Warren Buffett is considering the purchase of a substantial minority share of Bear Stearns Companies (NYSE: BSC), according to The New York Times. Bear Stearns is holding talks that could result in the sale of 20% of the company. Other potential investors include Bank of America (NYSE: BAC) and the China Construction Bank.Bear Stearns has been hit hard by the mortgage crisis and problems in the credit markets over the last few months. From early April to mid-August, shares of Bear Stearns lost nearly a third of their value, falling from more than $157 to $103 per share. In June, two Bear Stearns funds that made big bets on mortgage-backed securities were closed after suffering heavy losses.
Bear Stearns' CEO James E. Cayne reportedly demands a high premium for outside investors, as much as 40% above the public share price. But given the problems the company has been having, and the doubts that exist about its viability, Cayne would be wise to sell to Buffett at the market price. He may even want to give him a discount, given that a Buffett stake would send a very strong signal that Bear Stearns is here to stay.
Not surprisingly, Bear Stearns shares are up sharply on the news, closing at $123, up $8.76 or 7%.
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