Bear Stearns Cos, the U.S. investment bank battered by slumping mortgage markets, and China's CITIC Securities Co have agreed to swap stakes in each other and form a broad alliance, the firms said on Monday.
The deal would bolster access to business in booming China for Bear, which lags bigger Wall Street rivals in expanding its business beyond the United States.
But Peter Goldman, a portfolio manager at Chicago Asset Management, which invests $500 million and owns Bear Stearns stock, said investors might be disappointed that Bear Stearns did not land a large equity investor.
It's different than what most people were looking for. It may be a little disappointing, Goldman said. People thought there would be a huge capital infusion, not a quid pro quo business partnership.
Bear shares fell $1.61, or 1.4 percent, to $114.80 in early trade on the New York Stock Exchange.
Under the preliminary agreement, CITIC would invest about $1 billion in Bear Stearns securities that would convert into about 6 percent of the New York-based investment bank.
Bear Stearns would buy $1 billion of CITIC debt that would over time amount to a 2 percent stake in the Beijing-based firm. Neither company could hold more than 9.9 percent of the other's stock.
We are confident that combining our operations in Asia with CITIC Securities will greatly benefit Bear Stearns' global client base and generate substantial new revenues and growth opportunities for the firm, Bear Stearns Chairman and Chief Executive James Cayne said in a statement.
The deal is subject to a definitive agreement. The companies said they have agreed to negotiate only with each other. They also said there was no assurance a deal would be completed.
A deal needs the approval of China's State Council as well as securities regulators and shareholders.
State-backed CITIC Securities, the largest brokerage in China and Asia's biggest by market value, would continue an outward push by China's cash-rich financial services firms after the industry drew an influx of billions of dollars in foreign investment in recent years.
It's a good opportunity for CITIC to expand overseas and learn from global players, said Qiu Zhicheng, an analyst at Shanghai-based Haitong Securities.
The companies, in a statement, said the alliance will include broad collaboration in China and the development of new securities for the rapidly growing Chinese market.
As part of the deal, Bear and CITIC will form a new Hong Kong-based capital markets joint venture doing business across Asia. Bear will contribute its Asia operations to the 50/50 venture. CITIC will transfer a Hong Kong unit to the venture and pay an undisclosed amount of cash to Bear.
Bear and CITIC said they expect to have representation on each other's boards of directors.
Boosted by a feverish rally in mainland Chinese stocks, CITIC has a market value of $46.8 billion -- bigger than Lehman Brothers Holdings Corp and Bear combined. CITIC shares have risen 600 percent over the past year.
Bear Stearns, by comparison, has seen its share price fall 28 percent this year, giving it a market value of $13.4 billion. Plunging values in U.S. mortgages and derivative securities led to collapses at two of its hedge funds, losses in its flagship mortgage business, and the ouster of co-President Warren Spector.
Those struggles fueled speculation that Bear Stearns would sell all or part of itself to a larger bank, to give it greater heft in uncertain markets.
Donald Tang, a Bear Stearns vice chairman who maintains good relations with top executives at CITIC Securities' parent, CITIC Group, as well as with Chinese regulators, was traveling in Beijing on Monday to close the deal, a source familiar with the situation told Reuters.
A CITIC official working in its board office told Reuters that Shanghai-listed shares of CITIC Securities were suspended before the start of trading on Monday.
(Additional reporting by Olesya Dmitracova in London, Dane Hamilton in New York, and Jeffrey Hodgson in Hong Kong)