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The Bear Stearns Companies, Inc.

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Letter: Requesting JPMorgan Comments on Fair Alternatives


(May 23, 2008)


The Forum thanks Leonard Rosenthal, Professor of Finance at Bentley College, for providing his unpublished research on the use of contingent value rights (“CVR”) in corporate acquisitions.



Lutin & Company


575 Madison Avenue – 10th Floor, New York, New York 10022

Telephone: (212) 605-0335

Facsimile: (212) 605-0325



May 23, 2008

By email


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.[1]

            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.[2]  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 Stearns.[3]  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.[4]  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 transaction cost:

§  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.


Sincerely yours,




Gary Lutin                                                       


cc: Mr. Anthony J. Horan



[1] A report of the survey can be found at the following web site address:

[2] The reports of Egan-Jones Proxy Services, Glass Lewis & Co. and Proxy Governance Inc. stated variously that they considered the negotiation process and value of the proposed transaction to be unfair or improper, but each recommended voting for it in the absence of any real alternative.  The report of RiskMetrics (formerly known as Institutional Shareholder Services, or “ISS”) summarized the transaction as a “scenario” in which a policeman had given someone until the next morning to sell a house or have it taken away for nothing, but recommended a favorable vote based on theories about what might happen if shareholders rejected the proposal.  The Egan-Jones, Glass Lewis and Proxy Governance reports are available, with permission,  at the following web site address:

[3] A report of the Forum’s May 14, 2008 open meeting, including its discussion of the example of alternative terms, can be found at the following web site address:

[4] Examples include JPMorgan serving as the adviser to Polaroid Holding Co. in its 2005 sale to the Petters Group with a CVR structure (see the SEC Form DEFM14A filed by Polaroid on March 29, 2005), and J.P. Morgan Trust Company acting as trustee for the CVR used in Hewlett-Packard’s 2002 acquisition of Indigo (see the SEC Forum S-4 filed by Hewlett-Packard on February 14, 2002).


Transition Investments, Inc.

Exhibit to May 23, 2008 letter


May 14, 2008 discussion draft

Shareholder Forum for The Bear Stearns Companies, Inc.


Optional BSC Value Realization Shares



Exchange Option

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).

Distribution Rights

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.

Conversion Rights

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

Value Realization will be determined based on

(a)    amounts realized from sales to independent parties,

(b)   independent valuations of assets or operations integrated into JPM business, and

(c)    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 shares.

Threshold for Distributions

Allocations of Value Realization in excess of a $[Variable “T”] per BVR share threshold amount will be distributed.






This Forum program is open, free of charge, to all shareholders of The Bear Stearns Companies, Inc. ("BSC") and to any fiduciaries or professionals concerned with their investment decisions.  Its purpose is to provide shareholders with access to information and a free exchange of views on issues relating to their evaluations of alternatives, addressing issues described in the Forum Summary.

As stated in the posted Conditions of Participation, all Forum participants are expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

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The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.