JPMorgan Chase caved in to pressure from shareholders in Bear Stearns, including Joe Lewis, the British billionaire, and agreed yesterday to raise its offer for the stricken investment bank to about $1.4 billion (£705 million), roughly five times its original bid.

JPMorgan lifted its all-stock bid for its American rival to about $10 a share after a hastily convened board meeting yesterday morning, which followed a weekend of frantic behind-the-scenes negotiations.

By raising its offer price and agreeing a highly unusual side-deal, JPMorgan is seeking to prevent a revolt by leading shareholders in Bear, who had vowed to reject the original $2-a-share offer, threatening a “no” vote and litigation.

In the side-deal, Bear’s board immediately authorised a sale of a 39.5 per cent stake in itself to JPMorgan through a separate transaction in which Bear will issue new stock, also at about $10 a share, which JPMorgan will buy.

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The law of Delaware, where JPMorgan and Bear are incorporated, allows up to 40 per cent of a company be sold without shareholder approval.

The side-deal means that Jamie Dimon, JPMorgan’s chief executive, needs approval from only 10.5 per cent more of Bear shares to get the transaction done. Bear’s board will own 3 per cent of the group after the new issue and will vote for the revised deal.

JPMorgan and Bear aim to secure enough votes from remaining shareholders and to close the deal by April 8.

However, Wall Street was doubtful a deal would be finalised at $10 a share and investors lifted Bear’s price 91 per cent to $11.40 on announcement of the revised offer. Brad Hintz, a Sanford Bernstein analyst, said: “The market clearly doesn’t think this battle is over.” Bear closed up 88 per cent at $11.25.

Mr Hintz said that although the 39.5 per cent stake sale appeared to secure Bear for JPMorgan by effectively barring a rival offer and although the transaction had been justified on the basis that Bear desperately needed to raise new capital, a rival bidder could try to challenge the side-deal by arguing that Bear does not need to raise new capital through a share sale.

The stricken bank is being guaranteed by JPMorgan and, under a new rule introduced last week, has access to cheap funding through the Federal Reserve’s so-called discount window.

The revised deal was agreed a week after some Bear staff wept as they realised that the just-agreed $2-a-share firesale to JPMorgan would wipe out most of their savings.

Meredith Whitney, an analyst for Oppenheimer & Co, said: “Jamie Dimon was clearly very upset with how distraught Bear employees were.

His decision to raise the offer was definitely a human move and as a leader you can’t be human.

“He has made a big mistake and opened a Pandora’s box. If $10, why not $20, or $50? It’s like with a child: if you give the shareholders an inch, they will go for a mile.”

Analysts said that JPMorgan faced political pressure not to raise its bid too much, since the Fed has agreed to guarantee $29 billion of Bear’s most toxic sub-prime securities using public money to ensure that a deal is done.

Adam Compton, an RCM Investors analyst, said: “The Fed doesn’t want this to be seen as a bailout and the higher the price, the more it looks that way.”

The Fed is keen to prevent Bear’s near-collapse having a domino effect in the securities industry, but does not want to be accused of using public money to reimburse shareholders in a bank that fell victim to its own risky behaviour.

The low sale price angered Bear shareholders, in particular Mr Lewis, the Tottenham Hotspur Football Club owner, who would have lost $1 billion on his investment in Bear at that price.

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