Value Evaporation

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By Eva Lang - Another major corporate failure played out this week with the immolation of Bear Stearns. Over the last 52 weeks the stock price ranged from $159.36 per share to $2.84 per share, a spectacular collapse. The venerable Wall Street firm that had been worth as much as $20 billion at its peak and as much as $9.5 billion just three weeks ago was taken over by JP Morgan for $237 million. Oh yea, there was also that little matter of the $42.9 billion taxpayer dollars that the Fed pumped into the deal by taking on $30 billion of BSC’s illiquid mortgage-backed securities and the $12.9 billion special credit facility arranged with JP Morgan.

Why did this happen? Alan Schwartz, Bear’s chief executive, was quoted in The New York Times telling his staff that “we here are a collective victim of violence”. It was be easy to say the sub-prime market collapse was the violence that brought down Bear Stearns. But the real culprit was bad management. Bear Stearns wallowed in the sub-prime mess gorging on questionable securities. Not every financial institution made these same bad choices and Bear Stearns management had many opportunities to evaluate the risk and back away. During the time that Bear Stearns was dumping millions into these questionable securities, James Cayne was the CEO. Between 2004 and 2006, Mr. Cayne was paid over $40 million in cash and given stock and options worth millions more. He was very handsomely compensated for making the decisions that led to the collapse of his company. As a taxpayer, I want the Fed to hold Mr. Cayne and his similarly highly compensated management team accountable.

What lessons are there in all this for the business appraiser? Often discussions of the management team and the industry conditions get short shrift in a valuation analysis. But the Bear Stearns case shows us that the quality of management and the industry conditions can completely change the fortunes of a company. - Eva Lang


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