Friday, June 27, 2008

Deal Volume Falls, but Corporate Buyers Keep Rising

NYT DealBook, June 27, 2008:
Already, one report has noted doom and gloom in the deal-making world. Now Dealogic is adding its own take on the slump that has overtaken the world of mergers and acquisitions.
Global M&A volume fell 30 percent in the first half of 2008 from the same period last year, according to preliminary data just released by Dealogic. Much of the decline came from an 88 percent drop in private equity transactions.
But it looks like things may be on the upswing as strategic buyers are stepping in and doing increasingly larger deals now that private equity has exited the stage.
The first half of 2007 may be considered the Golden Age of M&A by financial historians. The credit crunch had yet to hit and banks were tripping over themselves to lend countless billions of dollars to buyout shops. The result was nearly $2.7 trillion worth of announced transactions. Deals in the tens of billions were commonplace, like the $45 billion buyout of power provider TXU.
In contrast, the first half of 2008 was marred by the failure of Bear Stearns, restricted lending, skyrocketing commodity prices and fears about inflation. But despite this, $1.87 trillion of deals were announced during that time. That is more than the volume announced for the entire years of 2001, 2002, and 2003.
Much of the deal volume stemmed from strategic buyers that were willing to pony up billions of their own capital to acquire a competitor. In fact, strategic M&A volume in the United States fell just 2 percent in the first half of 2008 compared to same period last year. InBev’s $46.4 billion hostile bid for Anheuser-Busch and Mars‘ $22.64 billion offer for Wm. Wrigley Jr. were two examples of mega-strategic deals that were announced in the first half of the year.
Many deals were done in non-cyclical sectors that are somewhat protected from a downturn in the economy. Consumer products, telecom, and food and beverages were the sectors that saw the most deal volume in the United States. That compares to last year which saw financial services, real-estate, and utilities lead the way.
So don’t pity the bankers; there are still deals getting done and fees to be reaped. Goldman Sachs was again the top dog in global M&A advisory, announcing $530 million worth of deals through June 26th of this year. Morgan Stanley, which was nipping at Goldman’s heels last year, was slammed, falling to number six in the league tables and announcing half of Goldman’s M&A volume at just $278 million.
But in Asia, the only region that showed growth in M&A volumes, with a 5 percent gain over last year, Goldman was not even in the top five. Leading the pack was JPMorgan Chase, with $61 billion in announced deals. In a sign of the times, newcomer China International Capital swept onto the stage at the number four spot, with $47 billion in announced deals.

As Markets Plunge, Deal-Making Plummets

NYT DealBook, June 27, 2008:
Gloom has descended over Wall Street once again. While the price of oil is rising, the health of the financial sector is flagging, taking yet another heavy toll on the markets.
And that has hit deal-making hard as well: Global mergers and acquisitions activity fell 35 percent in the year to date to $1.579 trillion, according to the latest 2008 data from Thomson Reuters. The pain doesn’t stop there: Mergers and acquisitions bankers are bracing for more job cuts as volumes fail to recover from their first-quarter tumble, and the markets seem unlikely to recover this year.
Among the reasons for the deal-making malaise, Reuters said, is that the credit crunch kept buyout firms away from large deals and economic uncertainty made companies reluctant to push the button.
Private equity buyout activity, which underpinned the recent M&A boom, fell 66 percent in Europe to $48 billion and slumped by 86 percent in the United States to $42 billion in the first half.
With inflation rising and no end in sight for economic woes in the U.S. and Europe, it seems unlikely that volumes will recover quickly to the record levels seen for the year until June 2007, observers said.
“We won’t see a boom like early 2007 again for another three or four years,” Hermann Prelle, joint-head of EMEA investment banking at UBS, told Reuters.
Several banks, including Citigroup and Goldman Sachs have already shed M&A jobs to try to adapt to the slower market, and there could be more cuts as the slowdown in activity eats into banks’ income.
In the U.S., the world’s biggest economy, a slowdown and bleak outlook were compounded this week as U.S. consumer confidence hit a 16-year low and housing prices suffered a record annual drop.
The slowdown that started with the credit crunch last summer has spread and is now undermining much of the economic stability in Europe and the U.S. that allowed the M&A boom.
Go to Article from Reuters via The New York Times »

Thursday, June 26, 2008

AMT Relief Bill

From PE Week Wire, June 26, 2008:
The U.S. House of Reps yesterday passed an AMT relief bill, which would partially be “paid” for by changing the tax treatment of carried interest from capital gains to ordinary income. Unclear if it can pass the Senate, and President Bush has promised a veto. So why are Charlie Rangel et. all going through the charade? My theory is twofold: (1) Carried interest is going to become a bargaining chip this year. Most everyone acknowledges that AMT must be dealt with at least on a temporary basis, so Rangel has preemptively created a sacrificial lamb. (2) There is now a legislative framework in place for 2009, when it’s expected that Democrats will have a few more Senators and a President Obama. With that, this change passes like taxis on a freeway.

S.E.C. Seeks to Reduce Reliance on Credit Ratings

Securities regulators proposed weaning investors and Wall Street institutions from over-reliance on credit ratings, part of changes to the rating industry prompted by the subprime mortgage crisis.
The Securities and Exchange Commission voted 3-0 on Wednesday in favor of reducing reliance on credit ratings, including proposing to eliminate a requirement that money market funds hold highly-rated securities.
“The official recognition of credit ratings… may have played a role in encouraging investors’ overreliance on ratings,” S.E.C. Chairman Christopher Cox told an open meeting of the commission.
Rating agencies such as Moody’s, McGraw-Hill’s Standard & Poor’s and Fimalac’s Fitch Ratings have been blamed for contributing to the crisis by assigning top ratings to mortgage-backed securities that later deteriorated.
“The recommendations we consider today are consistent with the objective of having investors make an independent judgment of the risks associated with a particular security,” Mr. Cox said.
Mr. Cox said high credit ratings are often not an indication of liquidity or low price volatility for structured financial products, such as mortgage-backed securities.
Fund managers would be required under the proposals to assess a security’s liquidity, or how easily the security can be bought or sold, before buying it for a money market fund.
The new rules would allow the asset to be valued based not only on credit ratings, but also on other subjective standards to determine credit risk.
Go to Article from Reuters via The New York Times »

Wednesday, June 25, 2008

The Return of Stealth Mode

PE Week Wire - Wednesday, June 25:

Josh Kopelman of First Round Capital is one of the better VC bloggers, and yesterday posted something called The Death of Stealth Mode. Here’s his intro:
A pre-launch, stealth-mode company just closes a seed round of funding. Three weeks go by, and the news of the company's funding starts appearing in VentureBeat, peHUB and Venturewire. The story is then picked up by mainstream tech bloggers and press.The CEO starts getting phone calls from journalists.I then receive frantic, angry phone calls and emails from the CEO that go something like this: "Dude! Did you announce the funding? We wanted to stay under the radar..."
I want to reply, "No. I didn't announce the funding. Your lawyer did."
What Josh is talking about, of course, is an SEC requirement that companies falling under Regulation D exemptions must submit a brief filing after raising capital. It should include the company’s name, business description, executive officers, significant shareholders, placement agents, amount of capital raised and what the capital will be used for. These are called Form D filings, and are what I regularly use to sniff out unannounced deals and fundraisings (when doing so, I cite “regulatory filings”).
Now Josh correctly asserts that these filings make it more difficult to keep a company in stealth mode. He also laments the fact that issuers soon will be required to submit Form D filings electronically, which will make them far more public than the current system of paper filings and reference room scouring. In other words, every blogger and their cousin will be able to “out” stealth mode companies. No need to have a colleague in DC.
But let me make a counter argument, which I’ll call The Rebirth of Stealth Mode.
What all of these Form D newbies are about to find out is that there can be more than 100 Form D filings in a single day. The majority of those have little to do with venture capital. Instead, they are capital raises from hedge funds, REITs, energy exploration companies and banks. Or small-time businesses that got $50k from Uncle Al (you can spot these quickly, because they’re often hand-written instead of typed). In other words, it takes lots of time to separate the wheat from the chafe.
Making matters worse, there are a lot of issuers that file for small Series A funding rounds that may or may not have institutional VCs behind them. I currently can identify the “real” ones because the company must list its significant shareholders. But the revised SEC restrictions remove that requirement, which means that my job is about to become much, much more difficult. For every one VC-backed deal I find via the SEC, there are another five companies I ignore because there does not appear to be institutional backing. Now the only way I can make the distinction will be through shoe-leather journalism. Not complaining about having to work hard, but pointing out that I’ll be unable to identify nearly as many deals as I do now.
The result, of course, is that more companies may slip through the cracks and remain in stealth mode. Yes there will be more people looking, but I think the change still favors secrecy. This is particularly true if/when clever lawyers tell their clients to make up bogus holding company names, so that the jazzy Web 2.0 startup funded by Sequoia now becomes Maple Holding Co. funded by anonymous. Unless I recognize the executive’s name, I’m probably skipping over it. So will most everyone else.

McCain Joins "Say on Pay" Wagon

Recently, Senator John McCain has been speaking out against excessive executive compensation and has now joined Senator Obama in calling for mandatory "say on pay." Here is a Business Week article about this - and here is an excerpt from McCain's June 10th speech:
"Americans are right to be offended when the extravagant salaries and severance deals of CEOs ... bear no relation to the success of the company or the wishes of shareholders," says McCain, adding that some of those chief executives helped bring on the country's housing crisis and market troubles. "If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders."
The proposals that both Senators Obama and McCain support not only would provide shareholders an annual non-binding vote on executive pay, they would also provide shareholders with a separate non-binding vote when a company gives a golden parachute to executives while simultaneously negotiating to buy or sell the company.
With H&R Block joining the list, there are now nine companies that have agreed to a non-binding vote on pay.

Tuesday, June 24, 2008

Hedge Funds Results Take a Beating in 2007

Hedge funds around the world became more cautious, reducing the amount of debt they took on to buy assets by the end of last year as returns took a beating from turmoil in global credit markets, according to a study released on Monday by Greenwich Associates.
Hedge fund leverage ratios declined to about 2.1 at the end of 2007 from 2.3 a year earlier, the Greenwich Associates/Global Custodian study showed. Meanwhile, the study showed the share of hedge managers reporting returns of more than 10 percent dropped to 52 percent in 2007 from 62 percent in calendar year 2006.
Go to Article from The Associated Press via The Guardian »

Monday, June 23, 2008

Will Higher Fees Hurt Riverside’s Latest Fund-Raising?

Posted by Deal Journal @, June 23, 2008, 9:34 am

Plans by Cleveland private-equity firm Riverside Co. to raise the carried-interest fee on its latest fund to 25% from 20% are causing some static on the fund-raising trail.
There are three or four past investors who will likely not re-up with the new fund, which aims to raise $900 million, several people familiar with the fund said. Stanford Management Co., which manages the endowment of Stanford University, is among them, these people said.
According to these people, Riverside said its past performance and large investment team–170 professionals across the globe–justified the increase. Riverside says on its Web site it has generated gross internal rates of return of over 50% on realized investments in North America and Europe. Riverside focuses on the lower middle market and invests in companies that have enterprise values of as much as $150 million.
According to public data from Oregon State Treasury, the 2000 Riverside Capital Appreciation Fund generated a net internal rate of return of 23.6% as of June 30. That is roughly in line with the 23.8% median return to limited partners from similar vintage funds, according to Cambridge Associates data, which is from the end of the year.
Despite the LP push back, Riverside Capital Appreciation Fund V LP is meeting with some interest. Fund V has had a first closing, one person said, declining to provide details on size. The City of Philadelphia Board of Pensions and Retirement, a new investor, has pledged $25 million to the fund.
The predecessor fund closed at $750 million in 2004.
Carried-interest fees of 25% and 30% remain rare among buyout firms. Only the best firms with the most loyal LP bases have been able to push through such a fee structure. Both Abry Partners LLC and Bain Capital LLC take 30% of their funds’ profits.

Former U.S. Attorneys Assail McNulty Memo

Joe Palazzolo, Legal Times, June 23, 2008

In the latest assault on the McNulty memo, a bipartisan group of 32 former U.S. Attorneys has written a letter to the chairman of the Senate Judiciary Committee, asking him to hold a vote on a bill that would shore up attorney-client privilege for corporations.
The letter to Sen. Patrick Leahy, D-Vt., marks the first time a group of the Justice Department’s own have panned the memo, which allows federal prosecutors to pressure, and in some circumstance force, corporations to waive their privilege, usually in return for leniency.
"The widespread practice of requiring waiver has led to the erosion not only of the privilege itself, but also to the constitutional rights of the employees who are caught up, often tangentially, in business investigations," the letter says.
The bill would bar the practice. Prosecutors would no longer be able to use a waiver as a factor in determining whether to indict a corporation, and they would also be prohibited from compelling a corporation to submit its attorneys' work product. The House passed a similar bill last fall.
Justice officials have argued that the legislation would weaken the government's ability to uncover corporate fraud and wrongdoing to the detriment of pension holders and investors. "There are some people who favor legislation. We think and continue to think that the McNulty memo is working and has worked," Attorney General Michael Mukasey told reporters earlier this month. "There were either no or very, very, very small numbers for actual requests of waiver of the privilege. There were requests for information."

SEC Approves One-Year Delay for Smaller Companies' Auditor Attestations

As proposed back in February, the SEC has approved another one-year extension of the compliance date for smaller companies to meet the Section 404(b) auditor attestation requirement of Sarbanes-Oxley. Smaller companies will now be required to provide the attestation reports in their annual reports for fiscal years ending on or after December 15, 2009.
In addition, the Office of Management and Budget is allowing the SEC to proceed with data collection for a study of the costs/benefits of Section 404, focusing on the consequences for smaller companies and the effects of the auditor attestation requirements.

Thursday, June 12, 2008

Lieberman Seeks Limits to Reduce Speculation

A prominent Washington lawmaker said Wednesday that he would propose next week to ban large institutional investors, including index funds, from the nation’s booming commodity markets.
The idea is one of several outlined by Senator Joseph I. Lieberman, independent of Connecticut, who is chairman of the Senate Homeland Security and Governmental Affairs Committee. That committee will hold a hearing on June 24 to continue examining whether financial speculation is affecting the prices of crops and fuel.
Go to NYT article -

Wednesday, June 11, 2008

CFTC to discuss energy speculators with Fed, SEC

SAN FRANCISCO (MarketWatch) -- The Commodities Futures Trading Commission said Tuesday that it is establishing a task force to study the role of speculators and index traders in commodities that will include representatives of the Federal Reserve, the Securities Exchange Commission and other agencies.
The announcement comes as the futures regulator furthers its investigation into whether financial investors are driving up the price of oil and other commodities, and if so, by how much. The task force also will include staff representatives of the Treasury Department, the Agriculture Department and the Energy Department.
The CFTC's own analysis of commodities prices and index traders, or investors who invest in commodities via a benchmark, such as the Dow Jones-AIG Commodity Index, has found no significant correlation between these financial investors and recent price spikes.
Still, under pressure by big users and producers of commodities as well as Congress, the regulator has acknowledged that it needs to dig deeper into trading data. It's already said that it will require more data from certain types of traders, such as swaps dealers and overseas oil traders.
Go to Article from MarketWatch»

Tuesday, June 10, 2008

CSX Grasps at Straws to Fight a Fund

CSX has scored a coup in its efforts to win a proxy fight against a pair of hedge funds, one of which is British: It has cast the battle as a matter of national security.
That has prompted howls of outrage from Congress and voluble CNN pundit Lou Dobbs. But, says Andrew Ross Sorkin in his latest DealBook column, it's an absurd situation, especially since Britain's The Children's Investment Fund isn't even seeking a majority of board seats.
Beyond that, however, CSX's fight is a case study of how a company's executives will go to defend themselves -- and how counterproductive those actions can be.

Go to Article from The New York Times»

Monday, June 09, 2008

Geithner’s Plan to Save the Financial System

NYT DealBook, June 9, 2008

Timothy F. Geithner has lived through the rockiest moments of the credit squeeze that have battered the global financial system, leading to the collapse of Bear Stearns. Now he has some ideas to help prevent a future crisis.
In Monday’s Financial Times, the president of the New York Federal Reserve Bank outlines several steps to help shore up what he calls a “fragile” financial network. Among his proposals: greater capital and liquidity requirements for big financial institutions; more robust and exacting supervision of both financial institutions and complex, highly levered derivatives; and more secure and formalized connections among the largest central banks to better work in concert should another potential catastrophe loom on the horizon.
Go to Article from The Financial Times »