Good Wednesday. Here’s what we’re watching:
• Was Bear a bad deal for JPMorgan?
• The failed Qualcomm bid portends a new front in potential global trade wars.
• How Boeing has the most to lose from the metals tariffs.
• Bear Stearns was a decade ago. Could it happen again?
• And R.I.P. Stephen Hawking.
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Was Bear a bad deal for JPMorgan?
Ten year’s ago almost to the day, JPMorgan Chase acquired Bear Stearns, a troubled investment bank, for what looked like a steal. But Jamie Dimon, JPMorgan’s C.E.O., has since said he wouldn’t do a deal like it again, citing the high legal costs that came later.
But was buying Bear Stearns as bad a deal as Mr. Dimon suggests?
While we don’t have all the numbers necessary for a full accounting, there is much in the public domain that can help answer this question. And this information suggests that, while the Bear Stearns acquisition probably wasn’t as profitable as expected in March 2008, JPMorgan may still have benefited from it — even after taking into account the legal expenses.
What caused the legal costs and how big were they? The payouts were made mostly to settle allegations that Wall Street firms had stuffed loans into mortgage-backed bonds that did not meet agreed upon standards. How big were those costs? In his 2015 letter to shareholders, Mr. Dimon said that some 70 percent of JPMorgan’s nearly $19 billion in mortgage-related legal costs were related to Bear Stearns and Washington Mutual, the thrift JPMorgan also bought during the crisis. For the sake of argument, let’s assume that 35 percent of that $19 billion stemmed from Bear Stearns’ mortgages. The cost to JPMorgan then would be around $6.7 billion.
That’s a lot, but when JPMorgan did the deal, it agreed to terms that gave it a lot of financial protection against nasty surprises like this.
JPMorgan paid $1.5 billion for Bear Stearns, far below the $11.8 billion of shareholders’ equity that Bear Stearns reported on its balance sheet at the end of 2007. This wide margin for error would have helped the bank absorb the $6 billion of merger-related costs that executives anticipated in March 2008.
True, JPMorgan almost certainly ended up marking down Bear Stearns’ riskier assets by more than expected in the months after the deal, when market conditions got even worse. But many of these assets could have recovered in the next few years as the financial system stabilized. After 2008, “principal transactions” at JPMorgan’s investment bank, the business line that included the performance of many of Bear Stearns’ assets, produced over $8 billion of annual revenue, far more than the $4.4 billion that JPMorgan on its own generated in 2007.
Let’s also not forget that the Federal Reserve took a large slug of the risk in the deal. The Fed made an extraordinary loan to a special entity that bought some $30 billion of Bear Stearns’ assets. According to Kate Kelly’s book on Bear Stearns’ final days, JPMorgan was reluctant to buy Bear Stearns without assistance from the Fed. JPMorgan did provide a $1.2 billion loan to the Fed’s entity, in theory exposing it to some losses on the assets. But in the end, that loan generated a $665 million gain for JPMorgan in 2012.
The Bear Stearns deal also came with some straightforward positives. JPMorgan, for instance, got Bear Stearns’ leading prime brokerage unit, a business that provided brokerage services to hedge funds. That and other Bear Stearns operations were expected to add at least $1 billion a year to JPMorgan earnings, the bank’s executives said at the time.
And, of course, JPMorgan scooped up Bear Stearns’ trophy tower in Midtown Manhattan. At the time of the deal, the building, at 383 Madison Ave., had an estimated value of $1.2 billion. According to the estimates of developers in the New York real estate market, the building is now worth at least $1.8 billion.
-- Peter Eavis with reporting from Charles V. Bagli.
Broadcom highlights a new age of tech protectionism
When he killed Broadcom’s pursuit of Qualcomm, President Trump put his administration in uncharted territory. The White House has made no secret of its concerns about Beijing, and seems to have been motivated by the prospect of Qualcomm losing its lead in 5G.
Some now worry that this could be another front in a potential global trade war. Here’s Jason Furman, a senior economic adviser in the Obama White House, talking to the NYT:
“If every country in the world conducted policy like that, it would make cross-border investment difficult to the detriment of American and foreign companies,” Mr. Furman said. “Foreign direct investment is an important part of the strength of the U.S. economy.”
Of note: Qualcomm spent far more than Broadcom on lobbying.
Broadcom officially withdrew its bid this morning.
What’s next for Qualcomm: The chip maker’s Hail Mary — petitioning the government for a national-security review of Broadcom’s bid — paid off handsomely. But now it has to show investors that it can fix its business.
Peter Eavis’s take: National champions have to deliver. Will Qualcomm become less efficient under the government’s protection? If so, U.S. tax payers may feel taken advantage of.
Elsewhere in semiconductors: The industry largely ignored a short seller’s report on purported security flaws in AMD chips. (Axios)
How Boeing could suffer in a Trump trade war
President Trump announced his metals tariffs to protect American makers of aluminum and steel. But that could put Boeing in the firing line — America’s top exporter, which employs nearly as many people as the U.S. steel and aluminum industries combined.
More from Natalie Kitroeff of the NYT:
“I’m really worried about what it’s going to do to us,” said James Springer, a mechanic who installs stow bins and class dividers on 787 Dreamliners at Boeing’s plant in North Charleston, S.C. “What will the E.U. and China do, especially China? They are one of our biggest customers now.”
And Mr. Trump’s attacks on Chinese metal production are in some ways a relic of past trade battles, as Beijing moves away from basic commodities.
Elsewhere in trade: Marco Rubio argues in an NYT Op-Ed that the U.S. should take measures more targeted than the tariffs to punish China for unfair trade practices. And our columnist Eduardo Porter explains the ways countries — and companies like Ford — have gamed other tariffs.
The politics flyaround
• With Mike Pompeo due to replace Rex Tillerson at the State Department, the future of the Iran nuclear deal is in doubt, and renewed sanctions are more likely. (NYT)
• The Democrat Conor Lamb has taken a small lead in the congressional special election in Pennsylvania; here’s the NYT vote tracker.
• Elizabeth Warren’s attacks on fellow Democrats who support a loosening of Dodd-Frank regulations are annoying Chuck Schumer and Heidi Heitkamp.
• The Republican leader of the House Intelligence Committee’s inquiry into Russian electoral meddling softened his committee’s conclusion that Russia did not work to undermine Hillary Clinton. Representative Trey Gowdy said it had.
Bear Stearns was a decade ago. Could it happen again?
Today is the 10-year anniversary of the investment bank, on the verge of bankruptcy, seeking a lifeline from JPMorgan Chase. These days, however, there’s little appetite for an extraordinary government-assisted of a bailout of a troubled financial firm — and post-crisis regulations are meant to eliminate the need for one.
Here’s what Rodge Cohen, Wall Street’s longtime favorite consigliere, told Justin Baer and Ryan Tracy of the WSJ:
“Nobody will ever again buy a severely troubled institution,” he says. “Period.”
The problem: Wall Street’s new defenses haven’t been tested. And today’s algorithm-dominated markets give embattled firms far less time to work out their problems, as the WSJ points out.
More trivia: Yesterday was the 10-year anniversary of David Solomon of Goldman Sachs contacting his former firm to offer help. Mr. Solomon is now the heir apparent at Goldman.
Has Trump been bad or good for deals?
The bad
A deregulation-minded businessman in the White House was supposed to be a huge positive for the M. & A. community. Yet investment banks have already lost out on some big advisory fees. And then consider:
• The blocking of the Qualcomm bid has raised uncertainty over cross-border acquisitions.
• The battle between the Justice Department and AT&T over the $85.4 billion takeover of Time Warner is heating up, with the first day of the trial set for Monday.
As Matt Levine writes in Bloomberg View, “One area where Donald Trump is more economically populist than I had expected is: He really does seem interested in blocking big mergers.”
The good
Announced deals so far this year are up 55 percent from the same time a year ago, according to Thomson Reuters. And the Republican tax overhaul has led other deal makers to feel better about opening their wallets. A survey of 500 U.S. companies by EY found that 42 percent of respondents intended to use their tax savings on M.&A., and 73 percent said that they planned to accelerate their deal strategies this year.
“At the end of the day, tax is not a driver of M. & A., but it certainly is a key element,” Bill Casey, EY’s Americas vice chair of transaction advisory services, told Michael.
The deals flyaround
• China’s sovereign wealth fund has sold out of Blackstone, severing a longstanding relationship as tensions rise between the U.S. and China. (NYT)
• Elliott Management will use Prosperity Life, which it bought for just over $500 million, to strike more life insurance deals. (FT)
• Two months after Jared Kushner joined the White House, Kushner Companies sold a stake in a Brooklyn building to a company controlled by the Japanese government. (Bloomberg)
• Bill Ackman sold about $125 million worth of ADP shares as its stock rose. (Bloomberg)
• Prince Alwaleed bin Talal sold his stake in the Four Seasons hotel in Damascus to a businessman linked to President Bashar al-Assad, unnamed sources said. (FT)
• The Finnish government has acquired a stake in Nokia. (FT)
• The real estate investment trust SL Green has been selling real estate assets into the private market at high values and using the proceeds to buy back its own shares at a discount. (WSJ)
• HNA Group is selling its 25 percent stake in Hilton Grand Vacations. (Bloomberg)
• K.K.R. is considering a sale or an I.P.O. for Cognita schools, which could be valued at about $2.8 billion, according to unnamed sources. (Bloomberg)
Google is banning Bitcoin ads
The ad giant has joined Facebook in restricting ads for virtual currencies. (Together the two companies account for most internet advertising.)
One problem: “crypto-jacking,” in which scammers steal the computing power of those who view their ads and use it to mine digital money. Google removed 130 million such ads last year.
Elsewhere in virtual currencies: Blythe Masters of Digital Asset Holdings is disappointed that gender diversity in the sector is even worse than in banking (she used to be at JPMorgan). And Coinbase has a Barclays bank account, which will simplify things for British customers.
The tech flyaround
• U.N. human rights experts investigating the possible genocide in Myanmar said that hate speech had spread on Facebook there. The investor Roger McNamee, a Facebook shareholder, accused Mark Zuckerberg of being insincere about fighting misinformation.
• YouTube is trying to combat misinformation by linking to Wikipedia pages and other “fact-based websites” on videos that promote conspiracy theories. Its announcement drew criticism.
• Amazon is recalling about 260,000 AmazonBasics battery packs because of potential fire and chemical burn risks. (WSJ)
• Walmart promises delivery groceries in 100 cities this year, using companies like Uber and Deliv. (WSJ)
• Companies that use A.I. are trying to set ethical standards, but skeptics say they’re just trying to pre-empt regulation. (WSJ)
• How Walmart and Google are challenging Amazon’s Audible. (Bloomberg)
• G.M. is planning a pilot program letting car owners rent out their vehicles, unnamed sources said. (Bloomberg)
The workplace issues flyaround
• The architect Richard Meier has taken a six-month work leave after the NYT contacted him about accusations of sexual misconduct by five women. (NYT)
• Producers of “The Crown” conceded that Claire Foy, its Queen Elizabeth II, was paid less than Matt Smith, playing her husband. (NYT)
• Anti-harassment training videos are a booming business. (Bloomberg)
Revolving door
• Andrew Witty, the former GlaxoSmithKline C.E.O., will head UnitedHealth’s Optum division, which focuses on pharmacy benefit management. (FT)
• Susan Repo, Tesla’s corporate treasurer and V.P. of finance, has left to become C.F.O. at another company, an unnamed source said. (Bloomberg)
The speed read
• Remington Outdoor, the gun maker that Cerberus spent more than a decade building into an industry giant, is planning to file for bankruptcy protection as early as March 18. (WSJ)
• Dick’s Sporting Goods said its stance on guns had hurt sales, but it faces other threats.
• Former staffers for The Onion, which once published “Elon Musk Offering $1.2 Billion in Grants to Any Project That Promises to Make Him Feel Complete,” are working on a secret project financed by Mr. Musk. (The Daily Beast)
• A commodity investor backed by a Russian billionaire is stockpiling cobalt. (Bloomberg)
• The political compromise that kept Angela Merkel in power could end Germany’s boom. (NYT)
• Britain’s M. & A. watchdog is celebrating its 50th birthday. (Bloomberg)
• More than half the fresh fruit and almost a third of the fresh vegetables Americans buy now come from other countries. (NYT)
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