More on the Bear Stearns Valuation

Posted on March 22, 2008


At market close on Thursday, Bear Stearns was trading at nearly $6/share, yielding a market capitalization of just over $800 million, nearly a tripling of the publicly-announced offer of $2/share ($236 million) from last weekend.

The general consensus indicates that the real estate owned by Bear Stearns in New York City is worth about $1 – 1.3 billion. On March 16, Paul Kedrosky wrote that that this real estate asset would account for a large portion of the sale price.

If this is the case, some things still don’t add up to –

1. At the original sale price of $2/share ($236 million), it seems that JP Morgan was buying a $1 billion real estate asset for about 25% of market value. There are proponents of the $236 million price tag that argue that JP Morgan is “buying the stock, not the assets.” In the simplest terms however, when you own a stock, you own a share of the company. When you own a share of a company, you own a share of all of its assets. This is the basis of intrinsic valuation.

This is my fundamental position againt the low valuation. I agree that Bear Stearns is not worth the $20+ billion when BSC share traded at $170, but their largest underlying real estate asset is worth more than $236 million.

2. What about the human capital at Bear Stearns? The company paid $3.4 billion in compensation in 2007 (according to their 10K). Assuming that anyone worth their salt has left the company by now, you can probably estimate that the remaining human capital still with the firm by the time this shakes out is worth some value of what they were paid in 2007. Let’s call it 10%, which provides a current human capital value of about $340 million.

By these estimates, assuming all other assets in the company are worthless:

Real Estate + Remaining Human Capital = Total Current Value of Bear Stearns


$1 bln + $0.340 bln = $1.340 billion, which calculates to $11.35/share. Given the risk profile of BSC right now, JP Morgan could justify a discount, a “risk incentive” to take the shares at a price slightly below this level.

So with a share price at the $6/share area and a secondary market valuation of about $800 million, we’re getting warmer. But it’s not surprising to see current shareholders balk at the $2/share originally proposed.