Deal Journal - WSJ.com
September 27, 2007, 10:48 am
Posted by Stephen Grocer
Do private-equity firms create jobs? It’s an essential point as the buyout kings get deeper into the economy and the U.S. Congress gets more eager to tax their pay.
The answer — at least for the most succesful private-equity owned firms — is yes. Accountancy Ernst & Young conducted the new study, examining 100 biggest sales of private-equity portfolio companies in the U.S. and Western Europe in 2006.
Ernst & Young found that the average enterprise value of the companies studied in both Europe and U.S. jumped more than 80% from the time they were acquired. The growth in enterprise value was driven in part by the fact that private-equity-owned companies achieved faster profit growth, two-thirds of which came from business expansion — while a third in Europe — and 23% came from cost reductions.
What does that mean for jobs? The study found that employment was at the same or higher level at the time of exit in 80% of U.S. buyouts and 60% of European buyouts. In the United Kingdom, France and Germany, where fears that the industry will slash jobs has spurred strong opposition and scathing criticism, employment at businesses owned by private-equity firms rose 5% annually. That compares to 3% for equivalent publicly traded companies.
And the performance of the company remains strong after private-equity exits the business.
The study could be used to challenge arguments by private-equity opponents: namely that buyout firms slice up companies and slash jobs all to fatten the wallets of their limited partners. Of course, the study is highly self-selecting, as it identifies what are essentially the most successful deals, not the ones that fail.
Still, the conclusions do get to an interesting point: Whether private-equity firms are better managers than others.
“I think it has been proven that IPOs of private-equity-backed companies perform better post-IPO than comparable companies not backed by private equity,” says John O’Neill, America’s director of private equity with Ernst & Young. “That’s because of their laser-like focus on improving the business and working very closely with management and the board that allows them to jump on things very quickly and make the business better.”
Thursday, September 27, 2007
Wednesday, September 26, 2007
Sallie Mae CEO’s Counterattack Against Waffling LBO Buyers
WSJ DealJournal, September 26, 2007:
Sallie Mae is the odds-on favorite to be the next deal after Harman and Genesco where the buyers try to slip away scot-free by arguing that a so-called Material Adverse Change has occurred to the business. The Sallie Mae buyers — private-equity firm J.C. Flowers & Co. as well as Bank of America and J.P. Morgan Chase — already have said education-finance legislation expected to be signed by President Bush may trigger the MAC clause in their merger agreement with SLM, the student lender’s parent.
With SLM saying last week, effectively, that a deal is a deal, if Flowers & Co. call a MAC — as many in the deal community expect they will — the parties could be headed to court (likely the Delaware Chancery Court, according to this post from Steven Davidoff from M&A Law Prof. Blog). That would be the biggest such deal ever to land there.
Here’s the key part: We spoke to someone who is familiar with the thinking of SLM Chairman Albert Lord, who is said by people who know him to be combative and competitive. He is expected to argue the following points: 1) Disclosures in the company’s 10-K annual filing with the SEC about possible legislation prevent the buyers from calling a MAC; and 2) Flowers sung the deal’s praises to potential equity partners after agreeing to the deal, and after it became clear that the legislation would be worse for the company than previously expected. How could he do that and at the same time argue that a material adverse change has occurred, the argument goes.
The Flowers camp won’t comment publicly. Privately they argue that the MAC clause in the deal does allow for an out if legislation for the industry is worse than what’s contemplated in the 10-K.
Of course, the two sides ultimately could settle their differences quietly and agree to a lower price for the deal. BofA chief Ken Lewis signaled that is what his bank wants in this interview published today in the Charlotte Observer.
At stake is the $900 million reverse break-up fee the buyers are on the hook for if they want to walk and can’t prove a MAC — and that will buy a lot of fireworks.
Sallie Mae is the odds-on favorite to be the next deal after Harman and Genesco where the buyers try to slip away scot-free by arguing that a so-called Material Adverse Change has occurred to the business. The Sallie Mae buyers — private-equity firm J.C. Flowers & Co. as well as Bank of America and J.P. Morgan Chase — already have said education-finance legislation expected to be signed by President Bush may trigger the MAC clause in their merger agreement with SLM, the student lender’s parent.
With SLM saying last week, effectively, that a deal is a deal, if Flowers & Co. call a MAC — as many in the deal community expect they will — the parties could be headed to court (likely the Delaware Chancery Court, according to this post from Steven Davidoff from M&A Law Prof. Blog). That would be the biggest such deal ever to land there.
Here’s the key part: We spoke to someone who is familiar with the thinking of SLM Chairman Albert Lord, who is said by people who know him to be combative and competitive. He is expected to argue the following points: 1) Disclosures in the company’s 10-K annual filing with the SEC about possible legislation prevent the buyers from calling a MAC; and 2) Flowers sung the deal’s praises to potential equity partners after agreeing to the deal, and after it became clear that the legislation would be worse for the company than previously expected. How could he do that and at the same time argue that a material adverse change has occurred, the argument goes.
The Flowers camp won’t comment publicly. Privately they argue that the MAC clause in the deal does allow for an out if legislation for the industry is worse than what’s contemplated in the 10-K.
Of course, the two sides ultimately could settle their differences quietly and agree to a lower price for the deal. BofA chief Ken Lewis signaled that is what his bank wants in this interview published today in the Charlotte Observer.
At stake is the $900 million reverse break-up fee the buyers are on the hook for if they want to walk and can’t prove a MAC — and that will buy a lot of fireworks.
Strategics Return to M&A Market
from Corporate Dealmaker Forum by Basdeo Hiralal
Strategic buyers are returning to the market in force after being outbid and crowded out by private equity buyers since 2004. However, strategic buyers will be more selective than private equity buyers and won’t pay the premiums and multiples that sellers have come to expect. Moreover, strategic transactions will be considerably smaller than the megadeals announced during the boom years.
Low interest rates, great liquidity and rising asset values fueled the greatest mergers and acquisition boom in history, with approximately $11.4 trillion in announced transactions on a worldwide basis since the beginning of 2004 (see table). Private equity accounted for a large percentage of these transactions. The credit crisis that developed in the summer of 2007 sharply reduced the number of private equity deals and the volume of M&A activity (see table).
Historically, sellers faced a trade-off between private equity and strategic buyers. Private equity buyers traditionally offered sellers a lower bid, but no antitrust risk of a delay or challenge by a competition agency in the U.S. or abroad. Strategic buyers, in contrast, traditionally offered a higher bid than private equity by sharing some of the synergies of a proposed transaction with the seller. That premium, however, was sometimes accompanied by antitrust risk. Over the last couple of years, private equity buyers were able to offer sellers both higher prices and no antitrust risk, effectively trumping strategic buyers and largely crowding them out of the market.
This dynamic has now changed. Most significantly, the credit crisis has restricted the availability of capital and raised uncertainty in the credit markets. Second, some private equity buyers also now present antitrust risk due to prior acquisitions.
We expect to see consolidation in the energy, steel, chemicals, pharmaceutical and healthcare industries. A number of strategic transactions have been recently announced, including Transocean Inc.-GlobalSantaFe Corp. (offshore drilling rigs); US Steel Corp.-Stelco Inc. (Canadian steelmaker) and Medco Health Solutions Inc.-PolyMedica Corp. (diabetes-care services and products). Bloomberg LP has reported speculation that Arcelor Mittal may bid for Tenaris SA (steel pipe). We see more strategic acquisitions in the pipeline and expect the weak dollar to attract foreign buyers. — Tom Fina
Tom Fina is a partner in the antitrust practice in the Washington office of international law firm Howrey LLP.
Strategic buyers are returning to the market in force after being outbid and crowded out by private equity buyers since 2004. However, strategic buyers will be more selective than private equity buyers and won’t pay the premiums and multiples that sellers have come to expect. Moreover, strategic transactions will be considerably smaller than the megadeals announced during the boom years.
Low interest rates, great liquidity and rising asset values fueled the greatest mergers and acquisition boom in history, with approximately $11.4 trillion in announced transactions on a worldwide basis since the beginning of 2004 (see table). Private equity accounted for a large percentage of these transactions. The credit crisis that developed in the summer of 2007 sharply reduced the number of private equity deals and the volume of M&A activity (see table).
Historically, sellers faced a trade-off between private equity and strategic buyers. Private equity buyers traditionally offered sellers a lower bid, but no antitrust risk of a delay or challenge by a competition agency in the U.S. or abroad. Strategic buyers, in contrast, traditionally offered a higher bid than private equity by sharing some of the synergies of a proposed transaction with the seller. That premium, however, was sometimes accompanied by antitrust risk. Over the last couple of years, private equity buyers were able to offer sellers both higher prices and no antitrust risk, effectively trumping strategic buyers and largely crowding them out of the market.
This dynamic has now changed. Most significantly, the credit crisis has restricted the availability of capital and raised uncertainty in the credit markets. Second, some private equity buyers also now present antitrust risk due to prior acquisitions.
We expect to see consolidation in the energy, steel, chemicals, pharmaceutical and healthcare industries. A number of strategic transactions have been recently announced, including Transocean Inc.-GlobalSantaFe Corp. (offshore drilling rigs); US Steel Corp.-Stelco Inc. (Canadian steelmaker) and Medco Health Solutions Inc.-PolyMedica Corp. (diabetes-care services and products). Bloomberg LP has reported speculation that Arcelor Mittal may bid for Tenaris SA (steel pipe). We see more strategic acquisitions in the pipeline and expect the weak dollar to attract foreign buyers. — Tom Fina
Tom Fina is a partner in the antitrust practice in the Washington office of international law firm Howrey LLP.
Monday, September 24, 2007
M&A Deal Credit Crunches
TheCorporateCounsel.net Blog
The Practical Corporate & Securities Law Blog, Broc Romanek and Dave Lynn are Editors of TheCorporateCounsel.net
September 24, 2007
Despite the Fed's reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: "The 'Downturn' Roadmap: Parsing the Shift in Deal Terms").
Here are some of the notable developments and disclosures:
1. Harman International's Form 8-K (expected soon) - According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce "stub equity."
2. Genesco's Form 8-K (filed 9/20/07) - As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).
3. Reddy Ice Holding's Proxy Statement (filed 9/12/07) - As noted in this article, Morgan Stanley, the deal's solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was "reserving its rights." According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout's equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley's consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.
4. Accredited Home Lenders Holding Co.'s Form 8-K (filed 9/20/07) - As noted in this article, Accredited Home Lenders compromised on its price tag in order to save its sale to the Lone Star Fund.
5. SLM Corp.'s Additional Soliciting Material (filed 8/7/07) - As noted in this article, Sallie Mae's purchase by a consortium led by JC Flowers & Co. might tank as the buyers are having second thoughts.
Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing
Join DealLawyers.com tomorrow for a webcast – “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing” – to hear Tim O'Connor of Imperial Capital, and Mark Palmer and Jonathan Gill of Bracewell Giuliani discuss the latest trends and developments regarding the opportunities and strategies available in distressed situations. Given what’s happening in the credit markets – this program is particularly timely!
Coming Soon: On November 1st, join us for the webcast: “Compensation Arrangements for Private Equity Deals.”
Act Now: To catch these programs, try a 2008 no-risk trial to DealLawyers.com today – and get the "Rest of 2007" at no charge.
Delaware Supreme Court: Rejects Deepening Insolvency Cause of Action
A few weeks ago, the Delaware Supreme Court decided - in Trenwick America Litigation Trust v. Billet, No. 495, 2006 (Del. Aug. 14, 2007) - that no cause of action asserting deepening insolvency exists under Delaware law. Sitting en banc, the court didn't issue its own decision - rather, it relied on the lengthy opinion of Vice Chancellor Strine issued in August of last year, where he looked carefully at the underlying theory (and other available causes of action) and concluded that the deepening insolvency theory was incoherent. We have posted memos regarding this decision in our "Bankruptcy & Reorganization" Practice Area.
- Broc RomanekPosted by broc at 06:42 AMPermalink: Some Notable Credit Crunch Disclosures and Developments...
The Practical Corporate & Securities Law Blog, Broc Romanek and Dave Lynn are Editors of TheCorporateCounsel.net
September 24, 2007
Despite the Fed's reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: "The 'Downturn' Roadmap: Parsing the Shift in Deal Terms").
Here are some of the notable developments and disclosures:
1. Harman International's Form 8-K (expected soon) - According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce "stub equity."
2. Genesco's Form 8-K (filed 9/20/07) - As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).
3. Reddy Ice Holding's Proxy Statement (filed 9/12/07) - As noted in this article, Morgan Stanley, the deal's solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was "reserving its rights." According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout's equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley's consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.
4. Accredited Home Lenders Holding Co.'s Form 8-K (filed 9/20/07) - As noted in this article, Accredited Home Lenders compromised on its price tag in order to save its sale to the Lone Star Fund.
5. SLM Corp.'s Additional Soliciting Material (filed 8/7/07) - As noted in this article, Sallie Mae's purchase by a consortium led by JC Flowers & Co. might tank as the buyers are having second thoughts.
Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing
Join DealLawyers.com tomorrow for a webcast – “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing” – to hear Tim O'Connor of Imperial Capital, and Mark Palmer and Jonathan Gill of Bracewell Giuliani discuss the latest trends and developments regarding the opportunities and strategies available in distressed situations. Given what’s happening in the credit markets – this program is particularly timely!
Coming Soon: On November 1st, join us for the webcast: “Compensation Arrangements for Private Equity Deals.”
Act Now: To catch these programs, try a 2008 no-risk trial to DealLawyers.com today – and get the "Rest of 2007" at no charge.
Delaware Supreme Court: Rejects Deepening Insolvency Cause of Action
A few weeks ago, the Delaware Supreme Court decided - in Trenwick America Litigation Trust v. Billet, No. 495, 2006 (Del. Aug. 14, 2007) - that no cause of action asserting deepening insolvency exists under Delaware law. Sitting en banc, the court didn't issue its own decision - rather, it relied on the lengthy opinion of Vice Chancellor Strine issued in August of last year, where he looked carefully at the underlying theory (and other available causes of action) and concluded that the deepening insolvency theory was incoherent. We have posted memos regarding this decision in our "Bankruptcy & Reorganization" Practice Area.
- Broc RomanekPosted by broc at 06:42 AMPermalink: Some Notable Credit Crunch Disclosures and Developments...
Tuesday, September 18, 2007
Trouble in the Private Equity Market
DealLawyers.com, September 18, 2007:
That there is much trouble in the private equity market is clear and well-documented. No credit available for signed deals. Private equity partners suing each other. Shareholders suing funds. The troubles will likely continue for some time.
On Sunday, the NY Times ran this column with some interesting remarks from Michael Jensen, professor emeritus at the Harvard Business School, leading scholar in finance and management, and the man whom many consider to be the intellectual father of private equity. Here is an excerpt:
“We are going to see bad deals that have been done that are not publicly known as bad deals yet, we will have scandals, reputations will decline and people are going to be left with a bad taste in their mouths,” Mr. Jensen said in an interview last week. “The whole sector will decline.”
Mr. Jensen was elaborating on the trenchant comments he made last month in a forum on private equity convened by the Academy of Management. There, he excoriated private equity titans who sell stock in their companies to the public — a non sequitur in both language and economics, he said — and warned that industry “innovations,” like deal fees that encourage private equity managers to overpay for companies, will destroy value at these firms, not create it.
He also said that private equity managers who sell overvalued company shares to the public, whether in their own entities or in businesses they have bought and are repeddling, are breaching their duties to those buying the stocks.
“The owners who are selling the equity are in effect giving their word to the market that the equity is really worth what it is being priced at,” he said. “But the attitude on Wall Street is that there is no responsibility to the buyers of the equity on the part of the managers who are doing the selling. And that’s a recipe for nonworkability and value destruction.”
That there is much trouble in the private equity market is clear and well-documented. No credit available for signed deals. Private equity partners suing each other. Shareholders suing funds. The troubles will likely continue for some time.
On Sunday, the NY Times ran this column with some interesting remarks from Michael Jensen, professor emeritus at the Harvard Business School, leading scholar in finance and management, and the man whom many consider to be the intellectual father of private equity. Here is an excerpt:
“We are going to see bad deals that have been done that are not publicly known as bad deals yet, we will have scandals, reputations will decline and people are going to be left with a bad taste in their mouths,” Mr. Jensen said in an interview last week. “The whole sector will decline.”
Mr. Jensen was elaborating on the trenchant comments he made last month in a forum on private equity convened by the Academy of Management. There, he excoriated private equity titans who sell stock in their companies to the public — a non sequitur in both language and economics, he said — and warned that industry “innovations,” like deal fees that encourage private equity managers to overpay for companies, will destroy value at these firms, not create it.
He also said that private equity managers who sell overvalued company shares to the public, whether in their own entities or in businesses they have bought and are repeddling, are breaching their duties to those buying the stocks.
“The owners who are selling the equity are in effect giving their word to the market that the equity is really worth what it is being priced at,” he said. “But the attitude on Wall Street is that there is no responsibility to the buyers of the equity on the part of the managers who are doing the selling. And that’s a recipe for nonworkability and value destruction.”
Wednesday, September 12, 2007
Smaller M&A Deals
WSJ DealJournal, September 11, 2007:
Need more proof of the impact the credit markets are having on global deal making? Look no further than the average size of deals announced last month.
With investment banks now balking at financing megadeals, the theory went that buyers would turn to the middle market to make deals. (See this post.) Data from August on the average deal size seems to bear that out.
Not only were the number of deals and deal volume down in August, but the average deal size tumbled world-wide to $121 million. That was the lowest average since November 2004, a 65% drop from July and a 32% slide from August 2006. Last month also had just one deal larger than $5 billion, the first time that had happened since September 2004, according to Thomson Financial.
Not surprisingly, the tumble in average deal size was most pronounced among private-equity-led buyouts, which fell to $197.8 million – a far cry from $881.8 million in July or even the $476 million in August 2006. It also represented the lowest average LBO size since February 2005, according to the data.
This was even more pronounced in the U.S., where the size of the average LBO deal tumbled to $239.6 million. By way of comparison, in only one other month this year (January) did the average buyout size fall below $1 billion and, at $748.5 million, January’s average still was more than three times as much as August.
Corporate buyers also announced smaller deals last month. The average size of strategic transactions globally fell 28% from a year ago to $114.4 million. That was the lowest since March 2005 and suggests – along with the fact that corporate deal volume fell to the lowest monthly total since January 2006 – that corporate buyers didn’t fill the void left by the now less-active private-equity firms.
In the U.S., the average size of strategic transactions did rise 6% from a year earlier, though it was down 26% from July.
Need more proof of the impact the credit markets are having on global deal making? Look no further than the average size of deals announced last month.
With investment banks now balking at financing megadeals, the theory went that buyers would turn to the middle market to make deals. (See this post.) Data from August on the average deal size seems to bear that out.
Not only were the number of deals and deal volume down in August, but the average deal size tumbled world-wide to $121 million. That was the lowest average since November 2004, a 65% drop from July and a 32% slide from August 2006. Last month also had just one deal larger than $5 billion, the first time that had happened since September 2004, according to Thomson Financial.
Not surprisingly, the tumble in average deal size was most pronounced among private-equity-led buyouts, which fell to $197.8 million – a far cry from $881.8 million in July or even the $476 million in August 2006. It also represented the lowest average LBO size since February 2005, according to the data.
This was even more pronounced in the U.S., where the size of the average LBO deal tumbled to $239.6 million. By way of comparison, in only one other month this year (January) did the average buyout size fall below $1 billion and, at $748.5 million, January’s average still was more than three times as much as August.
Corporate buyers also announced smaller deals last month. The average size of strategic transactions globally fell 28% from a year ago to $114.4 million. That was the lowest since March 2005 and suggests – along with the fact that corporate deal volume fell to the lowest monthly total since January 2006 – that corporate buyers didn’t fill the void left by the now less-active private-equity firms.
In the U.S., the average size of strategic transactions did rise 6% from a year earlier, though it was down 26% from July.
Monday, September 10, 2007
The Ranks of the Comfortable Are Still Thinning
By ANDREW ROSS SORKIN, New York Times, Sunday, September 9, 2007:
BY now, all of Wall Street understands that the private-equity gravy train has jumped the tracks. But few seem to realize how ugly the pile-up could become.
With the buyout market in free fall, lots of attention has focused on a few obvious pressure points, like which investment banks will rack up big losses on the $330 billion in debt that they committed to pay for leveraged buyouts over the last year.
For the most part, though, Wall Street seems to be taking it all in stride. James Dimon, the chief executive of JPMorgan Chase, said last month that he was “comfortable.”
Comfortable? Let me offer a more dour view: wide swaths of Wall Street, and many of the industries that serve it, are in for some serious collateral damage. Not only has private equity been out of business for the last two months, but that activity is not likely to resume with any significance soon. And when it does, it will be at a fraction of its recent peak.
So what does that mean? For much of Wall Street, a severe case of withdrawal. Forget about cutting the size of bonuses: let’s start really thinking about the possibility of slashing jobs.
See the article at: http://www.nytimes.com/2007/09/09/business/09deal.html?_r=1&dlbk&oref=slogin
BY now, all of Wall Street understands that the private-equity gravy train has jumped the tracks. But few seem to realize how ugly the pile-up could become.
With the buyout market in free fall, lots of attention has focused on a few obvious pressure points, like which investment banks will rack up big losses on the $330 billion in debt that they committed to pay for leveraged buyouts over the last year.
For the most part, though, Wall Street seems to be taking it all in stride. James Dimon, the chief executive of JPMorgan Chase, said last month that he was “comfortable.”
Comfortable? Let me offer a more dour view: wide swaths of Wall Street, and many of the industries that serve it, are in for some serious collateral damage. Not only has private equity been out of business for the last two months, but that activity is not likely to resume with any significance soon. And when it does, it will be at a fraction of its recent peak.
So what does that mean? For much of Wall Street, a severe case of withdrawal. Forget about cutting the size of bonuses: let’s start really thinking about the possibility of slashing jobs.
See the article at: http://www.nytimes.com/2007/09/09/business/09deal.html?_r=1&dlbk&oref=slogin
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