Company Commentary
How Much is Bear Stearns Really Worth?
By Rick Rouse
Mar 25, 2008 - 11:07:15 PM

After writing an article on Bear Stearns (BSC, $10.94, down $0.31) this morning, many of you shot me an email asking my opinion on what the company was really worth.  I said that Bear "might be able to squeeze a few more dollars" out of JPMorgan (JPM, $46.06, down $0.49) by the time a deal "officially" gets done.  Well, many of you gave me your predictions as well.  That is what makes the market so great and that is why stocks (and options) always move with supply and demand.  I decided to do a follow-up article because many of you had higher predictions than what the current stock price is.  In fact, the Wall Street rumor mill has Bear Stearns going as high as $65.  That's one analyst's opinion anyway.  Given this scenario, that's more than a "few more dollars" and makes going long a Bear Stearns call option a high risk/ high reward play.  Because I just got back from a recent trip to Vegas, I'm feeling lucky and took a look at the "jackpot" payout if Bear Stearns trades substantially higher from here.

The analyst who called a JPMorgan buyout at $65 said the bank could end up paying that much for Bear Stearns which includes the costs of merging the two companies together.  He went on to say that this is a very steep price to pay for the "deeply troubled company.  So here's where we start to break down the trade. 

When it was announced that Bear was originally being bought for $2/ share I was in shock.  But not surprised.  However, if you noticed, Bear Stearns stock never actually traded as low as $2/ share.  The day the deal was announced (March 17) Bear fell from $30 to a low of $2.84.  Over 166 million shares traded hands or more than 5x average daily volume.  That right there folks is the first clue that people are making a lot of Vegas type bets on where the stock will ultimately end up.  Anyway, on the 17th, Bear Stearns CLOSED the day at $4.81.  That almost $3 higher than the $2/ share offer.  Then we get Monday's huge pop from $6 to $11 on a revised $10/ share offer and now the table's are crowded looking for action. 

The next step is to figure out when the April calls expire since I have already told you I expect a deal to get down by early April.  The April calls do not expire until the 18th so we got another three weeks plus to "play" and place our bets on where the stock ends up at and how much money we can make. 

Here's where your calculations begin.  Let's say you feel Bear gets another higher offer and the stock tops $15.  The stock would gain roughly 40-45% but those April calls would get you a 300% gain because they would be worth at least $5 a contract and you bought them for $1.30.  Already, I like the possibilities.  Basically it means that if I put out $1300 to control 10 contracts, I have a chance to increase that to $5000 and possibility more.  Over 16,000 contracts traded on Tuesday so there are other traders who like this theory as well.

Next up I looked at the April 15 call (BVDDC, $0.20, down $0.20) which lost 50% of its value and traded nearly 6000 contracts.  By adding just a $1 to the 15 strike price you are predicting the stock at $16 which makes the April 15 calls worth $1 or 5x their investment.  The same $1300 gets me over 60 contracts here though.  Bottom line here is that if Bear Stearns can get to $16 then those same 60 April 15 call options would be worth at least $6000.  Now here's where the numbers hit you harder than a Vegas headache. 

Of course, you know where I'm going with this.  If the stock fails to reach any of these "numbers" or heads below $10 then your $1300 is going to start to evaporate quickly.  It's the same rush you might feel if you were at the roulette table and you see the ball bounding off a few numbers before finally settling in on it's final destination.  Either you hit it big or you don't. 

There's many more ways you can keep breaking this one down.  If you halved everything, meaning you bought 5 and 30 contracts of the aforementioned April 10 and 15 calls, and you turned $600 into $9000 that's still a huge jackpot.  Or even if the stock hit just half of the $65 target that would equate to a $32.50 buyout.  Wow.  Let the game begin and count me in.  For speculative accounts only!