looking at a Tec start-up your potential funding just got much, much harder.

- (superbad!) If the company you work for has a large amount of debt the options for refinancing that debt just got far harder. This could precipitate a bloodbath in the economy as finance directors run out of options to keep cashflow alive. Bottom line - many companies (big and little) are going to go under and take the IT guys with them. As a natural pessimist I fear that this will far outweigh any benefit from the good point above.!
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friday, 17 Mar 2008 @ 1:17am

$$$
Dude, JPM is making out like a bandit... $2 a share! For a company of JPM's size they can afford that and will be able to integrate it into their business pretty well.
As for the impact on tech stocks, I don't really see one. We have seen this many times before (especially in tech), there is a crisis, people get scared and sell things very cheaply.
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Chris Maresca, 17 Mar 2008 @ 1:28am

Re: Impact on Techs
This will have zero impact on funding as there is little relation between the two. If anything, it'll be like oil or the euro. All that money needs somewhere to go.

Besides, there's already too much money in SV and not enough good ideas.

Chris.
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Iron Chef, 17 Mar 2008 @ 1:47am

Mindset
Asked: "Is not commercial credit based primarily upon money or property?"
"No sir," replied Morgan. "The first thing is character."
"Before money or property?"
"Before money or anything else. Money cannot buy it...Because a man I do not trust could not get money from me on all the bonds in Christendom."

"Remember, my son, that any man who is a bear on the future of this country will go broke."

- John Pierpont Morgan
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Anonymous Coward, 17 Mar 2008 @ 4:20am

Canary in the Coal Mine
This is the tip of the iceberg, more consolidations to follow. While I see that it's a part of the business cycle, I think (fear) this is a signal that the current downturn will get much, much uglier for the economy-at-large. I don't see how this affects Tech much differently than other segments. Our saving grace may be that this bubble bursting wasn't of Tech's making (ala 2000-01), and we'll be affected the same as every other segment instead of being on the knife's edge like last time.
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Anonymous Coward, 17 Mar 2008 @ 5:06am

Watch banks carefully.
- I use a small local bank (6 offices total). That bank should have minimal exposure to the sub-prime issue. However, the bank is putting on the very hard sell to all it's customers to change the terms of any deposit account (savings/CD's etc) to allow the banks to take the principal as "fees". Clearly the bank is anticipating extremely hard times and looking to pad the executives lifestyles by tapping the depositors savings. Thus, I'm convinced that things are going to get very bad.
- I'm thinking a nice pad of cash in the mattress. Inflation will be a problem, but, cash won't be eaten up by banking exec's. keeping their high lifestyle going (through banking fees).
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Lucretious, 17 Mar 2008 @ 5:14am

evidently part of the deal includes the NYC skyscraper. If JP Morgan can turn it around they will have made the deal of the century.
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Haywood, 17 Mar 2008 @ 5:46am

Re: Watch banks carefully.
So long as people don't wise up on debit card overdraft, the execs should be ok. I know entirely too many people who have horror stories where their pay check was nearly gone in fees before they got it. Stupid perhaps, but it is one thing when you read or hear about it, but is much more common if you know several people to whom this has happened (Haywoods Law).
I recently watched a fellow in line in front of me have exactly that happen, they told him he had like $50 coming from his pay check, the rest was going overdrafts and fees. A $0.01 overdraft = ~ $25 in fees, it adds up when you are using your debit card for a pack of gum, & a coke.
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Steve R. (profile), 17 Mar 2008 @ 5:50am

Bear Stearns and Tech
The most obvious implication is "regulation". Companies scream please don't regulate us, let the free market work. Unfortunately, once again, companies (in this case the financial institutions) have demonstrated that they lack the self-control to operate in an open and honest fashion. Short term greed for corporate managers over long term sustainable corporate growth.

In the tech world, the current debate over net neutrality is similar from the "regulation" perspective. Companies such as Comcast and AT&T say "don't regulate us". The free market will "guarantee" that the ISPs will not "interfere" with internet packets. Well Comcast has already been "caught" "shaping" packet flows. As these corporate "mistakes" become exposed and accumulate, the natural "knee jerk" reaction will be to impose corrective regulation.

Like the financial institutions hiding the true value of the collateralized debt from the public, the tech industry is hiding the real implications of how the unregulated net neutrality will be managed by them. It has taken nearly five years for the growing credit bubble to burst. Now that it has, regulatory legislation will soon follow.

In terms of the tech world (net neutrality) it is probably too soon for the "bubble" to figuratively explode. When it does, regulation will soon follow.
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Santiago Crespo, 17 Mar 2008 @ 5:51am

Many consequences for the tech industry
Many overseas outsourcing companies have invested in securities in the US to avoid taking the profit back to their countries, which usually have higher taxes and shakier investment environments than in the US, what might happen is that many companies may withdraw that money from the American market, which will most certainly have an impact on the economy in general, as small as it may be. A more direct impact on the IT economy is that a weakening dollar makes Europe much more valuable than the US for some of these companies, so they might turn to Europe for customers or raise prices for their US clients, which will increase costs for many American companies, thus reducing their profits.
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Anonymous Coward, 17 Mar 2008 @ 5:52am

Re: Lesson for Tech People:
Commie Bastard! :P
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Lucifer, 17 Mar 2008 @ 6:14am

Re: Re: Watch banks carefully.
Benefits of a cash-less society-- Excellent, very very excellent!
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Anonymous Coward, 17 Mar 2008 @ 6:32am

At some point, Americans will wake up and notice that it's NOT the global economy that's suffering...it's the American Dollar. Why is the price of everything in America rising but not elsewhere??? Maybe because the government has been allowed to print more money whenever they want. Now it's come back to bite them in their collective arses. Unfortunately, the American Citizens are the ones who are going to suffer.

I truly hope all American Citizens noticed this problem back when in started and began picking up gold/silver when they could...it may be the only thing to get you through when the next Depression hits (which will be as soon as the other global economies finish cutting the ties to Wall Street so they can stop propping them up).
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Steve R. (profile), 17 Mar 2008 @ 6:42am

Dollar is undergoing a deevalution
I was considering making this point. Few people realize that the "rising" price of commodities such as gold, oil and the rise of the Euro is a demonstration that the dollar is falling in value. Our deficit spending is finally catching up to us. Our hubris, however, will not allow us to admit it.
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dan, 17 Mar 2008 @ 8:00am

Bear Stearns
I think the fall out will lead to questioning the banking industry in total. With the lockout that some startups have had in getting their money out of the banks (reported last week), this will not only influence startups, but the VC's and angel funds as well. The increase in credit card business rates to 29.99% (Capital One business card fine print), along with the quickly unraveling housing market and pressure on oil prices, this will be an interesting ride because people are going to be distracted by the "crisis".

This leaves startups not just looking for money, but trying to gain attention to their products/services as well as the threat of their banks locking money so that they can not pay bills or payroll.

It is a very interesting situation, the more money gets locked, including VC/Angel money, the harder time startups are going to have.

The positive side of this, social networking is going to boom if a pile of unemployed people start using facebook and linked in to help them find jobs. Talk about getting support from your friends.

My 2 cents.
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Matt Bennett, 17 Mar 2008 @ 8:59am

Well, I sell enterprise software to investment banks and hedge funds. (Is plugging bad? www.streambase.com) Both companies involved are accounts of mine. Obviously any deal I might have had with Bear Stearns are toast, but JPMorgan deals I may or may not have had might not go so well either, just due to the chaos it causes. In general the Street is in a panic, people are less likely to buy, and everyone is just going to be battening down the hatches.

On the other hand, some customers of mine are Hedge Funds that largely do better the higher the volatility. Times might be good for these folks.

Some uses of my product involve better, more real-time position-keeping, meaning a company is less likely to get into this sort of mess. It's all hindsight but sometimes peoples' ears perk up a bit more at things like that in times like these.

And lastly, there's argument that a product like mine, that helps you do more work with less man-hours, can help people deal with a reduced work-force keep up the same output.
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Mike (profile), 17 Mar 2008 @ 9:00am

Re: Impact on Techs
- If you're an entreupreneur looking at a Tec start-up your potential funding just got much, much harder.

This is the one that I'm trying to understand, because I don't see the direct impact. Most VCs have plenty of funds raised and committed from GPs, and those GPs tend to be things like pension funds and university endowments. The direct link to i-banks seems minimal. So why is it going to be that much more difficult to get funding?
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Jay, 17 Mar 2008 @ 9:42am

Re: Dollar is undergoing a deevalution
Should the dollar continue to fall, I wonder how long it'll be before everyone starts outsourcing TO the US?

This is already the reason cited for BMW's expansion in the US.

http://www.cnn.com/2008/BUSINESS/03/10/bmw.jobs.ap/index.html
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dan, 17 Mar 2008 @ 9:55am

Re: Re: Impact on Techs
Depends on how the bank locks the money, and if the startup, vc,gp, angel fund can actually get to the money they have in the banking system.
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Lisa Post, 17 Mar 2008 @ 1:13pm

Time to focus on the fundamentals
With such uncertainty in the financial markets, it is time to focus on core values, core products, and retaining quality people.
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Uncle Sumer, 17 Mar 2008 @ 2:25pm

jp morgan buys bear stearns...
Obviously few of the commentators here suffer from any great degree of naivette, but don't any of you consider the U.S.A.'s "war" 'in' Iraq, and the billions soaked up by corporate- contractors there-abouts, as a spending sinkhole? Why do you think it was deemed neccessary to mortage the lower & middle- middleclasses into more debt, along with the "lower-on-the-food-chain"- brokers; ie: to increase the supply of the world's #1 tradable commodity: DEBT ?
Of course, the real "war" is for our minds, -to control the impulses and beliefs of the zeitgeist, which has the analogous breadth of the floating cursor on a computer display... our critical consciousness ought to compare at least to the active window running a program, but our sense of progression and process through currents of history has been atrophied and skewed.... Marshall McLuhan is still required reading, global villiagers! Be you semioticly savant, technocratic-peasant, or global-villiage idiot; if you are reading this, you should study the insights of sage McLuhan, kidz!
((-keep diggin' in th' dirt, plant a few flowers where ya can, eh?-)) -Unk S
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T. Bone Rich Bastard™, 17 Mar 2008 @ 4:09pm

Look, you little people need nothing more than some good ole fashioned TeeVee and some of them TeeVee dinners. For too long y'all have been dining in restaurants that betray your plebian peon status, and living in houses that are too big. So to fix this mess y'all are gonna have to move to trailer parks, eat burgers, and watch 'merican Idle. We will take care of the money problems by cuttin' taxes for us and cuttin' jobs for y'all.

Have nice day, ya hear?
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Matt Bennett, 18 Mar 2008 @ 8:25am

Seriously? The both of you?
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