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JPMorgan Chase & Co’s (JPM) biggest test in integrating Bear Stearns Cos (BSC) may be making sure there’s still something left to join together. An exodus of Bear employees, who could take their unsettled clients with them, may further erode what value is left at the fallen investment bank.

“The people who make money for Bear Stearns get in the elevator and leave every night,” said David Hinkel, who advises companies on merger integration issues for consulting firm Towers Perrin. “Due to the nature of the business, the people are the business.”

People Problems

Encouraging and keeping Bear’s 14,000 employees, which jointly lost an estimated $3 billion on their Bear holdings over the past month as the investment bank collapsed, is a big problem for JPMorgan. CEO Jamie Dimon has allegedly phoned rival Wall Street firms and warned them to back off.

On March 24, 2008, JPMorgan raised its offer for Bear, which last year traded above $170 a share, to about $10 a share in stock. The original bid on March 16 was about $2 a share. JPMorgan also struck a deal to buy 95 million new Bear shares, a stake of 39.5%.

In total, the deal will cost JPMorgan roughly $9 billion in stock, transaction-related costs, and potential losses from Bear’s portfolio. The revised offer was intended to seal the deal and encourage Bear clients and employees to stay put. But employees are facing massive layoffs, with media reports saying up to half of Bear’s staff could get cut.

While doubts about the future of Bear businesses at JPMorgan persist, the bank has decided to integrate Bear’s prime brokerage and clearing operations. It is also keen on keeping the retail brokerage business, which will continue to operate under the Bear name, according to people familiar with JPMorgan’s plans.

“Uncertainty breeds fear. People are going to start to vote with their feet,” said Towers Perrin’s Hinkel.

“You’ll have an initial wave of talent that will walk out of the organization immediately. The bigger concern is the second wave of people who will potentially leave six months from now. The longer this goes on, the greater the risk of talent flight will be.”

Pay to Stay

In a attempt to keep Bear employees, JPMorgan is offering packages to keep them from leaving. Most bankers who are offered jobs by JPMorgan would receive a bonus in JPMorgan stock that matches their last bonus at Bear. Employees who are not offered jobs will receive a cash bonus of at least 30% of their 2007 compensation if they stay through the completion of the deal, according to people familiar with the situation.

Top-performing retail brokers are due to receive a bonus of as much as 100% of their annual production; 75% in cash and 25% in stock. Another bonus is in the cards if their output rises over the following three years, another person close to the situation said.

But some have already left. Morgan Stanley hired several Bear brokers and wealth managers over the last few days, according to a person familiar with the situation, and recruiters have been aggressively targeting Bear talent.

On March 26, 2008, Bear Stearns asked a New York state court to force five former employees to return client lists or papers they had taken. The court was also asked to prevent the five from contacting Bear clients for the purpose of taking their business to their new employers UBS AG and Morgan Stanley.

JPMorgan and Bear Stearns are organized very differently; Bear has a flatter and more entrepreneurial structure, experts say. Bridging those cultural differences will be a challenge, but one that JPMorgan and Dimon are considered capable of handling.

On March 27, 2008, FDA officials announced a possible connection between Merck & Co Inc’s blockbuster Singulair asthma drug and suicidal behavior in adults and children. The FDA said it has begun probing the issue after receiving reports of mood and behavior changes, suicidal thinking and suicide in patients who took the drug, which is used to treat stuffy nose, sneezing and other allergy symptoms, as well as asthma.

No definite link to the drug has been established and the agency did not say how many post-marketing reports it had received. Merck declined to say how many reports had been submitted, but said they involved both adults and children. While Merck earlier noted the behavioral risk on Singulair’s drug label, the FDA said it asked the company to evaluate its data for more information. The agency said its review would take up to nine months to complete.

In a statement, Merck said its analysis of more than 11,000 patients in 40 clinical trials found no reported suicides or suicidal thoughts or behavior. It added that it was working to inform doctors about the concerns with Singular, first approved in the United Stated in 1998. The FDA said it is also reviewing reports of behavioral changes in patients taking similar drugs, including AstraZeneca Plc’s Accolate and Critical Therapeutics Inc’s Zyflo, but has not yet decided whether further investigation is needed.

All three drugs are known as leukotriene agents that work by controlling leukotrienes, chemicals in the body that are released during an allergic reaction and can lead to inflammation, congestion and other symptoms.

Singulair is Merck’s biggest selling product and one of the world’s top selling medicines with 2007 global sales of $4.3 billion, and $3.4 billion of that in the Unites States.

In comparison, Accolate took in $57.4 million in U.S. sales in 2007, while Zyflo and Zyflo CR combined brought in about $10 million, according to data from IMS Health.

Some analysts said news of the FDA’s probe was not likely to curb the use of Singulair, which saw little impact on prescriptions following the label changes last year. Those changes highlighted the risk of tremors, depression, anxiousness and suicidal behavior to Singulair’s label.

“We do not expect this to be a meaningful issue and are not changing our estimates,” Morgan Stanley researchers said in a note.

As for patients, the FDA urged them to talk to their doctors.

“Until further information is available, healthcare professionals and caregivers should monitor patients taking Singulair for suicidality (suicidal thinking and behavior) and changes in behavior and mood,” the FDA said.

Bear Stearns shareholders aren’t the only ones questioning the bargain-basement buyout of the investment bank. Top lawmakers want additional information about the government’s role in pushing the sale of Bear Stearns Cos. to JPMorgan Chase & Co. The deal, negotiated earlier this month, was altered on March 24, 2008, when JPMorgan increased its offer for Bear Stearns to $10 per share from $2 a share, aiming to appease Bear Stearns shareholders angry about the sale price.

On March 26, 2008, Senators Max Baucus, D-Mont., and Charles Grassley, R-Iowa, the chairman and senior Republican on the Senate Finance Committee, sent a letter to executives at Bear Stearns, JPMorgan, the Federal Reserve and Treasury Secretary Henry Paulson asking for a detailed set of documents by March 28, 2008.

The Federal Reserve is providing $29 billion in backing for that deal, raising concerns that the Fed, and ultimately U.S. taxpayers, could wind up on the hook. Supporters of the Fed’s role say it was needed to prevent a panic from spreading on Wall Street that could have derailed the overall economy, but some lawmakers are skeptical.

“Americans are being asked to back a brand-new kind of transaction, to the tune of tens of billions of dollars,” Baucus said in a statement, adding that lawmakers want to “pin down just how the government decided to front $30 billion in taxpayer dollars for the Bear Stearns deal.”

Grassley said lawmakers want to examine “whether the taxpayers will lose money here, what kind of precedent this sets for federal involvement when other firms overextend themselves.” He added that the deal raises questions about “whether top executives will come out better than the rank-and-file workers who weren’t in the room negotiating.”

The new agreement calls for the Fed to assume control of $30 billion of Bear Stearns’ assets, which will be managed by New York-based investment firm BlackRock Inc. If there are losses on those assets, JPMorgan will take responsibility for the first $1 billion, with the Fed absorbing the rest.

If the Fed does lose money, the central bank’s payments to the government could be reduced. The 12 Federal Reserve banks paid $34.4 billion of their $41.9 billion in total income to the Treasury last year, the majority of which was earned through income on government-backed securities.

Representatives of Bear Stearns and JPMorgan couldn’t immediately be reached for comment. Spokeswomen for the Treasury Department and the Fed said they would respond to the senators’ request.

Rep. Henry Waxman, D-Calif., who heads the House Oversight and Government Reform Committee, is also collecting information for an inquiry, a committee aide said last week.

In addition to the Bear Stearns rescue, the Fed, in the broadest use of its lending authority since the 1930s, is letting squeezed Wall Street investment houses go directly to the central bank for emergency loans. That had been a privilege reserved for commercial banks.

The corrosion of Bear Stearns has prompted calls for tighter controls over investment banks including stricter cushions against losses. Paulson said that the breakdown of Bear Stearns underscores a need to bring investment banks under the same kind of federal oversight commercial banks receive. The Bush administration aims to soon release its own blueprint for regulatory overhaul.

“This latest episode has highlighted that the world has changed as has the role of other nonbank financial institutions and the interconnectedness among all financial institutions,” Paulson said in a speech to the U.S. Chamber of Commerce.

Rep. Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, last week unveiled a proposal to give the Fed or a new regulator the power to supervise the operations of major financial players. Critics see the current regulatory system as ineffective and unwieldy patchwork.

The Fed, divisions of the Treasury Department and the Securities and Exchange Commission each have jurisdiction over different types of financial institutions.