Forum Report

Alternatives Defined at May 14 Meeting

Yesterday’s open meeting of the Shareholder Forum, hosted by the New York Society of Security Analysts (“NYSSA”), addressed several issues that may be considered by investors in Bear Stearns as well as in its prospective acquirer, JPMorgan Chase.    As summarized below, these issues may be relevant to both buy-sell and voting decisions.

We expect to follow up tomorrow or Monday with these reports, focused on the information requirements for shareholder voting before May 29:

►  Glass Lewis [1] is expected to release its report by tomorrow on client voting recommendations for the proposed Bear Stearns acquisition by JPMorgan, and we will present it to Forum participants as soon as it’s available.

►  As soon as we get Forum participant feedback to refine the idea of an optional “Value Realization” stock discussed at the meeting – or replace it with a better idea – the Forum will present the suggested alternative for JPMorgan’s consideration and comment.

The following summary of the meeting is necessarily brief, and you are of course encouraged to ask for more information about anything that interests you.

Litigation

The first subject on the meeting’s agenda was a discussion with Daniel W. Krasner, of the law firm Wolf Haldenstein Adler Freeman & Herz, about his firm’s shareholder litigation claims that the proposed JPMorgan acquisition of Bear Stearns was not properly negotiated and that Bear Stearns shareholders should therefore be compensated based on a court-established value instead of what was negotiated.[2]

Generally, Mr. Krasner explained that it is not practical to try to block the proposed transaction, and most meeting participants agreed that there was and is no practical alternative to a JPMorgan acquisition.  The objective of the litigation, under these circumstances, is simply to get a higher payment to Bear Stearns shareholders.

Mr. Krasner explained that any shareholder benefit from the case will depend on the court’s finding that either (a) the sale to JPMorgan of 39.5% of Bear Stearns stock without shareholder approval was improper or (b) that JPMorgan is a controlling shareholder that must act in the interests of Bear Stearns’ minority shareholders.  If the court finds that one of these or any other claim provides a basis for awarding something to shareholders, the amount would depend on a valuation which is usually determined by courts based on presentations of professional “experts” hired by both sides.

In a discussion of what would be relevant to these findings, Mr. Krasner as well as other meeting participants familiar with how judges make decisions observed that a court could be expected to seriously consider the views expressed by Forum participants and other investors, particularly as reflected in the shareholder voting on May 29 for the currently proposed JPMorgan acquisition.  A high level of minority shareholder opposition to the proposed transaction would show a judge that the investors think they are being treated unfairly, while a high level of support would show him that investors don’t really see a need to fix anything.

If the litigation progresses to issues of valuation, it was observed that a court might also welcome the views of genuine investors on that subject.  Meeting participants familiar with the process concurred that at least some judges might welcome credible valuation information from sources other than the ritualized presentations of hired witnesses.

Proposed exchange option

The next subject addressed at the meeting was the development of a suggested alternative that could be presented to JPMorgan for its consideration, on the assumption that a sensibly designed variation of the transaction negotiated in the mid-March panic might be better for all parties, including the shareholders of JPMorgan.

As a foundation for discussion, the appended draft summary sheet and analysis of an optional “Value Realization” stock was distributed to meeting participants for their review.  The draft was introduced with an acknowledged need to simplify either this or any alternative concept, or at least its presentation, and with an invitation to (a) request analysis of different assumptions and (b) suggest improvements of either the terms or presentation.  All Forum participants are invited to do the same within the next couple of days, as indicated above.

During the meeting it was emphasized that, to be practical, the terms of any alternative to the currently proposed transaction must result in value enhancement of JPMorgan stock.  It was observed that the direct cost impact per share of JPMorgan stock was not likely to be meaningful even with extreme assumptions of the amount of value allocated, considering that the maximum number of JPMorgan shares that might be issued for the Bear Stearns acquisition would be less than 1% of the shares outstanding.  It was suggested that the most significant impact on value would be from the “brand image” result of JPMorgan’s management of the transaction, based on generally expressed views and supported by the responses of JPMorgan investors in last week’s survey of NYSSA members.[3]

Shareholder voting

Shareholder voting decisions were addressed again, noting that the earlier observations of how a court would view the results might apply also to JPMorgan in its consideration leadership responsibilities.

It was emphasized that voting could not result in a rejection of the proposed acquisition, since JPMorgan controls 51% of the vote either directly or through support agreements, so that shareholders would not have to be concerned about “killing the deal.”  Voting could be viewed as a safe expression of satisfaction or dissatisfaction with the terms presented to Bear Stearns shareholders, with the expectation that the results will be considered by the court, by JPMorgan, and by the marketplace.

Robert M. McCormick, the Chief Policy Officer of Glass Lewis, indicated that he and his colleagues would be considering the views expressed during the meeting in their determination of client voting recommendations.  As indicated above, he expects to issue the report by the end of this week.

Valuation questions

During all parts of the meeting, discussion turned repeatedly to the challenges of valuing either the stock or the component assets of Bear Stearns.  Questions ranged from the date that should be used for setting a price to the complications of determining whose securities are sold from an integrated trading desk.  It was noted during the meeting that recent reports had also created confusion between valuation and purchase accounting provisions.[4]

Based on the issues raised during the meeting as well as in other communications with Forum participants, the valuation issues will require further attention as specific applications are defined.

           GL – May 15, 2008

Gary Lutin

Lutin & Company

575 Madison Avenue, 10th Floor

New York, New York 10022

Tel: 212-605-0335

Email: gl@shareholderforum.com

[Distributed at May 14, 2008 open meeting]

May 14, 2008 discussion draft

Shareholder Forum for The Bear Stearns Companies, Inc.