NYT DealBook, January 31, 2008:
New accounting rules for mergers and acquisitions are likely to have some far-reaching consequences for what such deals cost and how they get done, Compliance Week reports.
One of the most significant changes relates to transaction fees, including fees for investment bankers, attorneys and accountants. Under the new standard, those fees will generally need to be expensed when they are incurred. (Under the current rules, such fees are capitalized and amortized over time.)
Because so much deal-related work happens before a transaction is announced, companies may need to worry about tipping off the markets about a potential deal when those expenses turn up.
The new rule, set to take effect in fiscal 2009 for calendar year-end companies, could also bring more attention to the size of lawyers’ and brokers’ fees.
“Anytime you have something hitting the bottom line, it’s going to lead to more attention,” David Zagore, a partner at Squire, Sanders & Dempsey, told Compliance Week.
Go to Article from Compliance Week »
Thursday, January 31, 2008
Monday, January 28, 2008
Here Is Why the Blackstone-ADS Deal Is in Trouble
Posted by Heidi Moore, WSJ DealJournal:
A lot of private-equity firms probably would be happy these days to have an excuse to walk away from a $7.8 billion deal. But Blackstone Group insists it is clinging tight to the dream of acquiring Alliance Data Systems – no matter what Office of the Comptroller of the Currency says.
The OCC appeared to deal a death blow late Friday to Blackstone’s hopes of acquiring the credit-card processor by setting down requirements that Blackstone refused to meet. Blackstone said the OCC wanted the firm to take on “operational and financial burdens…that cannot be reasonably assumed.”
In wake of that announcement, ADS shares have shed more than $22, or more than 34%, to $43.23 this morning, well below the $81.75 a share Blackstone agreed in May to pay for the Dallas company.
What requirements could be so harsh as to endanger a deal for which Blackstone already had set up financing? What the OCC required, according to a person familiar with the matter, is for Blackstone to guarantee itself as “the source of strength” for ADS’s bank operation.
What, you didn’t know ADS had a bank? Actually, it owns World Financial Capital Bank, an industrial bank with a Utah charter, which puts the company under the regulatory oversight of the OCC as well as the Federal Deposit Insurance Corp. ADS cited World Financial Capital in its most recent quarterly filing as one of its four main sources of funding. The OCC wanted Blackstone to bail out ADS in the event of any trouble – with no size limit to the bailout.
Given the scary press recently about the possibility of the U.S. slipping into recession and the general dismal state of the financial sector lately, it isn’t surprising that Blackstone declined.
Blackstone will continue to talk to ADS about doing a deal, this person says, and will take up a previously mentioned plan to restructure ADS so that the acquisition can go through.
It is a good thing, too: ADS today said Blackstone would have no grounds for walking away from the deal according to the merger agreement, and added that Blackstone should continue negotiating with the OCC.
Merger-structure wonks might be excited about what comes next. What Blackstone and ADS have discussed–and avoided so far–is a move that would somehow transfer World Financial Capital to another institution. (No word on what that institution might be, however.) A partial acquisition might be better than none at all.
A lot of private-equity firms probably would be happy these days to have an excuse to walk away from a $7.8 billion deal. But Blackstone Group insists it is clinging tight to the dream of acquiring Alliance Data Systems – no matter what Office of the Comptroller of the Currency says.
The OCC appeared to deal a death blow late Friday to Blackstone’s hopes of acquiring the credit-card processor by setting down requirements that Blackstone refused to meet. Blackstone said the OCC wanted the firm to take on “operational and financial burdens…that cannot be reasonably assumed.”
In wake of that announcement, ADS shares have shed more than $22, or more than 34%, to $43.23 this morning, well below the $81.75 a share Blackstone agreed in May to pay for the Dallas company.
What requirements could be so harsh as to endanger a deal for which Blackstone already had set up financing? What the OCC required, according to a person familiar with the matter, is for Blackstone to guarantee itself as “the source of strength” for ADS’s bank operation.
What, you didn’t know ADS had a bank? Actually, it owns World Financial Capital Bank, an industrial bank with a Utah charter, which puts the company under the regulatory oversight of the OCC as well as the Federal Deposit Insurance Corp. ADS cited World Financial Capital in its most recent quarterly filing as one of its four main sources of funding. The OCC wanted Blackstone to bail out ADS in the event of any trouble – with no size limit to the bailout.
Given the scary press recently about the possibility of the U.S. slipping into recession and the general dismal state of the financial sector lately, it isn’t surprising that Blackstone declined.
Blackstone will continue to talk to ADS about doing a deal, this person says, and will take up a previously mentioned plan to restructure ADS so that the acquisition can go through.
It is a good thing, too: ADS today said Blackstone would have no grounds for walking away from the deal according to the merger agreement, and added that Blackstone should continue negotiating with the OCC.
Merger-structure wonks might be excited about what comes next. What Blackstone and ADS have discussed–and avoided so far–is a move that would somehow transfer World Financial Capital to another institution. (No word on what that institution might be, however.) A partial acquisition might be better than none at all.
Alliance Data Says Blackstone Deal Is in Trouble
For months, Alliance Data Systems said that its $6.43 billion sale to the Blackstone Group was on track. In recent weeks, amid sudden, sharp declines in Alliance Data’s stock price, people briefed on the deal negotiations told DealBook and other media outlets that the acquisition was proceeding.
But on Monday, the credit-card services provider said it has received notice from Blackstone that the private equity firm does not expect to complete the deal. The notice, sent after the market’s close Friday, said that a federal regulator is asking for “extraordinary measures” in order to grant approval — and that Blackstone is unwilling to meet them.
Blackstone also said that it does not expect the regulator, the Office of the Comptroller of Currency, to consider alternative solutions that are acceptable to Blackstone, according to Alliance Data.
Alliance Data’s board said it “strongly disagrees” with Blackstone’s assessment. The company does not believe that the O.C.C.’s position is final, it said in its statement. Alliance Data also said that Blackstone’s notice does not claim any breach of the deal agreement by the company, or what is known as the declaration a material adverse change. Blackstone also has not taken issue with Alliance Data’s financial or operational performance.
A person close to Blackstone confirmed the notice and the buyout firm’s concern over the O.C.C.’s position, but reiterated that the regulator’s demands were untenable and would have exposed the private equity firm to millions of dollars in losses even after a potential sale of Alliance Data.
Alliance Data’s board is now evaluating its possible courses of action, the company said in its statement.
The deal has now joined the ranks of other buyouts that have run into trouble after the deflation of the buyout boom. Buyouts of companies ranging from Sallie Mae to United Rentals to PHH, another Blackstone deal, have collapsed for reasons ranging from legal issues to financing concerns.
Some of those deals, like those for Sallie Mae and United Rentals, have gone to court.
Go to Alliance Data Press Release via CNN Money »
But on Monday, the credit-card services provider said it has received notice from Blackstone that the private equity firm does not expect to complete the deal. The notice, sent after the market’s close Friday, said that a federal regulator is asking for “extraordinary measures” in order to grant approval — and that Blackstone is unwilling to meet them.
Blackstone also said that it does not expect the regulator, the Office of the Comptroller of Currency, to consider alternative solutions that are acceptable to Blackstone, according to Alliance Data.
Alliance Data’s board said it “strongly disagrees” with Blackstone’s assessment. The company does not believe that the O.C.C.’s position is final, it said in its statement. Alliance Data also said that Blackstone’s notice does not claim any breach of the deal agreement by the company, or what is known as the declaration a material adverse change. Blackstone also has not taken issue with Alliance Data’s financial or operational performance.
A person close to Blackstone confirmed the notice and the buyout firm’s concern over the O.C.C.’s position, but reiterated that the regulator’s demands were untenable and would have exposed the private equity firm to millions of dollars in losses even after a potential sale of Alliance Data.
Alliance Data’s board is now evaluating its possible courses of action, the company said in its statement.
The deal has now joined the ranks of other buyouts that have run into trouble after the deflation of the buyout boom. Buyouts of companies ranging from Sallie Mae to United Rentals to PHH, another Blackstone deal, have collapsed for reasons ranging from legal issues to financing concerns.
Some of those deals, like those for Sallie Mae and United Rentals, have gone to court.
Go to Alliance Data Press Release via CNN Money »
Friday, January 25, 2008
The Economic Impact of Private Equity
Fron Dan Primacks' Private Equity Hub:
Last Friday, SEIU protesters at Wharton accused the private equity industry of being a callous job killer. Then The Private Equity Council released a study purporting to show that its members were actually magnanimous job creators. Not surprisingly, the truth is found somewherei n the middle.
A massive new academic study called “The Economic Impact of Private Equity” was released today in Davos, and included detailed findings on private equity employment. Among the findings:
* Two years prior to a buyout, PE-backed companies cut 4% more of their employees than do companies that are not acquired by PE. The indication here is that the typical PE-backed company is in relatively tougher shape to begin with.
* PE-backed companies cut, on average, 7% of its existing workforce over the first two years post-buyout. But they also add jobs over the same amount of time, resulting in just a 1% net employment decrease. Job growth balances out with the non-PE control group in years four and five. Expect the SEIU and other critics to inquire as to the “quality” of those new jobs — in terms of location, salary and benefits.
The study examined around 5,000 PE transactions between 1980 and 2005 (recent boom excluded, therefore), and was co-led by Josh Lerner of Harvard Biz School and Steven Davis of U Chicago. I’ll have more on this later, once I read through it all. In the meantime, you can also read it for yourself:
Executive Summary: ExecSummary.pdf
Full Report: Full_Report.pdf
Last Friday, SEIU protesters at Wharton accused the private equity industry of being a callous job killer. Then The Private Equity Council released a study purporting to show that its members were actually magnanimous job creators. Not surprisingly, the truth is found somewherei n the middle.
A massive new academic study called “The Economic Impact of Private Equity” was released today in Davos, and included detailed findings on private equity employment. Among the findings:
* Two years prior to a buyout, PE-backed companies cut 4% more of their employees than do companies that are not acquired by PE. The indication here is that the typical PE-backed company is in relatively tougher shape to begin with.
* PE-backed companies cut, on average, 7% of its existing workforce over the first two years post-buyout. But they also add jobs over the same amount of time, resulting in just a 1% net employment decrease. Job growth balances out with the non-PE control group in years four and five. Expect the SEIU and other critics to inquire as to the “quality” of those new jobs — in terms of location, salary and benefits.
The study examined around 5,000 PE transactions between 1980 and 2005 (recent boom excluded, therefore), and was co-led by Josh Lerner of Harvard Biz School and Steven Davis of U Chicago. I’ll have more on this later, once I read through it all. In the meantime, you can also read it for yourself:
Executive Summary: ExecSummary.pdf
Full Report: Full_Report.pdf
Friday, January 18, 2008
Union Protest Roils Private Equity Conference
David Rubenstein was supposed to deliver the keynote speech Friday morning at the Wharton Private Equity Conference, an annual event that draws buyout professionals and academics to discuss the state of the industry. Instead, Mr. Rubenstein, managing director of the Carlyle Group, was “hooted off the stage,” as The Philadelphia Inquirer’s Joseph N. DiStefano described it, by protesters from the Service Employees International Union.
The union, which has emerged as one of the buyout industry’s fiercest critics in recent years, has been no stranger to street theater and other attention-getting events. But Friday’s protest, which Daniel Primack of PEHub.com said drew a “small army of police” to the scene, took things to another level.
George White, writing for TheDeal.com’s DealScape blog, described between 30 and 50 people streaming into the conference room at the Park Hyatt Philadelphia Hotel, shouting and passing out flyers. A woman with a megaphone “lit into” Mr. Rubenstein about his firm’s recent acquisition of ManorCare, the largest chain of nursing homes in the United States, Mr. White wrote.
The union tried to thwart that deal by questioning the effects it would have on residents’ living conditions, but it was ultimately approved by ManorCare’s shareholders as well as regulators in all the states involved.
The Service Employees International Union, which has nearly 2 million members, has moved on several fronts to raise questions about whether the recent boom in private equity deals is good for the average worker. Last summer, they organized a small demonstration in the Hamptons, a tony enclave in New York’s Long Island, where protesters pretended to be billionaires and expressed mock opposition to raising taxes on private equity fund managers.
The union has also created Web sites critical of various private equity firms as well as specific buyout deals.
On Friday, a correspondent for DealBreaker.com described Mr. Rubenstein as being rendered momentarily “speechless” by the protesters — remarkable in itself for a man who is a regular on the speech-giving circuit.
He apparently found his voice soon enough, however, telling the woman with the megaphone to “take a remedial course in English before you go any further.”
Go to Article from the Philadelphia Inquirer »
Go to Item from PEHub.com »
Go to Item from The Deal’s DealScape Blog »
Go to Item from DealBreaker.com »
The union, which has emerged as one of the buyout industry’s fiercest critics in recent years, has been no stranger to street theater and other attention-getting events. But Friday’s protest, which Daniel Primack of PEHub.com said drew a “small army of police” to the scene, took things to another level.
George White, writing for TheDeal.com’s DealScape blog, described between 30 and 50 people streaming into the conference room at the Park Hyatt Philadelphia Hotel, shouting and passing out flyers. A woman with a megaphone “lit into” Mr. Rubenstein about his firm’s recent acquisition of ManorCare, the largest chain of nursing homes in the United States, Mr. White wrote.
The union tried to thwart that deal by questioning the effects it would have on residents’ living conditions, but it was ultimately approved by ManorCare’s shareholders as well as regulators in all the states involved.
The Service Employees International Union, which has nearly 2 million members, has moved on several fronts to raise questions about whether the recent boom in private equity deals is good for the average worker. Last summer, they organized a small demonstration in the Hamptons, a tony enclave in New York’s Long Island, where protesters pretended to be billionaires and expressed mock opposition to raising taxes on private equity fund managers.
The union has also created Web sites critical of various private equity firms as well as specific buyout deals.
On Friday, a correspondent for DealBreaker.com described Mr. Rubenstein as being rendered momentarily “speechless” by the protesters — remarkable in itself for a man who is a regular on the speech-giving circuit.
He apparently found his voice soon enough, however, telling the woman with the megaphone to “take a remedial course in English before you go any further.”
Go to Article from the Philadelphia Inquirer »
Go to Item from PEHub.com »
Go to Item from The Deal’s DealScape Blog »
Go to Item from DealBreaker.com »
Tuesday, January 15, 2008
Supreme Court Restricts Securities Lawsuits
In one of the most closely watched business cases in years, the Supreme Court on Tuesday upheld protections for secondary players in securities-fraud schemes, as opposed to the primary engineers of those plots.
The court ruled, 5 to 3, against plaintiffs who had sued two cable television equipment suppliers whose dealings with a cable television company had allowed the cable outfit to inflate its earnings and hide its failure to achieve its financial goals.
Although the outcome of the case, Stoneridge Investment Partners v. Scientific-Atlanta, No. 06-43, hinged on terminology that might seem technical and arcane to a layman, the case is likely to be felt far beyond Wall Street, as lawyers for investors and businesses fight over who can be sued and who cannot.
The majority noted that, whatever deception was committed by the defendants, “their deceptive acts were not communicated to the investing public during the relevant times,” and that it was Charter that misled auditors and filed fraudulent financial statements.
The plaintiffs were unable to show any public reliance on the defendants’ actions “except in an indirect chain that we find too remote for liability,” Justice Anthony M. Kennedy wrote for the majority.
The Stoneridge ruling appears to offer protection for accountants, lawyers and others who may know about corporate shenanigans but can establish that they are not directly involved in them. Defense lawyers in shareholders’ suits often complain that defendants can be forced to settle claims with little merit rather than risk prolonged and costly litigation.
“The court held that you are not your brother’s bookkeeper,” said Jerrold J. Ganzfried, a former assistant to the solicitor general and now head of the Howrey law firm’s Supreme Court and appellate litigation group.
A key question in the case decided on Tuesday was whether Scientific-Atlanta and the other defendant, Motorola, were “primary violators” in a sham bookkeeping transaction with Charter, or if they were guilty only of “aiding and abetting” a fraud engineered by Charter.
At the request of Charter, which in mid-2000 was falling short of its cash-flow target, Scientific-Atlanta and Motorola agreed to increase their prices for the cable boxes they sold to Charter and to use the extra money to buy advertising on Charter’s cable stations. The arrangement allowed Charter to treat the advertising purchases as current revenue while listing the money spent on cable boxes as a capital expense.
Four Charter executives eventually pleaded guilty to criminal charges, and Charter paid $144 million to settle a suit brought by Stoneridge on behalf of shareholders.
When the case was argued before the justices on Oct. 9, the lawyer for Scientific-Atlanta and Motorola asserted that, at worst, his clients had aided and abetted Charter’s fraud, and thus should not be liable.
Subtle or not, the difference between a primary violation and aiding and abetting was all-important in the case decided on Tuesday. The reason is that in a 1994 case, Central Bank of Denver v. First Interstate Bank, the Supreme Court ruled that laws governing securities did not provide for any liability for “aiding and abetting.”
Although Congress responded to that decision by giving the Securities and Exchange Commission the authority to bring lawsuits for aiding and abetting, it did not give private plaintiffs the authority to do so.
Any decision to give private litigants the power to sue aiders and abetters “is thus for the Congress, not for this court,” Justice Kennedy wrote. Joining him were Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr.
Lawyers involved in securities litigation said the ruling continues a trend in which the court shows itself “less inclined to finish up legislation for Congress” than earlier lineups of justices, as Bob Pietrzak, co-head of litigation in Sidley Austin’s New York City office put it.
“The court’s decision continues its recognition that expanding the U.S. securities laws beyond the reach expressly intended by Congress is not only legally incorrect but endangers the competitive position of the United States in the global marketplaces,” Mr. Pietrzak said. “Non-U.S. entities can feel more comfortable that doing business in the United States will not have the unintended consequence of exposing them to liability under the U.S. securities laws.”
Go to Article from The New York Times »
Go to Previous Item from DealBook »
The court ruled, 5 to 3, against plaintiffs who had sued two cable television equipment suppliers whose dealings with a cable television company had allowed the cable outfit to inflate its earnings and hide its failure to achieve its financial goals.
Although the outcome of the case, Stoneridge Investment Partners v. Scientific-Atlanta, No. 06-43, hinged on terminology that might seem technical and arcane to a layman, the case is likely to be felt far beyond Wall Street, as lawyers for investors and businesses fight over who can be sued and who cannot.
The majority noted that, whatever deception was committed by the defendants, “their deceptive acts were not communicated to the investing public during the relevant times,” and that it was Charter that misled auditors and filed fraudulent financial statements.
The plaintiffs were unable to show any public reliance on the defendants’ actions “except in an indirect chain that we find too remote for liability,” Justice Anthony M. Kennedy wrote for the majority.
The Stoneridge ruling appears to offer protection for accountants, lawyers and others who may know about corporate shenanigans but can establish that they are not directly involved in them. Defense lawyers in shareholders’ suits often complain that defendants can be forced to settle claims with little merit rather than risk prolonged and costly litigation.
“The court held that you are not your brother’s bookkeeper,” said Jerrold J. Ganzfried, a former assistant to the solicitor general and now head of the Howrey law firm’s Supreme Court and appellate litigation group.
A key question in the case decided on Tuesday was whether Scientific-Atlanta and the other defendant, Motorola, were “primary violators” in a sham bookkeeping transaction with Charter, or if they were guilty only of “aiding and abetting” a fraud engineered by Charter.
At the request of Charter, which in mid-2000 was falling short of its cash-flow target, Scientific-Atlanta and Motorola agreed to increase their prices for the cable boxes they sold to Charter and to use the extra money to buy advertising on Charter’s cable stations. The arrangement allowed Charter to treat the advertising purchases as current revenue while listing the money spent on cable boxes as a capital expense.
Four Charter executives eventually pleaded guilty to criminal charges, and Charter paid $144 million to settle a suit brought by Stoneridge on behalf of shareholders.
When the case was argued before the justices on Oct. 9, the lawyer for Scientific-Atlanta and Motorola asserted that, at worst, his clients had aided and abetted Charter’s fraud, and thus should not be liable.
Subtle or not, the difference between a primary violation and aiding and abetting was all-important in the case decided on Tuesday. The reason is that in a 1994 case, Central Bank of Denver v. First Interstate Bank, the Supreme Court ruled that laws governing securities did not provide for any liability for “aiding and abetting.”
Although Congress responded to that decision by giving the Securities and Exchange Commission the authority to bring lawsuits for aiding and abetting, it did not give private plaintiffs the authority to do so.
Any decision to give private litigants the power to sue aiders and abetters “is thus for the Congress, not for this court,” Justice Kennedy wrote. Joining him were Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr.
Lawyers involved in securities litigation said the ruling continues a trend in which the court shows itself “less inclined to finish up legislation for Congress” than earlier lineups of justices, as Bob Pietrzak, co-head of litigation in Sidley Austin’s New York City office put it.
“The court’s decision continues its recognition that expanding the U.S. securities laws beyond the reach expressly intended by Congress is not only legally incorrect but endangers the competitive position of the United States in the global marketplaces,” Mr. Pietrzak said. “Non-U.S. entities can feel more comfortable that doing business in the United States will not have the unintended consequence of exposing them to liability under the U.S. securities laws.”
Go to Article from The New York Times »
Go to Previous Item from DealBook »
Congress asks Prince and O’Neal to testify on pay
A United States Congressional committee has asked Charles O. Prince III, the former chairman and chief executive of Citigroup, and E. Stanley O'Neal, his counterpart at Merrill Lynch, to justify their exit pay packages when they were forced to leave the banks.
Go to Article from Financial News»
Go to Article from Financial News»
VCs raise $34.7B in 2007
The final results are in, and it looks as if venture capitalists will have plenty of capital to invest over the next three to five years; new stats from the National Venture Capital Association and Thompson Financial show that last year's fundraising reached its highest level since 2001.
Two hundred and thirty-five new vehicles closed with $34.7 billion in 2007, an increase of 9.4% from the $31.6 billion in 2006. Additionally, 2007 fundraising dollars reached the highest level since 2001 when venture capitalists raised $38.8 billion from 318 funds. Early-stage funds grabbed $9.7 billion, but balanced stage funds raised the most with $10.6 billion. Later-stage vehicles secured $7.2 billion while expansion-focused funds raised $4.8 billion.
Back in 2001, (the last time VCs had so much in their coffers) venture firms received $38.8 billion for new funds before everyone realized that the party was over, resulting in negative IRRs, returned capital and shuttered funds for a number of firms. Although today there's no bubble approaching the size of the one inflating at the turn of the century, venture capitalists are once again looking at an iffy environment. With startups needing less money than ever to get off the ground, an economic slowdown (hopefully without a recession) and valuations in their most attractive industries - cleantech and Web 2.0 - reaching sky-high levels, venture firms may once again have a tough time deploying all the cash they raised. Still, venture capitalists have reason to be optimistic even during a downturn, as companies like Google Inc., Facebook Inc., MySpace.com and others that were funded after 2001 show there's still money to be made even in tough times. - George White
Souce: The Deal.com, 1/14/08
Two hundred and thirty-five new vehicles closed with $34.7 billion in 2007, an increase of 9.4% from the $31.6 billion in 2006. Additionally, 2007 fundraising dollars reached the highest level since 2001 when venture capitalists raised $38.8 billion from 318 funds. Early-stage funds grabbed $9.7 billion, but balanced stage funds raised the most with $10.6 billion. Later-stage vehicles secured $7.2 billion while expansion-focused funds raised $4.8 billion.
Back in 2001, (the last time VCs had so much in their coffers) venture firms received $38.8 billion for new funds before everyone realized that the party was over, resulting in negative IRRs, returned capital and shuttered funds for a number of firms. Although today there's no bubble approaching the size of the one inflating at the turn of the century, venture capitalists are once again looking at an iffy environment. With startups needing less money than ever to get off the ground, an economic slowdown (hopefully without a recession) and valuations in their most attractive industries - cleantech and Web 2.0 - reaching sky-high levels, venture firms may once again have a tough time deploying all the cash they raised. Still, venture capitalists have reason to be optimistic even during a downturn, as companies like Google Inc., Facebook Inc., MySpace.com and others that were funded after 2001 show there's still money to be made even in tough times. - George White
Souce: The Deal.com, 1/14/08
Monday, January 14, 2008
Study Sparks Regulator Scrutiny of Merger Arbitrage
With the rise of proprietary trading desks, investment banks sometimes find themselves taking positions in the stocks of companies they are advising in merger talks. At least a few of those instances are probably coincidental, and the firms will certainly argue that they are.
But an academic study released last month suggests something more troubling: that as investment banks advise companies in takeover situations, they are also investing in the targets of these merger talks. The research, which says the rate of such investments is too high to be merely coincidental, has now interested securities regulators as well, The Wall Street Journal reported Monday.
The Journal, by reviewing stock-ownership and deal records, identified dozens of instances in which investment banks appeared to be buying shares in target companies around the same time their bankers were advising the acquirers. The transactions involved most of the major investment banks, including Citigroup, Credit Suisse Group, Goldman Sachs, Merrill Lynch and Morgan Stanley.
The firms either declined to comment or said they found no problems with the trading, The Journal said.
The issue is “definitely on our radar screen,” says Stephen Luparello, a top official at the Financial Industry Regulatory Authority, or Finra, formed last year when the National Association of Securities Dealers and the enforcement unit of the New York Stock Exchange merged.
Finra has asked banks for their trading data, but Mr. Luparello told The Journal the inquiry may not find any problems.
Go to Study via SSRN »
Go to Article from The Wall Street Journal »
But an academic study released last month suggests something more troubling: that as investment banks advise companies in takeover situations, they are also investing in the targets of these merger talks. The research, which says the rate of such investments is too high to be merely coincidental, has now interested securities regulators as well, The Wall Street Journal reported Monday.
The Journal, by reviewing stock-ownership and deal records, identified dozens of instances in which investment banks appeared to be buying shares in target companies around the same time their bankers were advising the acquirers. The transactions involved most of the major investment banks, including Citigroup, Credit Suisse Group, Goldman Sachs, Merrill Lynch and Morgan Stanley.
The firms either declined to comment or said they found no problems with the trading, The Journal said.
The issue is “definitely on our radar screen,” says Stephen Luparello, a top official at the Financial Industry Regulatory Authority, or Finra, formed last year when the National Association of Securities Dealers and the enforcement unit of the New York Stock Exchange merged.
Finra has asked banks for their trading data, but Mr. Luparello told The Journal the inquiry may not find any problems.
Go to Study via SSRN »
Go to Article from The Wall Street Journal »
Wednesday, January 09, 2008
DOL Guidance on Proxy Proposals
The U.S. Department of Labor recently issued Advisory Opinion 2007-07A to the U.S. Chamber of Commerce, responding to the Chamber’s concerns about “the use of pension plan assets by plan fiduciaries to further public policy debates and political activities through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a company.”
Mike Melbinger notes in his CompensationStandards.com blog: “By way of background for those not familiar with ERISA, the DOL has long considered the right to vote proxies related to a retirement plan's stock holdings as a valuable asset of the plan. In Advisory Opinion 2007-07A, the DOL said:
‘Under section 404(a)(1)(A) and (B) of ERISA, plan fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses. In our view, plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process when there is no clear economic benefit to the plan. In such cases, the Department would expect fiduciaries to be able to demonstrate in enforcement actions their compliance with the requirements of section 404(a)(1)(A) and (B).* * *Consistent with these various pronouncements, the use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a corporation would, in the view of the Department, violate the prudence and exclusive purpose requirements of section 404(a)(1)(A) and (B).’
Those of us familiar with ERISA's fiduciary requirements were sometimes curious as to how some union plan fiduciaries could square their proxy activism with ERISA. Apparently, the DOL was too.”
Mike Melbinger notes in his CompensationStandards.com blog: “By way of background for those not familiar with ERISA, the DOL has long considered the right to vote proxies related to a retirement plan's stock holdings as a valuable asset of the plan. In Advisory Opinion 2007-07A, the DOL said:
‘Under section 404(a)(1)(A) and (B) of ERISA, plan fiduciaries must act solely in the interest of participants and beneficiaries and for the exclusive purpose of paying benefits and defraying reasonable administrative expenses. In our view, plan fiduciaries risk violating the exclusive purpose rule when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process when there is no clear economic benefit to the plan. In such cases, the Department would expect fiduciaries to be able to demonstrate in enforcement actions their compliance with the requirements of section 404(a)(1)(A) and (B).* * *Consistent with these various pronouncements, the use of pension plan assets by plan fiduciaries to further policy or political issues through proxy resolutions that have no connection to enhancing the value of the plan’s investment in a corporation would, in the view of the Department, violate the prudence and exclusive purpose requirements of section 404(a)(1)(A) and (B).’
Those of us familiar with ERISA's fiduciary requirements were sometimes curious as to how some union plan fiduciaries could square their proxy activism with ERISA. Apparently, the DOL was too.”
More activists were circling prey in 2007
[TheDeal.com, Posted on January 8, 2008 at 4:53 PM]
Activist investing gained steam in 2007. At least that's the conclusion reached by new data produced by FactSet Research System's SharkWatch product.
The research company reported that activist campaigns went up 17% in 2007, rising to 501 from 429 in 2006. Additionally, 138 institutional investors and other investors launched their first ever campaigns in 2007.
John Laide, product manager of FactSet SharkWatch, says that the activist campaigns considered in the study relate to any agitation for change, including proxy fights and efforts to have corporations sell divisions, complete stock buybacks or issue special dividends, among many other tactics.
Some less high-profile activist efforts are included as well. Laide added that when activist hedge funds report in government filings that they have had discussions with management about potential ideas to improve shareholder value, that effort is often included as an activist campaign.
SharkWatch tracks activist Securities and Exchange Commission filings such as Schedule 13Ds. - Ron Orol
Activist investing gained steam in 2007. At least that's the conclusion reached by new data produced by FactSet Research System's SharkWatch product.
The research company reported that activist campaigns went up 17% in 2007, rising to 501 from 429 in 2006. Additionally, 138 institutional investors and other investors launched their first ever campaigns in 2007.
John Laide, product manager of FactSet SharkWatch, says that the activist campaigns considered in the study relate to any agitation for change, including proxy fights and efforts to have corporations sell divisions, complete stock buybacks or issue special dividends, among many other tactics.
Some less high-profile activist efforts are included as well. Laide added that when activist hedge funds report in government filings that they have had discussions with management about potential ideas to improve shareholder value, that effort is often included as an activist campaign.
SharkWatch tracks activist Securities and Exchange Commission filings such as Schedule 13Ds. - Ron Orol
Monday, January 07, 2008
Outlook good for midmarket deals in 2008
Many investment bankers who focus on transactions under $500 million say that the performance of smaller companies has remained strong and that mergers are going forward, with financing only rarely being a deal breaker. On the other hand, some financial sponsors suspect that if tight financing conditions prevail amid a weakening economy, the steep valuations of recent years will likely moderate, and deal activity will slacken.
This article reports that 2007 ended on a strong note for middle-market deals: There were about $10 billion worth of deals in December for transactions $100 million to $500 million in size, compared with $10.9 billion in November and $9.9 billion in January 2007, according to research firm Dealogic.
This article reports that 2007 ended on a strong note for middle-market deals: There were about $10 billion worth of deals in December for transactions $100 million to $500 million in size, compared with $10.9 billion in November and $9.9 billion in January 2007, according to research firm Dealogic.
Has Measuring Risk Changed ‘Forever’?
For years, three big agencies assigned risk ratings to thousands of securities, helping investors figure out which were likely to be safe investments and which were more speculative.
But one of those agencies, Moody’s Investors Service, essentially said on Monday: Goodbye to all that.
Financial innovations in recent years — and a concurrent lack of information — has cut the ability to track risk “probably forever,” the agency said on Monday.
“It is extremely unlikely that in today’s markets we will ever know on a timely basis where every risk lies,” analysts at the ratings agency, led by chief international economist Pierre Cailleteau, wrote in a report.
Of course, the agency is one of those faulted for the meltdown in the subprime mortgage market. As securities firms dived headfirst into the origination, packaging and reselling of securities tied to those risky home loans, agencies like Moody’s, Standard & Poor’s and Fitch assigned top ratings to those instruments. But some of them were composed of loans to less creditworthy borrowers, who defaulted.
That upended the entire system of repackaging subprime debt, leading to billions of dollars in write-downs by investment banks and a squeeze in the credit markets.
Go to Article from Reuters »
But one of those agencies, Moody’s Investors Service, essentially said on Monday: Goodbye to all that.
Financial innovations in recent years — and a concurrent lack of information — has cut the ability to track risk “probably forever,” the agency said on Monday.
“It is extremely unlikely that in today’s markets we will ever know on a timely basis where every risk lies,” analysts at the ratings agency, led by chief international economist Pierre Cailleteau, wrote in a report.
Of course, the agency is one of those faulted for the meltdown in the subprime mortgage market. As securities firms dived headfirst into the origination, packaging and reselling of securities tied to those risky home loans, agencies like Moody’s, Standard & Poor’s and Fitch assigned top ratings to those instruments. But some of them were composed of loans to less creditworthy borrowers, who defaulted.
That upended the entire system of repackaging subprime debt, leading to billions of dollars in write-downs by investment banks and a squeeze in the credit markets.
Go to Article from Reuters »
Friday, January 04, 2008
As Buyouts Falter, New Tactics Aim to Lock in Deals
By KAREN DONOVAN
Published: January 4, 2008, The New York Times
Happy New Year? Not for Wall Street deal makers.
The PHH Corporation announced 18 minutes into 2008 that its sale to the Blackstone Group and a unit of General Electric had collapsed. Now buyout specialists and lawyers are wondering which deals might go belly up next.
Among the biggest pending buyouts is the $19 billion planned acquisition of Clear Channel Communications by Thomas H. Lee Partners and Bain Capital. Smaller deals outstanding include a $1.1 billion offer for Reddy Ice Holdings and a $794 million planned takeover of Myers Industries.
Blackstone, the private equity powerhouse run by Stephen A. Schwarzman, could not come up with the funding for its $1.7 billion takeover, according to PHH. The company, based in Mount Laurel, N.J., says the Schwarzman firm now owes it a $50 million breakup fee.
Several other buyout firms, including Cerberus Capital Partners and J. C. Flowers, have likewise bowed out of deals they made before the credit markets seized up. A recent ruling in the influential Delaware Chancery Court may make it easier for others to follow suit.
During the height of the buyout boom, corporate executives focused on getting the best price for their companies. Few thought private equity pros would risk their reputations by hanging up on deals.
Now companies and their lawyers are likely to change tack and focus on strengthening the language in takeover contracts to help ensure that transactions are completed.
“Certainty is going to take on a different meaning,” said Morton A. Pierce, chairman of the mergers and acquisitions group for the law firm of Dewey & LeBoeuf. “People are going to look at the standard provisions and see if they can tighten them up to get more certainty other than a breakup fee.”
Sellers are bound to seek stronger financing guarantees and fatter breakup fees, Mr. Pierce said. “These are all things that have been negotiated in favor of the buyer, until now,” he said.
The issue of when buyers can walk away — and how much they have to pay to do so — gained new urgency with the Delaware ruling in late December. Chancellor William B. Chandler III, the chief judge of the Delaware Chancery Court, ruled that Cerberus, the private equity firm that bought Chrysler last year, did not have to close on its $4.1 billion planned buyout of United Rentals, the rental equipment operator. Cerberus could terminate the deal by paying United Rentals a $100 million fee, he said.
Judge Chandler wrote in his opinion that the contract for the deal was “hopelessly conflicted” on the question of whether United Rentals could force Cerberus to complete the transaction, what is known in legal parlance as “specific performance.” His decision limited the company’s legal remedy to collecting the $100 million termination fee as stated in the contract.
Clear Channel’s agreement calls for Thomas Lee and Bain to pay a $600 million breakup fee. The SLM Corporation, the student loan giant informally known as Sallie Mae, has sued J. C. Flowers in Delaware to collect a $900 million fee after its deal with the buyout firm went sour.
In the United Rentals case, the crucial testimony came from Eric M. Swedenburg of Simpson Thacher & Bartlett, who was the primary negotiator for United Rentals. His testimony, shown on CourtroomViewNetwork.com, was widely followed by deal lawyers.
Mr. Swedenburg told the court that United Rentals was looking for an “off market” provision — in lawyer lingo, something out of the ordinary — when it began the contract negotiation with Cerberus last July. Mr. Swedenburg testified that he had tried to secure a provision that would have forced Cerberus to close the deal. He later said, “I don’t recall using the words ‘specific performance’ when talking about the contract.”
On cross-examination, Mr. Swedenburg then threw up his hands and said, “Anything is possible.” When presented with notes written during the negotiations by United Rentals representatives that said the company would accept a breakup fee as its only remedy if the deal fell apart, he said, “I don’t recall that.”
Lawyers said the United Rentals case could have gone either way. The judge not only had to consider testimony about how the two sides struck the deal but also about the negotiations that preceded the contract.
“The idea that you have to go to extrinsic evidence to figure out the right solution is very tricky,” said Lawrence A. Hamermesh, professor of law at Widener University in Wilmington, Del. “It’s all part of the same tension, between seller and buyer, as to how much certainty each one is able to extract.”
Deal contracts are often left vague on purpose. For sellers, “if they have a buyer who is not willing to give up much, they might let ambiguity rule the day,” Mr. Hamermesh said. And that seems a common theme when it comes to contract talks. Judge Chandler, in his 68-page opinion, wrote, “The law of contracts, however, does not require parties to choose optimally clear language; in fact, parties often riddle their agreements with a certain amount of ambiguity in order to reach a compromise.”
Published: January 4, 2008, The New York Times
Happy New Year? Not for Wall Street deal makers.
The PHH Corporation announced 18 minutes into 2008 that its sale to the Blackstone Group and a unit of General Electric had collapsed. Now buyout specialists and lawyers are wondering which deals might go belly up next.
Among the biggest pending buyouts is the $19 billion planned acquisition of Clear Channel Communications by Thomas H. Lee Partners and Bain Capital. Smaller deals outstanding include a $1.1 billion offer for Reddy Ice Holdings and a $794 million planned takeover of Myers Industries.
Blackstone, the private equity powerhouse run by Stephen A. Schwarzman, could not come up with the funding for its $1.7 billion takeover, according to PHH. The company, based in Mount Laurel, N.J., says the Schwarzman firm now owes it a $50 million breakup fee.
Several other buyout firms, including Cerberus Capital Partners and J. C. Flowers, have likewise bowed out of deals they made before the credit markets seized up. A recent ruling in the influential Delaware Chancery Court may make it easier for others to follow suit.
During the height of the buyout boom, corporate executives focused on getting the best price for their companies. Few thought private equity pros would risk their reputations by hanging up on deals.
Now companies and their lawyers are likely to change tack and focus on strengthening the language in takeover contracts to help ensure that transactions are completed.
“Certainty is going to take on a different meaning,” said Morton A. Pierce, chairman of the mergers and acquisitions group for the law firm of Dewey & LeBoeuf. “People are going to look at the standard provisions and see if they can tighten them up to get more certainty other than a breakup fee.”
Sellers are bound to seek stronger financing guarantees and fatter breakup fees, Mr. Pierce said. “These are all things that have been negotiated in favor of the buyer, until now,” he said.
The issue of when buyers can walk away — and how much they have to pay to do so — gained new urgency with the Delaware ruling in late December. Chancellor William B. Chandler III, the chief judge of the Delaware Chancery Court, ruled that Cerberus, the private equity firm that bought Chrysler last year, did not have to close on its $4.1 billion planned buyout of United Rentals, the rental equipment operator. Cerberus could terminate the deal by paying United Rentals a $100 million fee, he said.
Judge Chandler wrote in his opinion that the contract for the deal was “hopelessly conflicted” on the question of whether United Rentals could force Cerberus to complete the transaction, what is known in legal parlance as “specific performance.” His decision limited the company’s legal remedy to collecting the $100 million termination fee as stated in the contract.
Clear Channel’s agreement calls for Thomas Lee and Bain to pay a $600 million breakup fee. The SLM Corporation, the student loan giant informally known as Sallie Mae, has sued J. C. Flowers in Delaware to collect a $900 million fee after its deal with the buyout firm went sour.
In the United Rentals case, the crucial testimony came from Eric M. Swedenburg of Simpson Thacher & Bartlett, who was the primary negotiator for United Rentals. His testimony, shown on CourtroomViewNetwork.com, was widely followed by deal lawyers.
Mr. Swedenburg told the court that United Rentals was looking for an “off market” provision — in lawyer lingo, something out of the ordinary — when it began the contract negotiation with Cerberus last July. Mr. Swedenburg testified that he had tried to secure a provision that would have forced Cerberus to close the deal. He later said, “I don’t recall using the words ‘specific performance’ when talking about the contract.”
On cross-examination, Mr. Swedenburg then threw up his hands and said, “Anything is possible.” When presented with notes written during the negotiations by United Rentals representatives that said the company would accept a breakup fee as its only remedy if the deal fell apart, he said, “I don’t recall that.”
Lawyers said the United Rentals case could have gone either way. The judge not only had to consider testimony about how the two sides struck the deal but also about the negotiations that preceded the contract.
“The idea that you have to go to extrinsic evidence to figure out the right solution is very tricky,” said Lawrence A. Hamermesh, professor of law at Widener University in Wilmington, Del. “It’s all part of the same tension, between seller and buyer, as to how much certainty each one is able to extract.”
Deal contracts are often left vague on purpose. For sellers, “if they have a buyer who is not willing to give up much, they might let ambiguity rule the day,” Mr. Hamermesh said. And that seems a common theme when it comes to contract talks. Judge Chandler, in his 68-page opinion, wrote, “The law of contracts, however, does not require parties to choose optimally clear language; in fact, parties often riddle their agreements with a certain amount of ambiguity in order to reach a compromise.”
Thursday, January 03, 2008
Venture Investors Leap Through I.P.O. Window
NYT DealBook, January 2, 2008:
Giving money to start-ups is easy. Getting it back, with profits: That’s the tough part of being a venture capitalist.
In their quest for profitable exits, venture capitalists have been having a lot of success with initial public offerings lately, according to year-end data compiled by Thomson Financial and the National Venture Capital Association. They found that there were 31 initial public offerings by venture-backed companies in the fourth quarter of 2007, with a combined value of $3 billion. That is the highest level in a single quarter since 2000, reflecting how investors in the last year or so have been relatively receptive to new stocks, and especially tech-related offerings.
(Those statistics include all companies trading on a United States stock exchange with at least one U.S.-based venture investor.)
The pace could be slowing, however. At the end of the third quarter, there were 72 venture-backed I.P.O.’s in the pipeline, based on registrations with the Securities and Exchange Commission. That number dropped to 60 by the end of 2007.
The largest venture-backed I.P.O. of the quarter came not from a tech start-up but a pharmacy chain: China Nepstar Chain Drugstore, a Chinese company, raised $350 million, after fees, in a November offering on the New York Stock Exchange. Its only venture investor was a unit of Goldman Sachs.
Mergers, the other exit path for venture investors, have been a dead end by comparison.
Wednesday’s report found that there were 45 mergers and acquisitions involving venture-backed companies in the fourth quarter. That was the lowest quarterly figure in nearly 10 years.
That means that, for many Silicon Valley investors, the notion of cashing out a la YouTube — which sold to Google for $1.65 billion in stock — remains a pipe dream for the moment.
The biggest merger of a venture-backed company in the quarter involved Oxygen Media, the cable network whose early investors include Oprah Winfrey. It was sold to NBC Universal, a unit of General Electric, for about $925 million.
Go to Press Release from Thomson Financial and the N.V.C.A. »
Giving money to start-ups is easy. Getting it back, with profits: That’s the tough part of being a venture capitalist.
In their quest for profitable exits, venture capitalists have been having a lot of success with initial public offerings lately, according to year-end data compiled by Thomson Financial and the National Venture Capital Association. They found that there were 31 initial public offerings by venture-backed companies in the fourth quarter of 2007, with a combined value of $3 billion. That is the highest level in a single quarter since 2000, reflecting how investors in the last year or so have been relatively receptive to new stocks, and especially tech-related offerings.
(Those statistics include all companies trading on a United States stock exchange with at least one U.S.-based venture investor.)
The pace could be slowing, however. At the end of the third quarter, there were 72 venture-backed I.P.O.’s in the pipeline, based on registrations with the Securities and Exchange Commission. That number dropped to 60 by the end of 2007.
The largest venture-backed I.P.O. of the quarter came not from a tech start-up but a pharmacy chain: China Nepstar Chain Drugstore, a Chinese company, raised $350 million, after fees, in a November offering on the New York Stock Exchange. Its only venture investor was a unit of Goldman Sachs.
Mergers, the other exit path for venture investors, have been a dead end by comparison.
Wednesday’s report found that there were 45 mergers and acquisitions involving venture-backed companies in the fourth quarter. That was the lowest quarterly figure in nearly 10 years.
That means that, for many Silicon Valley investors, the notion of cashing out a la YouTube — which sold to Google for $1.65 billion in stock — remains a pipe dream for the moment.
The biggest merger of a venture-backed company in the quarter involved Oxygen Media, the cable network whose early investors include Oprah Winfrey. It was sold to NBC Universal, a unit of General Electric, for about $925 million.
Go to Press Release from Thomson Financial and the N.V.C.A. »
Wednesday, January 02, 2008
Mid-Market Deal Flow Expected to Sustain in ‘08
Dow Jones LBO Wire, January 2, 2008:
The middle market survived last year’s credit crunch relatively unscathed. Indeed, some industry practitioners say they even see an uptick in deal prospects for 2008.
Since the summer, M&A advisory firm Harris Williams has seen a 25% increase in pitches, a benchmark for deal prospects whereby bankers solicit sell-side mandates, firm co-founder Chris Williams told reporters in a recent breakfast meeting.
That was echoed by Jeff Rosenkranz, managing director of investment bank Piper Jaffray Cos. “We’ve seen a big pickup in pitch activities,” Rosenkranz told a conference December in New York. “The middle market is somewhat immune” to the liquidity crisis.
The bankers’ views are borne out in data from research firm Dealogic. While megadeals have come to a virtual stop since July, middle-market transactions have maintained a buoyant - albeit subdued - pace.
As of Dec. 27, in the $1 billion-and-above range, no more than $5 billion of transactions were announced every month since July, down from a monthly average of roughly $30 billion in the first half of this year, the data shows. No deals over $10 billion were announced since July.
But in the mid-market, deal volume has come down from the first half of 2007, but the decrease is less pronounced. For deals valued at $100 million to $500 million, the monthly average of announced deals since July was $2 billion, down from the average of $3 billion in the first half.
One reason for middle market’s resilience, bankers say, is that those deals typically contain a smaller percentage of debt financing than do mega-buyouts. Smaller LBOs normally include debt financing totaling no more than six times earnings before interest, taxes, depreciation and amortization, compared with eight times or higher for mega-deals.
Another reason is that many middle-market deals are driven by factors other than the availability of debt. Buyout firms looking to raise new funds may put portfolio companies on the block to ramp up returns. Owners of family businesses may hang up “for sale” signs for estate-planning purposes or for lack of successors to the business.
Those sellers are less concerned about wringing out the “last dollar” from buyers than, say, boards of publicly traded companies, Williams said.
There is also a theory that sellers may be rushing to unload assets before the market turns further south. “They are trying to get to the market sooner rather than later,” said Rosenkranz.
Still, market participants say deal activities will not resume to levels seen in the past few years, as banks digest the hangover. Sellers will have to adjust their valuation expectations, while buyers must be more innovative in order to get deals done.
Over the past few months, deal makers have come up with new tactics. For example, they are doing club deals, using more mezzanine debt, and putting in more equity than they normally would. Sellers, too, have chipped in with so-called seller financing, whereby they foot part of the bill in the form of notes.
“The (middle-)market is very entrepreneurial and adaptable,” said Hiter Harris, a co-founder of Harris Williams.
The middle market survived last year’s credit crunch relatively unscathed. Indeed, some industry practitioners say they even see an uptick in deal prospects for 2008.
Since the summer, M&A advisory firm Harris Williams has seen a 25% increase in pitches, a benchmark for deal prospects whereby bankers solicit sell-side mandates, firm co-founder Chris Williams told reporters in a recent breakfast meeting.
That was echoed by Jeff Rosenkranz, managing director of investment bank Piper Jaffray Cos. “We’ve seen a big pickup in pitch activities,” Rosenkranz told a conference December in New York. “The middle market is somewhat immune” to the liquidity crisis.
The bankers’ views are borne out in data from research firm Dealogic. While megadeals have come to a virtual stop since July, middle-market transactions have maintained a buoyant - albeit subdued - pace.
As of Dec. 27, in the $1 billion-and-above range, no more than $5 billion of transactions were announced every month since July, down from a monthly average of roughly $30 billion in the first half of this year, the data shows. No deals over $10 billion were announced since July.
But in the mid-market, deal volume has come down from the first half of 2007, but the decrease is less pronounced. For deals valued at $100 million to $500 million, the monthly average of announced deals since July was $2 billion, down from the average of $3 billion in the first half.
One reason for middle market’s resilience, bankers say, is that those deals typically contain a smaller percentage of debt financing than do mega-buyouts. Smaller LBOs normally include debt financing totaling no more than six times earnings before interest, taxes, depreciation and amortization, compared with eight times or higher for mega-deals.
Another reason is that many middle-market deals are driven by factors other than the availability of debt. Buyout firms looking to raise new funds may put portfolio companies on the block to ramp up returns. Owners of family businesses may hang up “for sale” signs for estate-planning purposes or for lack of successors to the business.
Those sellers are less concerned about wringing out the “last dollar” from buyers than, say, boards of publicly traded companies, Williams said.
There is also a theory that sellers may be rushing to unload assets before the market turns further south. “They are trying to get to the market sooner rather than later,” said Rosenkranz.
Still, market participants say deal activities will not resume to levels seen in the past few years, as banks digest the hangover. Sellers will have to adjust their valuation expectations, while buyers must be more innovative in order to get deals done.
Over the past few months, deal makers have come up with new tactics. For example, they are doing club deals, using more mezzanine debt, and putting in more equity than they normally would. Sellers, too, have chipped in with so-called seller financing, whereby they foot part of the bill in the form of notes.
“The (middle-)market is very entrepreneurial and adaptable,” said Hiter Harris, a co-founder of Harris Williams.
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