If you work at Bear Stearns, don't assume the firm is safe from a takeover if its bottom line survives the collapse of two hedge funds.
Bear Stearns "may be mortally wounded" - and takeover bait - even if it avoids major financial damage from its credit hedge funds that blew up recently, says MarketWatch columnist David Weidner.
While the investment bank won't take a financial bath, "the real damage is how the firm and its management are perceived on the Street," writes Weidner, who covers Wall Street for the Dow Jones Web site.
Ever since Bear's High Grade Structured Credit Strategies Fund and High Grade Structured Credit Strategies Enhanced Leverage Fund began facing margin calls more than a month ago, the press has entertained vague speculation the bank could be a takeover target. However, two facts initially work against a takeover, according to MarketWatch. First, the firm's own financial exposure to the hedge funds appears well contained. Second, company insiders own about nine percent of Bear Stearns shares and employees own roughly another 33 percent.
In June, Bear rescued one of its troubled funds by providing a $1.6 billion credit line. That loan "is almost certain to be paid back," says Weidner. While the hedge funds' investors will be wiped out, he says Bear and the other institutions that lent to them look to come out whole.
Still, Weidner argues, less tangible factors may ultimately play a greater role in whether Bear and its very visible CEO, James Cayne, succeed in riding out the storm.
The hedge funds' collapse "may be a bigger blow to the firm's and the industry's reputation," the column says. It likens Cayne's present position to that of former Morgan Stanley chief Philip Purcell, who in 2005 was ousted along with his handpicked board after senior investment bankers inside and outside the firm waged a successful campaign to bring back former president John Mack.