Tuesday, October 30, 2007

Has the M&A Market Hit Bottom?

October 29, 2007, 3:52 pm
Posted by Dana Cimilluca, DealJournal - WSJ.com

M&A bankers can start crawling out from under their rocks.
The credit squeeze this summer put the M&A market in a deep freeze, and sent bankers running for cover. The volume of announced U.S. deals plummeted to $53.7 billion in September, according to data compiled by Thomson Financial. That is down nearly 80% from the $250.8 billion of deals struck at the height of the deal boom in May, courtesy of a leveraged-buyout surge fueled by the cheap credit then coursing through the veins of world financial markets.
With October ending in two days and the books closed on the final Merger Monday of the month today, it looks as if a rebound could be underway. In October, U.S. companies have struck $73.6 billion of takeovers, up 37% from last month, according to Thomson.
World-wide, a similar uptick is observed. After plunging 65% to $197.8 billion in September from May, global M&A volume has ticked up to $263 billion this month, the data show.
Caveats and caution flags abound. For one, the totals include Oracle’s $6.3 billion bid for BEA Systems this month. The offer has been rebuffed and may ultimately come to naught. And with jitters in the credit markets persisting, the jury is still out on whether we are in a temporary thaw before an even deeper deal freeze.
Still, should the upticks turn into a trend, bankers may come to remember this October more fondly than anyone outside of Red Sox fans.

Thursday, October 25, 2007

A Battle Over Funding for Small Businesses

Representative Jason Altmire, a Pennsylvania Democrat, says he was just trying to help the small technology companies blossoming in his district, just north of Pittsburgh.
So when two of his constituents argued that small businesses should be able to qualify for federal research grants without being penalized for accepting venture capital money, he agreed to introduce legislation that would help them.
His bill, the Small Business Expansion Act of 2007, sailed through the Small Business Committee and then the full House of Representatives on a 325-to-73 vote last month. But the House adopted an important change as the measure came up for a vote — it specified that a small business could not give up an ownership stake of “50 percent or more” to a venture capital firm.
The amendment was meant to satisfy critics, among them officials of the Small Business Administration who argued that allowing venture capitalists to pour unlimited amounts of money into these fledgling businesses would fundamentally alter the concept of a small — and independent — business.
But as the legislation awaits Senate action, opponents argue that the amendment did not resolve their concerns. The S.B.A., they say, has long had discretion in determining whether venture capital’s support of a small business represents an investment or whether it crosses the line into control of the company. The legislation, they say, takes away that discretion by spelling out a particular percentage.
In addition, the critics say they fear that the bill will clear the way for venture capital firms to use their investment to take a controlling stake, giving them the potential to masquerade as small firms and tap into billions of dollars in federal research grants and contracts.
That is an important and sensitive argument at a time when the government has been criticized for awarding contracts to large corporations operating under the guise of small businesses. Edsel M. Brown Jr., assistant director for S.B.A.’s office of technology, said the legislation was unnecessary because “a venture capital company already can invest more than 49 percent as long as it doesn’t have ownership and control.”
The White House also opposes the measure. “The provision would allow large businesses, not-for-profit organizations, and colleges and universities,” a White House statement said, “to own and control small businesses and benefit from programs designed for independent small businesses.”
Quite the contrary, Representative Altmire insists, saying that his bill “does not favor any small business over another, but it also does not automatically disqualify a small business either.”
He argues that the legislation is needed because many tech start-ups are “told by the Small Business Administration that they are ineligible for government money because they got venture capital money — and that doesn’t make any sense.”
Go to Article from The New York Times »

Two Tax Proposals Target Wealthy Fund Managers

The House's leading Democratic tax writer said he will propose a $48 billion tax increase on executives of hedge funds and private-equity firms to help pay for curbing the alternative minimum tax this year.
Go to Article from Bloomberg News»
Go to Article from The Wall Street Journal»
Go to Article from The New York Times»

Wednesday, October 24, 2007

Shareholders Reject Cablevision Deal

Shareholders on Wednesday unplugged the Dolan family’s $10.6 billion bid for Cablevision Systems.
The investor vote leaves Cablevision as an independent company and spells an end, for now, to two years of takeover efforts by the Dolans. Though Cablevision did not provide a breakdown of the vote, large shareholders, proxy advisory firms and analysts had expressed strong reservations about the offer.
Cablevision’s largest outside shareholder, the hedge fund ClearBridge Advisors, and the fund manager Mario Gabelli both opposed the buyout offer, saying the price was too low. Mr. Gabelli went even further, filing notice that he planned to exercise his shareholder appraisal rights, which allow a Delaware court to determine the fair value of his shares.
For their part, despite the latest and most definitive setback they have faced, the Dolans said they remain confident in the company’s future.
“While we are disappointed that shareholders did not approve the transaction, there is really nothing negative about today’s outcome,” the family’s two leading members, Charles Dolan and James Dolan, said in a statement. “We see today’s outcome as a vote of confidence in the prospects of Cablevision, its management team, its 20,000 employees and the industry’s future.”
Go to Cablevision Press Release »

Cisco Goes WiMax With Navini Deal

Cisco Systems has finally put its weight squarely behind WiMax wireless broadband technology, announcing on Tuesday a $330 million agreement to buy the privately held Navini Networks.
Dallas-based Navini, founded in 2000, is a leading developer of technologies that improve the performance of WiMax services and that can cut the capital and operational expenditures for service providers by as much as 50 percent, Cisco said.
WiMax, which stands for Worldwide Interoperability for Microwave Access, is a wireless broadband technology that can travel over much greater distances than Wi-Fi.
The deal marks a decent exit for Navini’s many venture capital backers, which poured roughly $200 million into the startup over six rounds. Backers include Austin Ventures; Acapita Ventures, the venture capital arm of Arcapita Bank; Scottwood Capital; Granite Ventures; Investor Growth Capital; Lehman Brothers Venture Partners; Sternhill Partners; Intel Corp.’s Intel Capital and Motorola Ventures, the corporate V.C. arm of Motorola.
Go to Article from The Deal.com »

Monday, October 22, 2007

The Gloomsayers Should Look Up

In his weekly column in The New York Times, Ben Stein argues that while the economy is basically in good shape, the current problems in the credit market can be squarely laid at the door of the investment banking chieftains.
Go to Article from The New York Times»

Tuesday, October 16, 2007

Tech Companies Ramp Up M&A

Technology companies have ramped up their M&A spending in the last six weeks, and one survey suggests they are just getting started. The 451 Group polled corporate development professionals at actively acquiring companies, and more than 80 percent of them said they planned to maintain or increase their level of M&A in the next year.

Go to Report from The 451 Group»

Thursday, October 11, 2007

Private Equity Is on Pace for Record Fund-Raising Year

Posted by Deal Journal on WSJ.com:
Keenan Skelly of Dow Jones Newsletters files this report on fund-raising by private-equity firms.
While trouble in the credit markets led to a pronounced slowdown in buyout deal-making in the third quarter, no corresponding decline has been seen in fund-raising.
Through the third quarter of this year, $199.4 billion has been raised by 295 U.S. private-equity firms, well ahead of the $154.1 billion collected by 232 firms in the year-earlier period, according to data collected by Private Equity Analyst, an industry newsletter published by Dow Jones & Co. The figure is $60 billion ahead of where the industry was at the midpoint of the year.
The data encompass funds raised by buyout, venture capital, and other types of private-equity firms.
With such firms as Apollo Management, the Carlyle Group and Warburg Pincus still in the market raising funds of $10 billion or more each, the tally looks likely to continue rising rapidly through year end, meaning U.S. fund-raising could well break 2006’s record total of $254 billion.
The continued strength is in part a reflection of the fact that it takes time for limited partners and general partners alike to adjust to new circumstances in their markets. It also is driven by the recognition by many LPs that private equity is a long-term investment, and that consistently committing capital to the asset class over time – and not just when market conditions are good – is likely the best way to generate strong returns.
The buyout category continues to dominate, with 132 buyout funds raising $155 billion this year, up from $100.7 billion raised by 96 shops at this point in 2006. Strong fund-raising by firms looking to take advantage of distressed opportunities is a big part of the 2007 picture, with such funds accounting for $29.6 billion of the total raised this year. Distressed firms had already raised a record sum by July of this year.
On the venture-capital side, fund-raising continues to be sluggish. A total of 102 U.S. venture firms have raised $18.8 billion this year, down from $21.3 billion raised by 89 firms in the year-ago period.
In Europe as in the U.S., fund-raising totals remain on track for a record. Through the first nine months of the year, 116 European private equity firms raised a total of $73.1 billion, ahead of the $68.6 billion that 114 funds had raised at this point in 2006. The record for Europe of $100.8 billion was set last year.

Wednesday, October 10, 2007

Plaintiffs Face Skeptical Court in Key Fraud Case

With Chief Justice John G. Roberts Jr. taking the lead in arguments in the Stoneridge case -- one of the most closely watched business cases in years -- the Supreme Court appeared strongly inclined to leave it to Congress to define the circumstances under which secondary players like investment banks, auditors and vendors can be sued in private securities fraud actions. Go to Article from The New York Times»

Tuesday, October 09, 2007

Justices to Consider the Liability of Bankers, Vendors

Submitted by: Ted Allen, RiskMetrics Group - Risk & Governance blog:

The U.S. Supreme Court will hear arguments today in Stoneridge Investment Partners v. Scientific-Atlanta, a high-profile case that concerns the liability of bankers, vendors, and other third parties who help companies commit securities fraud.
The Stoneridge case stems from claims by shareholders of Charter Communications against Motorola and Scientific-Atlanta, which manufactured set-top boxes used by Charter’s cable television subscribers. The investors allege that the two vendors engaged in “wash” transactions in 2000 to help Charter meet its annual operating cash flow goals.
The closely watched case, which one industry group has called “the most important case in a generation,” has attracted 30 amicus briefs from investor advocates, state officials, and industry groups.
The Council of Institutional Investors, the North American Securities Administrators Association, the University of California, the New York State Teachers’ Retirement System, the Change to Win labor federation, and 30 state attorneys general have filed briefs in support of investors. The Bush administration disregarded the recommendation of the Securities and Exchange Commission and filed a brief in support of the Charter vendors.
While the Supreme Court previously barred suits against “aiders and abettors” in its 1994 Central Bank of Denver decision, the Charter investors argue that they should be able to bring “scheme liability” claims against vendors, bankers, and others who knowingly participate in transactions that help companies mislead shareholders, even if the third parties didn’t publicly mislead anyone. Billions of dollars may be at stake in the case, as the high court’s decision likely will have far-reaching implications and affect the ability of Enron investors to pursue a class lawsuit against the company’s former investment banks.
On Sept. 20, the Supreme Court announced that Chief Justice John Roberts would take part in the court’s deliberations in Stoneridge. Roberts, along with Justice Stephen Breyer, earlier recused himself from the high court’s decision on whether to hear the case. Both justices reported in their 2006 financial disclosure forms that they own shares in Cisco Systems, the parent of Scientific-Atlanta, Legal Times reported. The Supreme Court did not disclose the basis for the chief justice’s decision to rejoin the case.
Roberts’ participation in the case presumably will help the defendants. During the past year, the chief justice joined court majorities in several rulings that favored business interests.

Sallie Mae Sues to Force a Buyout

Published: October 9, 2007, The New York Times

The SLM Corporation, parent of the student lender Sallie Mae, filed a lawsuit yesterday against a group of firms that had agreed to buy it for $25 billion but now are trying to renegotiate the deal.
The suit, filed last night in Delaware Chancery Court, comes one day ahead of a self-imposed deadline by the buyers to reach a new agreement. Failing that, the buyers — the private equity firms J. C. Flowers & Company and Friedman Fleischer & Lowe and the banks JPMorgan Chase and Bank of America — were prepared to walk away. Under the terms of the deal negotiated in April, the firms would pay a $900 million breakup fee.
The lawsuit is the harshest turn yet in one of the most bitter buyout fights this year. Buyers in other deals have clashed privately with their targets over price and terms of the acquisitions, but Sallie Mae and its suitors have been unafraid to slug it out in public.

Friday, October 05, 2007

Open Season on American Companies

WSJ.COM/DealJournal, October 4, 2007, 1:05 pm:

U.S. voters are getting increasingly nervous about free trade, reports this most recent edition of the WSJ-NBC News Poll. Here’s another reason for them to pay notice.
It turns out 2007 is shaping up as the most-active year for foreign acquisitions into the U.S. since 1990, according to recently released statistics from Thomson Financial. Seventeen years ago, there were jitters about Japanese buyers scooping up American icons from Rockefeller Center to Columbia Pictures.
Today, the list of buyers is incredibly diverse, with English, Russian, German, Chinese and Finnish companies getting into the mix.
In all, foreign buyers were responsible for more than 21% of U.S. acquisitions this year, a total of $275 billion of the record-setting $1.3 trillion in overall deals. Since 1990 — when the foreign buyers accounted for 28% of the M&A world — the percentage has fluctuated largely in the teens. See what effects this has had in New England, via this Boston Globe story.
There are a series of mixed political and economic messages in these numbers: The first is that the weakening U.S. dollar is creating a ripe opportunity for buyers around the world. The past week alone, for instance, has seen Canada’s TD Bank spend $8.5 billion on Commerce Bank and Finland’s Nokia Oyj buy digital map maker firm Navteq Corp. for roughly $8 billion.
Is this good or bad for the U.S. economy? There’s a thesis in this question. We’ll try to sum it up in two paragraphs.
It’s positive in that American companies continue to attract the best capital from around the world. This preumably keeps the American economy in its dynamic state, which is essential to overall growth and wealth creation. Want to see what happens when global capital dries up? Take a look at Asia after the currency crisis about 10 years ago.
Yet there’s understandably a worry underneath these investments. From a political standpoint, might a backlash against investments into the U.S. push the U.S. government to install its own trade roadblocks — thus blocking off U.S. capital from foreign markets? Even more important is the dilemma of our own economic habits: Are our trade imbalances so great that we’ve set up the seeds for our own cherry-picking?

Venture Capital's Hidden Calamity

BusinessWeek.com, October 3, 2007, 12:01AM EST :

A closer look at otherwise strong investment growth shows many firms are getting all the drawbacks of a hot market, with few of the benefits. by Sarah Lacy

This is a bad time to be a venture capitalist. Anyone who says different is raising a new fund—or works at one of the few firms having a good year.
Sure, the numbers look great on the surface. The value of deals rose a solid, yet not bubbly, 8% in the second quarter, with investors pumping $7.4 billion into emerging companies, according to Dow Jones VentureOne. And the money is funding some legitimately exciting frontiers, including Web 2.0, which attracted $500 million in the first half. Companies specializing in clean tech got $1.1 billion in the same period.
Initial public offerings are up for the year, too. In the second quarter, venture-backed companies tapped the public markets for $2.73 billion, the most raised in a three-month period since the go-go days of 2000. And researchers expect the current period to be another banner quarter, with a whopping 46 companies looking to file.
IPOs and Acquisitions Tell a Different Story
But a closer look at the numbers reveals some disturbing trends. Consider IPOs. Most of the initial share sales getting done are mainly one-off companies that were founded years ago and have slogged away at building solid businesses for a half-decade or more. This year's biggest hits were MetroPCS (PCS) of Dallas and EMC's (EMC) spin-out of VMware (VMW)—hardly your classic Silicon Valley startups. There's simply no big overall tech movement getting Wall Street revved up, and among entrepreneurs, the feeling is mutual. Sarbanes Oxley and other regulations have made the prospect of going public far less appealing.
The picture looks worse among acquisitions. Sure, the usually sleepy third quarter saw $10 billion come in acquisition proceeds, but that was spread among 90 deals. Companies like TellMe, the voice recognition software company founded in the late 1990s that snagged $800 million from Microsoft (MSFT), are in the minority this year. Far more common is the tech company that plodded along for more than six years, chewing through some $30 million in venture cash to eventually get bought for $50 million or so. Indeed, the median length of time it took companies to get bought was the longest Dow Jones VentureOne has seen since it started measuring the industry 20 years ago. Meanwhile, valuations keep rising, as billions of dollars in VCs’ coffers fight to get in what few great companies are out there.

Thursday, October 04, 2007

Time for a New Corporate Buying Spree?

BusinessWeek.com, October 3, 2007, 3:57PM EST
As earnings take a nosedive, analysts expect to see more companies turn to M&A to pick up the slack. They certainly have the cash. by Steve Rosenbush

The slowdown in U.S. corporate profits has been swift and stunning. While earnings for companies in the Standard & Poor's 500-stock index grew a robust 14.7% in 2006, profit growth has screeched to a halt amid the troubled financial climate of 2007. With the income-reporting season kicking off the week of Oct. 8, average earnings for the S&P 500 companies are on track to grow just 1.9% during the third quarter, the slowest pace in more than five years, according to senior S&P index analyst Howard Silverblatt. That's down from 7.9% for the first quarter and 9.6% in the second. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)
The slowdown creates a dilemma for corporations, which face an imperative to "grow or die," Silverblatt says. How will they address their profit-growth problem? Many experts believe they will increasingly turn to mergers and acquisitions. "I don't think there's any question that growth will be harder to come by and that many companies will attempt to compensate for that by using M&A," says Hal Ritch, the former co-head of M&A at Citi (C); Donaldson, Lufkin & Jenrette; and Credit Suisse (CS), which acquired DLJ. He's now co-CEO of Sagent Advisors, an M&A advisory shop.
Ritch and other M&A advisers say they have detected a shift in their business during the last few months. The private equity firms that dominated M&A last year and during the first half of 2007 have been doing fewer deals of late. They are having a tougher time securing funding (BusinessWeek.com, 9/17/07).
continue http://www.businessweek.com/bwdaily/dnflash/content/oct2007/db2007103_812197.htm?dlbk

Wednesday, October 03, 2007

Leveraged Buyout Bust By-Product: Lawsuits

DealLawyers.com Blog

Here is some good stuff from the D&O Diary Blog: As credit market disruption has reached the leveraged buyout world, a number of deals announced earlier this year to great fanfare have been unceremoniously snuffed, while others are on life support. Not too surprisingly, one direct result from this deal derailment has been a spate of lawsuits, as jilted partners and disappointed investors cast blame and seek to recoup their lost expectancy.
The most interesting of these litigation developments is the securities class action lawsuit that a Harman International Industries shareholder filed on October 1, 2007 against the company and three of its officers and directors. (Here is the complaint and the plaintiffs’ lawyers’ press release.) The Harman International lawsuit filing follows hard on the heels of the company’s September 21, 2007 announcement that its erstwhile acquirers, Kohlberg Kravis Roberts and a Goldman Sachs investment fund, had informed the company that they "no longer intend to complete the previously announced acquisition" of the company, and that they "believe a material adverse change in Harman’s business has occurred." Here is a Wall Street Journal’s article discussing the cancellation of the $8 billion deal.
The lawsuit, filed on behalf of shareholders who bought the company’s stock between the time of the company’s April 26, 2007 merger announcement and the September 24 cancellation announcement, alleges among other things that the company failed to disclose that it had breached the merger agreement; that it had R & D and other capital expenses, as well as inventory levels, above disclosed amounts; and that its relationship with a key customer had deteriorated. The complaint further alleges that Harman’s Chairman and controlling shareholder "had a strong personal motive" for the completion of the merger, from which he would received proceeds of $420 million. The implication is that the company withheld the true information to ensure that the merger would be completed, and that the merger fell apart only when the misrepresentations came to light.
In addition to the possibility of shareholder lawsuits, it may also be anticipated that other disappointed targets will sue their former suitors for breach of contract. The current dustup between Genesco and Finish Line provides an example of what this kind of dispute looks like. On June 18, 2007, Finish Line announced that it would be acquiring Genesco in a transaction valued at approximately $1.5 billion. But something happened on the way to the altar; on September 21, 2007, Genesco sued Finish Line in Tennessee state court seeking an order requiring Finish Line to complete the merger and forcing UBS to fulfill its agreement to finance the deal. Here is a CFO.com article describing the parties’ dispute and the Genesco lawsuit.
Finish Line, in turn, has filed a counterclaim asking the court, according to news reports, to compel Genesco to "provide information related to their proposed merger or else rule that a materially adverse event has occurred."
To my knowledge, no lawsuit has yet arisen in connection with the other very prominent deal in which the would-be acquirer invoked the "material adverse change" clause to cancel a deal – that would be the $25 billion deal to take over SLM Corp. (better known as Sallie Mae) that J.C. Flowers cancelled last week. Here is a Wall Street Journal article discussing the kibosh put on the Sallie Mae deal. But while there is no lawsuit yet, Sallie Mae did issue a September 26th press release saying that "the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to the fullest extent of the law." While there apparently remains some hope that the Sallie Mae deal might be salvaged, Sallie Mae yesterday rejected the would-be buyers latest reduced offer. If the deal dies altogether, keep an eye out for a lawsuit -- by somebody against somebody else.
It seems like only yesterday that the business pages were full of stories about increasing numbers of ever-larger buyout bids. Now the papers are covering the same deals as they fall apart. As the Journal noted, the termination of the Harman deal "represents a severe setback for the overall deal market as it tries to close upward of $350 billion of leveraged buyouts amid tightening credit conditions." If buyers’ remorse or tight credit undermines more deals, the disappointed targets can be expected to launch lawyers. Chances are that the lawsuits will live on long after the buyout bubble has become a distant memory. Posted by broc at October 3, 2007 08:06 AM

Monday, October 01, 2007

A Parched Month Ends on Hopeful Note

WSJ DealBook, September 28, 2007, 1:13 pm

A few months ago, at the peak of the buyout boom, a $2 billion transaction could have easily slipped under the radar. These days, it is, literally, a big deal.
Case in point is 3Com, which said Friday that it will be taken private by Bain Capital for $2.2 billion. That single announcement accounted for about 11 percent of the world’s buyout volume during the entire month of September, according to data from Dealogic. It was about 16 percent of buyouts in the United States. That gives you an idea how slow this month has been.
Private equity firms rely on borrowed money to fund their acquisitions. After a long period of easy access to credit, buyout firms hit a wall this summer when the debt markets pulled back. The result was a dramatic decline in private equity deals, especially those with big price tags.
It remains to be seen whether 3Com is an isolated event or a sign that the drought of private equity deals is breaking. On Thursday, the banks financing the buyout of First Data — a deal that came before the credit crunch — were able to sell a larger-than-expected amount of loans related to the transaction, which is also a potentially positive sign.
Before the 3Com buyout was announced, Dealogic calculated that global buyout volume in September was about $17.6 billion. In September 2006, a single buyout — that of Freescale Semiconductor — was worth just as much. For all of September 2006, the figure was $57.5 billion, more than three times this September’s total.
The dropoff was similar for private equity activity in the United States, where buyout activity came to $11.4 billion in September (excluding 3Com), compared with $31.7 billion a year ago.
Dealogic also published preliminary third-quarter data, which indicated that overall merger activity — as opposed to just buyouts — actually rose from a year ago. It reported Friday that global announced mergers came to $992 billion in the latest quarter, 24 percent more than the same period a year ago (but down 43 percent from a very busy second quarter).
Go to Article from The Financial Times »
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