Taking Stock of Bonds

March 25, 2008

An Empty Box

Managers at JPMorgan should be happy at snaring a prized asset such as Bear Stearns, but they ought to be very careful about low-balling their offer price.

Why? One-third of the Bear shareholders are its own employees. These are people who built the business and kept it running. There is a point when offering them a price that is obscenely low becomes an insult. Pretty soon, the employees simply up and leave. What is left? An empty box. In this case, an empty box with a lot of problems that the employees could solve or help diminish.
 
Take a business school grad and put him or her behind a trading desk and it will take years before he gets a feel for the markets. It will take years for him to come up with creative solutions in fixed-income markets or ideas to make deals happen in the M&A world. Clients -- be they private companies up for sale or PE funds buying the business -- don't want to see some youngster straight out of 8th period statistics class running their deal. The sales professionals calling on hedge funds or any institutional accounts get to know their clients very well only after years of personal interaction.
 
This is called experience. It is something that comes with age and time spent on a trading floor or in conference rooms and dinner tables across from clients. For many decades the unwritten rule on Wall Street has been that if you treat your people well you will see your business flourish. We are at an important point where old franchises are about to change hands, but deal-makers may want to consider what happens to the true asset: the professionals and the intellectual capital that keeps your business going. Without it your business may lose value that cannot be readily measured.
 
The folks at Bear may lick their wounds and take their $10. Then, they will leave. So, what will JPMorgan have gotten for its money?
 
For those who do not believe this can happen they ought to consider the new venture announced by BlackRock and Highfields on Monday.
 
The company, known as PennyMac -- a play on Freddie Mac if there ever was one -- is peopled with senior professionals who ran different businesses within Countrywide Financial. Interestingly enough, they even set up shop in Countrywide's home town -- Calabasas, Calif.
 
Sure, Stan Kurland, Countrywide's former CEO, left the lender in 2006. But, look closer and you will notice that PennyMac's chief technology officer was a managing director at Countrywide Financial Corp., PennyMac's chief development officer co-founded Countrywide Bank, PennyMac's chief capital markets officer was Treasurer and CIO of Countrywide Bank, PennyMac's chief credit officer was in charge of Countrywide's credit and portfolio management.
 
There are others such as Mark Suter -- chief portfolio strategy officer at PennyMac -- who co-founded Countrywide Bank and helped "establish it as the fastest organically growing depository in the history of US banking" if we are to believe the company's press statement.
 
So, that leaves us wondering what Bank of America is getting for its money. Is it overpaying?
 
Either way, deal makers may want to reconsider what happens to the professionals that kept businesses running smoothly and profitably for many years before the credit storm.