May 23, 2008
Mr. James Dimon
JPMorgan Chase & Co.
277 Park Avenue
New York, New York 10172
Re: Shareholder Forum for Bear Stearns
Dear Mr. Dimon:
Participants in a “Shareholder Forum” program for Bear Stearns
have expressed interest in JPMorgan’s view of possible alternatives to the
terms currently proposed for your acquisition of Bear Stearns. It should be
noted that a Forum survey of securities analysts showed that this interest
was shared by both JPMorgan and Bear Stearns investors, with 33% of
respondents who reported being existing or prospective holders of JPMorgan
stock, but not of Bear Stearns, saying they would like
to see alternative terms.
The Forum therefore requests JPMorgan’s comments on issues that
may be relevant to investment decisions concerning either Bear Stearns or
JPMorgan. This request is not intended to relate to litigation issues, or
to support any dissident negotiation. There is also no need to address
shareholder voting issues, even if you respond before the May 29 special
meeting, since you control sufficient shares to assure approval of the
transaction – and, in any event, all four of the proxy advisory firms have
recommended favorable votes based on the absence of alternatives.
What concerns Forum participants, expressed also by the proxy advisors in
blunt observations that accompanied each of their recommendations of
reluctant approval, is the fairness of a transaction that is forced upon
investors. Plainly stated, everyone wants to know what JPMorgan considers
fair, now that you are in a position to decide.
As an example of alternative terms, the appended summary sheet
was used to provide a foundation for Forum discussions of how variations of
the current proposal could benefit shareholders of both JPMorgan and Bear
Its “Optional BSC Value Realization Shares” (“BVR”) concept is essentially a
variation of the “contingent value rights” (“CVR”) structure with which
JPMorgan is familiar from other transactions.
In this case, Forum participants had suggested using a convertible stock
form of CVR to avoid any need to modify the essential structure of your
offer. The variables can also be defined to suit a range of issuer
objectives and investor preferences without significant effects on the
If the “Allocation” variable is set at 80% of Value
Realization from the Bear Stearns assets, the “Threshold” for distributions
at $10.00 per CVR/BVR share, and the “Conversion” right at 50% of the
0.21753 JPMorgan shares offered in the primary exchange, the resulting cost
of the alternative would be the same as the current proposal if the ultimate
value of Bear Stearns is $2.7 billion. Below that amount, CVR/BVR holders
would get less than the value of the primary exchange offer, and above that
amount they would get more.
Using the same variables and assuming a relatively high 25%
proportion of Bear Stearns investors elect to take the optional CVR/BVR
shares, a high range test of Value Realization assumptions at $10.3 billion
– the amount of Bear Stearns pre-collapse book value – would give the CVR/BVR
holders $51 per share in combined distribution and conversion value. The
cost of this high range assumption to JPMorgan would reduce the company’s
retained portion of the $10.3 billion realization by approximately $1.5
billion to a net $8.8 billion, before taxes but including the effects of
JPMorgan stock exchanges and conversions, or from about $3.01 to $2.56 per
JPMorgan share, for a $0.45 per share difference.
Reviewing these and similar analyses, Forum participants
generally concurred that the actual direct costs of any conceivable
variations of a CVR option would have virtually no effect on the valuation
of JPMorgan stock. The marketplace perception of fairness, though, was
viewed as a critical element of JPMorgan’s evolving leadership position and
“brand” value, and was therefore expected to have a significant effect on
JPMorgan’s shareholder value.
Please let me know if you have any questions, either about this
request or for submission to Forum participants.
cc: Mr. Anthony J. Horan
Exhibit to May 23, 2008 letter
Shareholder Forum for The Bear Stearns Companies, Inc.
Optional BSC Value Realization Shares
JPMorgan Chase (“JPM”) will offer holders of Bear Stearns (“BSC”) the
option to exchange each share of BSC common stock for either 0.21753
shares of JPM common stock, as currently proposed, or, alternatively,
for one (1) share of a special class of JPM stock designated “BSC
Value Realization Stock” (“BVR” shares).
A portion of the value ultimately realized by JPM from the acquired
BSC assets (including business operations) will be distributed
annually to holders of BVR shares.
BVR shares may be converted at any time into JPM shares, with the
number of JPM shares equal to [Variable “C”]% of the 0.21753 JPM
shares originally offered for each BSC share.
Value Realization will be determined based on
amounts realized from sales to independent parties,
independent valuations of assets or operations integrated into
JPM business, and
market value of assets held for sale after 5 years.
Allocation of Value
[Variable “A”]% of the Value Realization will be allocated and then
divided by the number of BSC shares that had been eligible for BVR
Threshold for Distributions
Allocations of Value Realization in excess of a $[Variable “T”] per
BVR share threshold amount will be distributed.