Bear Stearns' Wild-Card Shareholder

How did Joe Lewis wind up with an outsize share of Wall Street's problem child, and what will his next move be?

by Ben Levisohn

Related Items

• Video: BW's David Henry on Bear's Big Problems

Joe Lewis Fernando Medina

Story Tools

• post a comment
• e-mail this story
• print this story
• order a reprint
• digg this
• save to del.icio.us

Joseph Lewis' big bet on Bear Stearns (BSC) is looking like a big mistake. Since the billionaire investor came on board last September, upping his stake three months later, the stock has been in a death spiral. The latest hit: a nearly 7% plunge following the expected news on Jan. 8 that James Cayne would step down as chief executive of the beleaguered investment bank. In all, Lewis, the single largest shareholder in Bear, has watched the value of his 10% stake erode from $1.2 billion to $840 million.

The 70-year-old Lewis has endured such losses before in his far-reaching and eclectic portfolio. The Tavistock Group, which he founded in 1978, has stakes in 170 companies that span the real estate, financial-services, manufacturing, entertainment, and restaurant industries. He uses at least five fast-moving investment funds—Aquarian Investments, Nivon, Mandarin, Darcin, and Cambria—to trade currencies and make more opportunistic moves like his Bear bet. And one of Lewis' hallmark strategies is to troll for cheap plays, then patiently wait years for the payoff. After buying Tottenham Hotspur, the English soccer team, at 80 pence in 2000, the club's stock dropped to 17 pence. Today, it trades at 138 pence.

Lewis may need to be long in patience with Bear, which took a $1.9 billion writedown from subprime-linked securities in the latest quarter. Bear's newly anointed chief, Alan Schwartz, has to figure out a way to revive the firm's core fixed-income business now that its bread-and-butter trading in mortgage-related investments is dead. Meanwhile, Bear faces scrutiny from securities regulators and federal investigators, after the implosion of two of its hedge funds last summer. "Bear became a one-trick pony, and now its business model is broken," says Dick Bove, analyst with research firm Punk Ziegel. "It's one of the worst investments of all time."

Takeover Bid?

There's plenty of speculation that a U.S. rival or overseas competitor will swoop in to buy Bear at its current beaten-down price. The stock sells at a 15% discount to the value of the assets on its books—unprecedented for an investment bank. But Bear may be too much, or too unappetizing, to swallow whole, increasing the odds that a few players will bite off pieces such as the smaller prime brokerage or clearinghouse businesses that are still in decent financial shape.

So that leaves plenty to ponder about exactly how Lewis will play his hand at Bear. The secretive Lewis has a history of hostile takeover bids. An art collector who owns paintings by Chagall and Picasso, Lewis made an aggressive move on auction house Christie's back in 1995. He gradually built a 29% stake in the company, taking advantage of the cheap stock prices that resulted when the art market softened. Ultimately, Lewis couldn't pull off a takeover and in 1998 sold his shares to French media tycoon Francois Pinault for nearly £300 million at a 50% gain.

A Bear takeover would be tricky. Even at a recent share price of $70, Lewis would need to pony up at least another $4 billion to buy Bear outright. So it's more likely that Lewis will take a more passive stance, at least at the outset, allowing Schwartz time to prove he can restore the bank as a Wall Street competitor.

Profitable Career

Lewis made his early millions rehabbing a business in much the same way.