The New York Times has reported that Warren Buffett is contemplating buying a sizable stake in the investment banking firm Bear Stearns (NYSE: BSC). No doubt the rumor affected the stock, which closed today at $123.00 per share, up $8.67 on the day. It had closed as low as $99.75 this past summer amid the news of two of its hedge funds being distressed over subprime loan investments.
If there is money to be made, which I think there is, then "My pal Warren" will be investing. I will be watching closely because I own Berkshire Hathaway (NYSE: BRK.B) and Bear Stearns as well. I have written about both stocks: Serious Money: Safe havens -- T-Bills or Warren Buffett? and Chasing Value: Bear Stearns - cheap and growing. In the case of Berkshire I am making a tidy sum, but in the case of Bear Stearns I was broadsided by the subprime fiasco and am just now recovering, although I have not held it long.
It is said that BSC might be willing to sell about 20% of the company and that CEO James E. Cayne, is looking for as much as a 40% premium. A premium to what is the question? If you add it to today's closing price you arrive at a value of $172.20, right at BSC's 52-week high of $172.61. I do not think Buffett or any of the other potential investors would be willing to pay this much or should pay this much. I do believe they would be willing to pay as much as a 20% premium, with an eye to obtaining the potential of a 20% remaining return if they can "set the ship right" and get back on a growth track.
Bear Stearns has a reasonable P/E ratio currently hovering between 10 and 11. It has low price-to-book and price-to-sales ratios, both under 1.5 and one of Buffets key metrics -- huge cash flow!
I know that Warren Buffett has long admired Bear Stearns as a company. The biggest hurdle for him would be that he is not a Wall Street guy, and may not mesh with the culture. That not withstanding, Buffett's decision will be based on value and value alone. If Bear Stears wants Buffett to be a part of the team it is going to have to offer him clear value. At today's price that value is there. The closer the deal price is to that the more likely a deal can be struck. If BSC asks too high a premium, there will be no deal or it will be with someone else.
To find potential opportunities and verify my track record read Chasing Value or Serious Money.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He is on the advisory board of internet start-up CircleBuilder.com.
Will Rich Ross really have a positive impact on Disney's movie operations?
Consumers sick of recession, may spend extra on holidays
Corrections, seasonality and Santa Claus
