Ohio.Merger.Blawg

Merger Reviews by DOJ and FTC on the Rise

2011-11-21T08:48:00.001-05:00

From the Blog of the Legal Times, Posted by Jenna Greene on November 18, 2011:

In a sign that antitrust work is rebounding, the number of mergers reviewed by the U.S. Department of Justice and Federal Trade Commission increased for the second year in a row after bottoming out in 2009.
In fiscal year 2011, companies submitted 1,450 Hart-Scott-Rodino Act filings to the antitrust agencies, up from 1,166 filings in 2010 — and a mere 716 in 2009. Under the act, companies are currently required to obtain pre-merger review for deals worth more than $66 million.
In a Nov. 17 speech at the American Bar Association’s fall antitrust forum, acting Antitrust Division head Sharis Pozen said DOJ ”allowed 98 percent of the transactions it reviewed to clear its process without requesting any further information from the parties.”
As for the other 2 percent where there’s a second request for information? “In many of these matters, the parties proposed remedies that the division agreed would solve the competitive problem it had identified,” she said. In other cases, DOJ lawyers went to court, recently blocking the merger of H&R Block and TaxACT. A challenge to AT&T's acquisition of T-Mobile USA is still pending.
As for the Federal Trade Commission, which released its annual report this week, it had less to brag about.
The FTC reported that it missed one key antitrust goal in fiscal year 2011. The agency’s target was to “obtain a positive result” 40 to 60 percent of the time when bringing antitrust actions, whether via wins in court, consent decrees, abandoned transactions or restructured transaction remedies.
In 2011, the FTC came out on top in only 14 of 44 “significant merger and non-merger investigations” — or 32 percent of the time. (In 2010, the FTC succeeded in 23 out of 58 cases, or 40 percent of the time).
Of the 14 wins, nine involved consent decrees, four were merger transactions that were abandoned, and one matter was won on appeal.
Among the losses: a bid to block the merger of clinical laboratory testing companies and an appeal in the U.S. Court of Appeals for the 8th Circuit involving a drug for premature babies with heart defects
The FTC did note that although it missed its target, the tally doesn’t count one additional merger investigation and one restructured transaction. According to the report, these were excluded because ”they did not involve the use of compulsory process. (Compulsory Process refers to a resolution, or vote, adopted by the Commission that authorizes staff to issue subpoenas and civil investigative demands (CIDs); it is the adoption of a Compulsory Process resolution that would have made these cases fall under the definition of substantial as specified by this measure.)”

Private Equity Poised for Pickup

2011-04-21T09:09:00.000-05:00

By Adley Bowden, Managing Editor, PitchBook
U.S. private equity firms as recently as 2007 were closing almost 700+ deals a quarter with over $200 billion of total capital invested. Then in 2008 the bubble burst with the financial crisis shutting down the debt markets and bringing PE activity to an almost complete stop. Since the middle of 2009 PE activity has ever so slowly been improving, to the point where this past quarter PE firms closed a total of 377 U.S. investments totaling $28 billion of capital.

So when will PE activity again resemble 2007? It will be a while, but there is a combination of trends emerging today that might push PE back to pre-crises levels before many would have thought possible. These trends include the returning availability of financing for PE buyouts, $490 billion of PE capital ready for investment, attractive valuation multiples, a continued narrowing of the buyer/seller gap, increasing competition for deals and a business cycle in the early phases of expansion. These trends have all been steadily improving/growing over the last year (think about how you felt about any of these in April last year), however private equity activity has largely remained flat. Something will have to change soon and given private equity's need to put capital to work and the increasing ability for investors to do so, look for deal flow to increase through 2011, with it perhaps approaching pre-crisis levels as soon as 2012 or 2013.

More Good Times Ahead for M.&A., Survey Finds

2011-03-30T07:53:00.000-05:00

By MICHAEL J. DE LA MERCED, NYT DealBook blog: Deal-makers are by their very nature an optimistic lot. And as many of the top legal specialists in the field head down to the annual Tulane Corporate Law Institute in New Orleans on Wednesday, it appears that their confidence is rising. Of the roughly 40 top M.&A. bankers and lawyers surveyed by the Brunswick Group, a public relations firm, about 92 percent said they believed the rest of this year would bring continued strong growth in mergers and acquisitions. Much of that was driven by a strong first quarter for deal-making, capped last week by AT&T’s blockbuster $39 billion deal for T-Mobile USA. M.&A. volume rose 58 percent for the quarter from the period a year earlier, in the best start since 2007, according to preliminary data from Thomson Reuters. Roughly half of the deal-makers surveyed by Brunswick said they believe that the biggest contributor to rising M.&A. was greater confidence among management teams and company boards. (Other factors include the improving economy and more buying firepower in the form of cash on corporate balance sheets and the availability of cheap credit.) That confidence could be seen in part through hostile deals, including an unsolicited $5.7 billion bid for Cephalon by Valeant Pharmaceuticals International announced on Tuesday. According to those surveyed, the majority of deals seen this year will continue primarily to be domestic ones by emboldened strategic buyers. Still, Asia is considered to be the most fertile source of international buyers of American assets — so long as those would-be bidders are not stymied by regulatory hurdles, which 40 percent of respondents identified as the most likely obstacles to deals. Much of the rest of this year’s survey mirrored the results of last year’s, including the most likely active sectors for deals (health care and energy) and the most likely problems for hostile bidders (overpaying and staggered boards, in which only a portion of directors are up for election in any given year). But 57 percent of respondents said that they expected more deals to be done using just cash, more than double from last year. Part of that is likely a reflection of the tremendous stores of cash companies have built up, as well as the willingness of banks to lend. Part of it may also be some lingering uncertainty over the potential vicissitudes of the markets. Yet it may also reflect even more bullishness, suggesting that the shares of potential acquirers still have some room to grow and therefore are not worth using as currency — at least not right now. In other words, the good times may continue to roll. 2011 Brunswick Group M&A Survey

Deal Making Gets Off to a Strong Start in 2011

2011-03-04T08:51:00.000-05:00

By Stephen Grocer, WSJ DealJournal, March 3, 2011:
Two months into the year, M&A is off to its best start since Lehman failed and the flow of deals slowed to a trickle.
Global M&A volume this year stands at $435 billion, a 9% increase from 2010. The biggest jumps in deal activity came in the U.S. and Asia, where deal volume was up 34% and 42% respectively. Europe saw a 9% fall in deal volume.
M&A activity did slow in February. Volume world-wide slipped 7% to $210 billion in February from January. U.S. volume last month was essentially flat from January.
Below are some more tidbits from Dealogic.
– Oil and gas has been the busiest industry for deal making, with $65.8 billion in announced transactions. Real estate and finance follow with $9.4 billion and $45.1 billion, respectively.
–The biggest deals in the oil-and-gas sector? BP’s announced $9 billion acquisition of a 30% stake in 23 of Reliance Industries’ oil and gas blocks and Ensco’s $7.5 billion acquisition of Pride International.
–Deutsche Borse’s $10.5 billion deal for NYSE Euronext ranks as the largest deal in February.
–J.P. Morgan Chase still tops the globally and U.S. league tables. Goldman is No. 2 globally, while Morgan is No. 2 in the U.S.
–Through the same period last year, J.P. Morgan ranked eighth global and didn’t crack the top 10 in the U.S.

Securities class actions inched up in 2010; those targeting M&As surged

2011-01-21T10:39:00.001-05:00

Karen Sloan, The National Law Journal, January 19, 2011:
2010 was a relatively slow year for federal securities class action filings, according to the latest research from the Securities Class Action Clearinghouse — a partnership between Stanford Law School and Cornerstone Research. There were 176 filings throughout the year, a slight increase from the 168 filings in 2009 but nearly 10% below the average from the previous 13 years. Filings were significantly slower in the first half of the 2010 but picked up later in the year. The past year saw a surge in the number of class action filings resulting from alleged disclosure violations in mergers and acquisitions. That number rose from seven in 2009 to 40 in 2010. The report points out that the 20% increase in merger activity last year does not alone explain the much larger increase in M&A securities class action filings. "The sharp increase in federal litigation alleging disclosure violations in M&A transactions suggests that plaintiff lawyers are scrambling for new business as traditional fraud cases seem to be on the decline," said Joseph Grundfest, the director of the Stanford Law School Securities Class Action Clearinghouse. "There is little reason to believe that this trend will reverse or slow down; if anything, plaintiff lawyers may well bring an increasing percentage of these claims in federal court in an effort to control the litigation and share in any fees that may result." Continuing with a trend from 2009, filings related to the credit crisis waned last year, making up slightly more than 7% of filings — down from nearly 33% last year. Settlement rates for those filings tend to be lower compared with other types of filings, though there is no difference in dismissal rates, the study found. The research shows that firms with recent initial public offerings are most at risk to be targeted by securities class actions, said John Gould, senior vice president of Cornerstone Research. In fact, companies are most likely to be sued in their second year of public trading, when they have a 4% chance of being targeted. Exposure to litigation typically decreases over time, though a newly public company has a nearly 34% chance of being sued in its first 11 years. Among those newly public companies targeted by suits last year were 12 Chinese entities, a trend that appears to be emerging, Gould said. Foreign companies were targets in nearly 16% of the filings in 2010, a record high. "These are companies that just became public in the U.S. in the past year or two," Gould said. One out of every 19 companies on the Standard & Poor's 500 index was a defendant in a class action filing in the past year, which is down from the average one in 15 during the previous decade. Filings against companies in the financial sector declined, while filings against health care companies rose. "With the wave of credit-crisis filings behind us, the industry focus for class action filings shifted to health care, where more than one out of every seven S&P 500 companies was involved in a class action," Gould said. For-profit colleges were also the target of 10 securities class action filings, which came on the heels of several government reports that alleged that prospective students were provided with fraudulent information and had low loan-repayment rates. Karen Sloan can be contacted at ksloan@alm.com.

Dealmaker Confidence High as M&A Starts Off New Year with a Bang

2011-01-19T08:23:00.002-05:00

Posted by Tom Huddleston Jr., The AmLaw Daily, January 19, 2011:
Shortly after the champagne corks stopped popping, the M&A market started to take off, with a blast of new large deals announced globally.
The Financial Times reported on Monday that, during the first ten days of 2011, combined deal volume totaled $83 billion, up from $67 billion last year. Deal lawyers see this as an example of rising confidence among companies representing a wide array of industry sectors, as well as a reflection of a surplus of cash on the balance sheet.
"[Everyone] looks and says that the improved financing markets and the large accumulation of cash by the large strategics is certainly a factor," says Allison Schneirov, an M&A partner at Skadden, Arps, Slate, Meagher & Flom.
U.S. companies are reported to have roughly $1 trillion in cash on their balance sheets; many are expected to face shareholder pressure to put that cash to use. All that, say deals lawyers and analysts, adds up to what could be the biggest year for M&A since 2007.
Link to article: http://amlawdaily.typepad.com/amlawdaily/2011/01/manda-jan2011.html

Pepperdine Private Capital 2011 Economic Forecast

2011-01-18T15:29:00.002-05:00

2011 Economic Forecast Report: Complimentary Download
Some highlights:
1. GDP seen at 1.98% with probability of recession at 28.43%.
2. Housing expected to decline 1.76% while S&P seen increasing by 6.46%.
3. ‘Increased access to capital’ seen as policy that would help spur job creation the most
4. Most participants ‘somewhat more confident’ in U.S. economic growth in 2011
5. Likewise, most participants ‘somewhat more confident’ in growth prospects of privately held businesses
6. Most participants more incentivized to innovate today
7. 80% of business owners feel economic stimulus measures distributed unfairly
8. Business owners believe a stronger dollar would be more beneficial than weaker dollar
9. Compared to one year ago, respondents more likely to invest in US, Brazil, India, Canada, Australia, and China. Less likely to invest or expand in Japan, EU, Mexico, and Russia.
10. Most respondents believe raising the $14.3 trillion US debt ceiling would be detrimental to US businesses.
A link to download the complimentary Pepperdine Private Capital Markets 2011 economic forecast report can be accessed here: http://www.linkedin.com/redirect?url=http%3A%2F%2Fpepperdine%2Equaltrics%2Ecom%2FSE%2F%3FSID%3DSV_8GNkCURw7bC3gVu&urlhash=-gjL&_t=tracking_anet.

The Thin Gruel of Rising M&A Volume

2010-12-21T16:19:00.000-05:00

Alessandro Pasetti, of Dow Jones Investment Banker, reports:
The banking industry remains in a regulatory flux and there is thin gruel for rainmakers contained within Dealogic’s preliminary end-of-year data out today. A sharp rebound in credit is necessary to spur M&A on a large scale. That still feels a long way off, and may never reach the pre-credit crunch heights.
The key Dealogic numbers are:
–Announced global M&A activity this year was nearly a fifth higher in dollar terms than last year, with emerging markets snatching a record-breaking third of the world-wide total and surpassing Europe for the first time.
–Cross-border transactions account for an increased proportion of the rally.
–North America, with $979.7 billion of deals, is ahead of all. Japan’s deal volume is down 36% year-on-year to $90 billion, the only country bucking the trend of an M&A pick-up across the globe.
–Energy led the industry ranking for the first time on record, having recorded its highest yearly volume ever. The figure is skewed by the $42.6 billion acquisition of Brazilian oil & gas assets by Petrobras, the largest deal of the year.
–Emerging-market volume reached $876.9 billion in 2010, up 56% from $561.2 billion in 2009. It accounted for 32% of global M&A, the highest share on record. The so-called BRIC nations (Brazil, Russia, India and China) accounted for 52% of emerging-market volume.
–Financial-sponsor buyouts totaled $183.8 billion in 2010, up 74% from $105.5 billion in 2009. Secondary buyouts reached $56.7 billion in 2010, the highest since 2007.
–Cross-border volume reached $969.2 billion via 9,573 deals, up 62% from $598.6 billion via 8,328 deals in 2009. Emerging markets accounted for 35% of total cross-border volume, at $336.3 billion.
Fortunes over the next year or two ride on whether banks will get the loan engine firing on all cylinders for clients across the rating spectrum. Of course, lending conditions by financial institutions have eased recently, but it certainly doesn’t feel as if a credit splurge is around the corner.
As growth stalls in western economies, M&A will struggle to record a significant rebound next year, with activity likely to be driven by defensive moves. Defensive, opportunistic, strategic. It doesn’t much matter to a banker what results in fees, though arguably a vigorous deal-making world needs all three to be kicking around.
Slivers of light are appearing. Blackstone Group gets in gear to launch a $15 billion buyout fund, Apax is following suit, so private equity may provide the necessary fillip on the back of opportunities among distressed assets.
Then there are the emerging markets.
The BRICs are providing bankers with trends and M&A activity likely to keep them busy in the medium term. Growth potential remains strong in the group but there are political risks bubbling up and surging competition for mandates. This suggests only the few with scale will emerge victorious–and the Chinese banks, with longer-term aspirations to be as powerful as Goldman Sachs Group, will complicate that.
To visit the Dow Jones Investment Banker Web site, click HERE.

Corporate Deal Makers Cautiously Return

2010-12-20T15:25:00.001-05:00

December 20, 2010, 10:54 am — Updated: 12:51 pm -->
By EVELYN M. RUSLI, NYT DealBook:
As the dark clouds of economic uncertainty lift, the environment for corporate deal-making is looking brighter.
With record cash on their balance sheets, United States companies are once again willing to invest in growth, according to McKinsey & Company’s quarterly report on economic conditions. The report, set to be released on Monday afternoon, found that a majority of executives are not postponing acquisitions or capital investment. And many are looking abroad, eager to capitalize on the fast-growing emerging economies and the rising influence of China, India and Brazil.
William Huyett, a director at McKinsey, said companies were cautiously optimistic, a positive sign for deal-making activity in 2011.
“First and foremost, there is confidence that the real markets are starting to grow again, unemployment is starting to drop and capital markets are starting to stabilize,” Mr. Huyett said. “Boards of directors are less skittish in pursuing transactions. We’re far from out of the woods, but the period of absolute uncertainty has passed.”
That said, McKinsey’s findings represent a more tempered view among executives compared with other recent reports. Thomson Reuters and Freeman Consulting Services recently predicted a 36 percent rise in global deal activity to $3 trillion in 2011. PricewaterhouseCoopers announced this month that “key conditions are in place for a resurgence in deal-making in 2011.”
McKinsey interviewed 2,076 executives in early December from a broad swath of industries. According to the results, 54 percent said they were not delaying or failing to pursue strategic deals, versus 25 percent who said they were holding back. And about 22 percent were undecided. The results, noted Mr. Huyett, were “remarkably consistent” across all sectors.
The availability of credit has also improved. Some 44 percent said their company had received financing in the last six months. Among those who said they were postponing deals, only 16 percent cited credit issues for their decision — an improvement from 30 percent in September.
Most executives said they were looking to the emerging markets for growth, particularly India, China and Brazil. More than 75 percent expect the three countries’ influence to grow over the next five years, while the clout of developed economies, like the United States, the European Union and Japan, will stagnate or recede. Unsurprisingly, the vast majority of companies that do play in emerging markets — some 72 percent — expect a greater share of revenue or profit from these regions in the coming years.
Mr. Huyett said he expected companies to take a more moderate approach to deal-making, especially amid the current volatility.
“It’s better to take a measured course and pursue M.&A. systematically, instead of a reflexive jump in the pool that companies may regret,” he said.

Why M.&A. May Rebound

2010-12-10T20:39:00.001-05:00

BY HEIDI N. MOORE, NYT DealBook, December 10, 2010:

After a long drought, companies and private equity firms may be ready to make deals again, oddly enough because of cash, debt and taxes.

Here are the main reasons why:

Cash
A consensus is emerging from several prominent dealmaking experts that mergers are coming back, largely because companies can now afford them. U.S. companies have a near-record $1.93 trillion of cash on hand, according to Federal Reserve data.

Debt
Low interest rates have spurred corporate borrowing and refinancing at unprecedented levels. Private equity firms, which are enthusiastic users of junk bonds, have driven junk volumes to an all-time record this year, according to new data from Thomson Financial.

Big borrowing is likely to continue. Analysts at investment bank Keefe Bruyette & Woods predicted that the Fed will keep interest rates low throughout 2011. That would keep the debt markets open for a long enough time for private equity, in particular, to refinance their companies’ crushing debt loads.

Taxes
The potential of new stimulus in the form of tax cuts that will benefit companies and rich individuals. Congress is currently hammering those out.

But despite the increasingly ideal conditions, deal makers may have to prepare themselves for potential disappointment. For one, American corporations may still prove themselves unwilling to spend on acquisitions as long as the economy’s growth still looks tenuous.

That kind of caution has prevailed so far. Despite record cash levels, companies have bunkered down, presumably traumatized by the financial crisis and reluctant to deploy their cash for activities like hiring. It’s a big reason why the national unemployment rate has hovered about 10 percent for over 18 months even as corporate cash balances hit their highest levels in 50 years.But despite the increasingly ideal conditions, deal makers may have to prepare themselves for potential disappointment. For one, American corporations may still prove themselves unwilling to spend on acquisitions as long as the economy’s growth still looks tenuous.

Hope, however, springs eternal. PricewaterhouseCoopers, for instance, struck an optimistic note for 2011 in a report on Thursday, indicating that incipient merger activity this year is a leading indicator of … more mergers. PwC believes that companies are out of recovery mode and ready to make acquisitions again to grow.

PwC also said that private equity is returning to the fray. A veteran dealmaker, Kohlberg Kravis Roberts & Co. founder Henry Kravis, strongly agreed this week. Kravis showed some optimistic swagger in a speech at a Goldman Sachs financial services conference this week, in which he lauded private equity’s ability to pay more for companies as a sign that private equity is ready to drive deals again after a two-year hiatus.

The observations from Kravis and PwC’s report echo the same outlook from veteran investment banker Kenneth D. Moelis at a conference last week. Moelis believesthat M&A will recover, but slowly.

“These bubbles don’t get reblown quickly,” he said last week.

There is still a question, however, of whether companies will actually go out there and start buying.

One merger arbitrager said that companies are dying to make acquisitions again, but there is very little interest from shareholders in doing so.

And if and when investors become vocal about how companies deploy their excess money, the shareholders would have to support deals and strongly oppose low-return uses of the cash, like raising dividends or staging big stock buybacks.

But there is another option: companies might do acquisitions, but just spend very modestly. Small deals would allow companies to make acquisitions without digging to deeply into their treasure chests.

And, even if all this is enough to increase confidence to pull the trigger— and prices are right— cautionary tales loom large. There are still significant problems being worked out from the past dealmaking boom.

There are different views on whether those past merger and debt issues will be damning enough to put the brakes on new deals.

On the optimistic side is Tim Hartnett, who leads the U.S. private equity practice for PwC. He said this week that an anticipated high volume of distressed private equity deals never materialized because companies cut costs, cleaned up their balance sheets and “that Doomsday scenario never happened.”

Meanwhile, research from Moody’s Investors Service indicates the weak volume isn’t necessarily a reflection of responsible management. A Moody’s report this week suggested that some private equity firms may have saved their portfolio companies from bankruptcy through high-wire financial engineering: buying up their portfolio companies’ distressed debt and then paying creditors with other kinds of securities.

Private equity firms particularly favored a certain kind of debt with a risky feature called “payment in kind,” or PIK, toggles. PIK toggles are a feature that allow companies to pay back their debt with more debt. The companies that use PIK toggles are overwhelmingly backed by private equity firms. Of the 62 companies that Moody’s studied, the majority were backed by PE firms Apollo and TPG, who were active proponents of PIK toggles.

The companies that favored PIK toggles have also been defaulting at a higher rate than expected. Moody’s said that in 2009, nearly 30 percent of the companies that used PIK toggles during the boom went on to default – or nearly double the rate of ; Moody’s also found a close link between distressed exchanges, PIK toggles and default. A separate academic study last year found that 50 percent of companies that used distressed exchanges to save themselves from bankruptcy eventually went on to fail anyway.

The companies that suffered as a result of this kind of financial engineering are still stumbling through, but barely. Moody’s says companies like Clear Channel Communications, Harrah’s and other boom-time buyouts are now at high risk of defaulting on their PIK-toggled debt.

And those companies are owned by the same PE firms that are enthusiastic about a new round of deal-making.

The lesson: With problems from the past still lurking, it pays for deal makers to be cautious, even as M.&A. rebounds.

L.B.O.’s: Don’t Call It a Comeback

2010-12-07T12:46:00.000-05:00

December 7, 2010, 10:02 am
By HEIDI N. MOORE , NYT DealBook
The buyouts last month of the big consumer names J. Crew and Del Monte were two promising signs that private equity firms were ready to come out and play again.
But don’t call it a comeback.
Sure, on the surface, there seems to be a reasonable resurrection. The volume of global leveraged buyouts have more than quadrupled this year, according to Dealogic data. Private equity firms have spent $73.6 billion on 193 deals in 2010, compared with $16 billion for 76 buyouts over the same period in 2009, noted Dealogic.
But dig deeper into the financing, and the story looks grimmer.
The private equity business runs on debt — mainly the leveraged loans and junk bonds it takes out to buy companies. As DealBook has noted, there has been a boom in such debt this year, with new records set for issuance.
That is not necessarily a good sign. Rather than funding new deals, most of the financing activity has helped private equity firms sustain their current investments, which would be in deep trouble without the help. It’s a survival play, as their portfolio companies are loaded up with debt that is quickly coming due.
The wall of refinancing that these firms face may be $100 billion more than many expected, according to Moody’s.
And private equity firms are trying to sign longer loans to avoid having to refinance again soon. The average L.B.O. loan is now 5.6 years in length compared with 5.2 years just last year.
According to Dealogic, private equity firms are signing very few fresh deals. The current volume of loans backing new buyouts is 89 percent below the record of $681.5 billion set by this time in 2007. The value of deals that private equity firms have exited is 44 percent lower than the $279.6 billion they racked up by this time in 2007.
As the industry battles its dependency on debt, private equity’s long winter may rage on for awhile.
The chill seems to have set in shortly after two blockbuster demonstrations of private equity power in 2007: the buyout of Hilton Hotels and the initial public offering of the Blackstone Group.
In 2008, private equity firms broke up — or tried to break up — richly priced deals they had signed in flusher times.
In 2009, private equity firms had plenty of cash but little access to the debt markets to deploy their strategies.
In 2010, private equity firms, with two years of weak exits and skimpy returns, had trouble fund-raising. According to Prequin, 242 funds raised $116 billion in the first half of 2010 compared with 336 funds that raised $171 billion in the second half of 2009.
In 2011, the industry’s revival may depend on whether firms can work through their debt issues while the markets are still open. To do that, private equity may have to scale back its ambitions and operate more cautiously, looking for known quantities rather than grand risks and high returns.
As the longtime investment banker Kenneth D. Moelis pointed out at a conference last week, the J. Crew and Del Monte deals were still relatively small in size for private equity deals. He predicted that such smaller buyouts would become more common, as private equity gave up its dream of the $100 billion “Big One” and focused on the more mundane job of turning around midmarket companies.
Consider one of the bigger potential deals: the Carlyle Group’s public offering. While Blackstone cashed out when times were good and valuations were high, William E. Conway Jr., a Carlyle founder, recently told Bloomberg News that the firm was going public because it was harder to get access to capital.
It’s a good insight into private equity in the aftermath of the financial crisis: the big players, once known to embrace risk and swagger, are stuck looking for sustenance for their troubled companies.
The barbarians at the gate are looking more like beggars these days.

M.&A. to Hit $3 Trillion in 2011, Report Says

2010-11-15T12:34:00.001-05:00

By EVELYN M. RUSLI, NYT DealBook, November 15, 2010
The recent rebound in mergers and acquisitions is expected to strengthen significantly next year, according to a new report, with global deal activity on track to rise 36 percent, to $3.04 trillion.
The total would be the highest amount since 2007, when the market logged $4.28 trillion in deals in the months that preceded the financial crisis.
A widespread surge in confidence will power the rally, according to the report, a joint project by Thomson Reuters and Freeman Consulting Services that included interviews with 150 executives from a broad swath of industries.
“Respondents in every sector are forecasting increased mergers and acquisitions for 2011,” Matthew Toole, Thomson Reuters’ director of deals intelligence, said in an interview. “Capital markets activity will also continue to be robust, with increased corporate bond issuance and syndicated lending, driven by refinancing activity.”
The numbers tell the story.
The totals are far from levels before the recession, when leveraged buyouts frequently fetched multiples of 15 times earnings before interest, tax, depreciation and amortization, but the appetite for deals is gaining momentum despite lingering concerns in the credit markets.
After hitting a recent low in 2009, with $1.98 trillion in deals, the volume of mergers and acquisitions is expected to rise 12.6 percent this year, to $2.23 trillion, and pick up speed in 2011, according to the report.
On the equity capital markets side, activity is forecast to rise 21 percent next year, to $920 million, while corporate bond issuance should gain 14 percent, to $1.28 trillion.
The report also predicted that two sectors would shine in 2011 for deals: real estate and financial firms. After being pummeled by the credit crisis, many companies from these industries will need to restructure their businesses, pursue consolidation, divest assets or simply play catch-up.
“Financials seem to be the most bullish on a percentage basis,” Mr. Toole said. “This year we saw Goldman Sachs divesting its prop trading desk. … Now we’ll see it on a fuller scale.”
Mr. Toole added that investors should also expect decent deal volume in the health care sector, where competition is driving mergers and acquisitions.

Merger and acquisition activity stirs among Northeast Ohio companies

2010-10-25T08:56:00.001-05:00

By DAN SHINGLER, Crains's Cleveland Business, 4:30 am, October 25, 2010
A look around Northeast Ohio's industrial landscape makes one thing quickly apparent: It's a great time to sell a company. And if local investment bankers, private equity managers and manufacturers themselves are any indication, the pace of mergers and acquisitions is only going to continue, if not accelerate, at least through the end of this year. Driving the deals is a combination of coming tax changes, newly available cash, rising company valuations and a group of sellers that's been kept out of the market for two years. “There are some really fine companies out there for sale,” said investment banker Ralph Della Ratta, managing director of Western Reserve Partners in Cleveland. A few of them already have been bought. Fairmount Minerals of Chardon is cited by some in the M&A arena as the first large local company to take advantage of the new environment. In August, its owners sold a controlling stake to a New York private equity firm, American Securities Capital Partners. The sum was not disclosed, but the deal involved at least $775 million in debt that observers said probably could not have been raised in 2009. Since then, the deals have come with increasing frequency and, as was the case with Fairmount, they've involved big names in the region's industrial economy. Solon-based Keithley Instruments, which employs 550, announced Sept. 29 that Danaher Corp. was buying the maker of test and measurement instruments for $300 million. Cleveland-based Hawk Corp. announced Oct. 15 that Carlisle Cos. planned to purchase the maker of friction products for brakes and clutches for $413 million. And just last week, Hexpol AB of Sweden said it would buy Solon-based Excel Polymers for $212.5 million. Proving their mettle
These companies might be attractive to buyers not in spite of the recession, but because of it. Any company doing well and earning a decent profit today has been stress-tested, said Hawk president Chris DiSantis, and that's an attractive quality to potential buyers. “Look at Hawk,” he said. “It doesn't get much worse for us than 2009.” In 2009, Hawk's revenues were down 35% from 2008, Mr. DeSantis said, but it still managed a profit before rebounding this year. Aside from the large companies being bought here, other local entities are involved in acquisitions, though the deals they're cutting are often in far-flung lands and do not garner much local attention. Private equity firms such as Linsalata Capital Partners in Mayfield Heights and Riverside Co. in Cleveland busily have added companies to their portfolios. Meanwhile, manufacturers such as specialty chemical producer Omnova Solutions in Fairlawn and Akron-based plastics resins supplier A. Schulman Inc. have made strategic acquisitions of other companies in their industries to expand their offerings and markets. As for when the blizzard of activity will end, there's some disagreement. But most think the pace will keep up through the end of this year and some think it will continue even thereafter. “I think you'll see more activity in 2011 than you are seeing even now in 2010,” said Steve Rosen, co-chief executive officer of Resilience Capital Partners in Beachwood. Confluence of influences
There are several factors making the deal flurry possible. For one, companies are profitable again after the downturn of 2008-2009. The rebound in their bottom lines means when companies are priced for sale, generally using some multiple of their earnings, the price once again is high enough that sellers are interested. Also, sellers are trying to avoid an increase in the federal capital gains tax rate, set to rise next year to 20% from 15% and widely expected to increase down the line. And then there's the impact of private equity firms, such as Mr. Rosen's Resilience Capital. Typically, these firms raise money from investors with a plan to invest the money by buying private companies, holding and improving them for five to seven years, and then selling them at a profit. During the financial crisis and recession, those sales could not be made, even though the investments had matured. So private equity firms have a pent-up need to divest some of their holdings, Mr. Rosen said. Finally, would-be buyers again are able to buy. Funds and financial buyers have access to credit again and many companies that survived the downturn amassed large war chests of cash in the process. “What you've got going on in the market right now is a combination of higher supply and higher demand,” Mr. DiSantis said. A rush to year end
It's all keeping Western Reserve Partners' Mr. Della Ratta busy. “We're involved in 22 deals right now, but not all of them are in Ohio,” he said. “I think we've got two or three more that we're about to sign up.” Mr. Della Ratta said he thinks local companies are the buyer in deals as often as they are the seller, and that international deals and strategic acquisitions of similar companies are the prevailing trends among company mergers. Among sellers, private equity firms are the most active right now, he said. That jibes with what Mr. Rosen said he's experiencing. “We're in the process of selling three companies now,” Mr. Rosen said during a telephone interview from the airport last Tuesday, Oct. 19, before he left for his next deal. But some think the spate of sales will last only through the end of this year, before tapering off or even declining in 2011. Sellers know the capital gains tax is going to increase on Jan. 1, which could have the same accelerating effect on corporate acquisitions that the expiration of the homebuyers tax credit had last spring on residential real estate sales, predicts Eric Bacon, senior managing director of Linsalata Capital. Deal flow won't die, but ...
Mr. Bacon declined comment on a recent Reuters report that Linsalata is preparing to sell Transtar Industries, a distributor of transmission parts based in Walton Hills. Reuters said Transtar is on the block for about $700 million. Generally, though, Mr. Bacon said sellers are rushing to get their deals done before the end of this year and, after that, there will not be as much urgency to sell. “I'm working on some deals now and they were saying, "If you want to be a player, you have to close by year end,'” Mr. Bacon said. Mr. Bacon said his firm's deal flow picked up in July and August and since has slowed a bit. He's one who thinks the wheeling and dealing will slow soon, but not come to a virtual stop as it did during the financial crisis and recession. Deal flow, he said, is significantly greater than it has been in the last two years. That's a trend Mr. Bacon said will continue through 2011, even if the pace does slow from its current rapidity. Mr. DiSantis agrees, saying, “I wouldn't be surprised to see a weak January and February in the deal market. Anyone who could compress their schedule pulled everything they could into December.”

The Buyout Gospel According to Rubenstein

2010-10-22T11:48:00.000-05:00

Tom Fairless, of Financial News, reports:
David Rubenstein, co-founder and traveling salesman for Carlyle Group, is fond of firing off lists of emerging trends at industry conferences. His latest predictions were made at a speech at the SuperReturn Middle East conference in Abu Dhabi this week.
1) The private-equity industry is shrinking. Deal and fund sizes will be smaller, leverage will remain below its peak and there will be fewer club deals. Large investors will give money to fewer firms. The jury is still out on whether the megadeals and funds from the boom years will yield strong returns.
2) But investor interest is returning. They have concluded that private equity withstood the downturn better than almost any asset class, partly because of its illiquidity, which protected investors from panic sales.
3) Return expectations have fallen. Investors have become more realistic.
4) Investors also have more clout and will demand and receive greater transparency from buyout firms and a better alignment of interests, particularly on management fees. Guidelines issued by the Institutional Limited Partners Association, a trade body for investors in private equity, will have a considerable impact.
5) Big investors will demand preferential treatment. They will seek lower fees and higher hurdle rates.
6) Governments want to get more involved. They will seek to protect stakeholders with new regulations such as the US Volcker Rule, which will deter big banks from sponsoring private equity funds.
7) The industry has gone mainstream. Buyout firms and their investors have deepened relations with government, media, consumer and environmental groups, rather than focusing exclusively on returns.
8) Brand value is increasing. Firms will start to advertise to build their brand names and aid fund-raising.
9) Global reach is increasingly important….
10) …particularly exposure to emerging markets. China is in a league of its own among emerging markets and will attract enormous amount of private-equity capital, while India and Brazil are not far behind. The Middle East and Africa will become increasingly attractive.

Megadeals Go Missing From M&A Rebound as Companies Avoid Risk

2010-10-22T09:50:00.001-05:00

By Alex Sherman and Zachary R. Mider -
Oct 22, 2010 12:01 AM ET
Bloomberg.com
This year’s rebound in mergers and acquisitions has one conspicuously large absence: the megadeal.
Announced takeovers of more than $25 billion are set to make up the smallest percentage of total deal volume in any year since 2002, according to data compiled by Bloomberg. BHP Billiton Ltd.’s offer for Potash Corp. of Saskatchewan Inc. is the only bid this year valued at more than $30 billion, and there have been only two others valued at more than $25 billion, including net debt.
Companies are spending stockpiled cash on smaller competitors that complement their business rather than pursuing transformational takeovers. While 73 percent of transactions this year have been less than $5 billion, the purchases have put dealmaking on pace to surpass last year’s $1.78 trillion in volume and may portend the return of more sizeable acquisitions.
“The drop-off in the very large transactions is masking a significant pickup in $1 billion to $5 billion deals,” said Gary Posternack, head of M&A for the Americas at Barclays Plc, in an interview. “Companies are looking at transactions that are lower risk, closer to the core business of the acquirer, and perceived as being synergistic.”
The biggest deals so far this year account for just 5.8 percent of total volume, while acquisitions from $1 billion to $5 billion have risen to 34 percent, the highest in at least a decade, according to Bloomberg data. Transactions less than $1 billion account for 39 percent of the total, a six-year high, the data show.
Cash Available
Many conditions for a comeback in bigger deals are in place. The 1,000 largest non-financial companies have almost $3 trillion on their balance sheets, and financing rates are near record lows. The Federal Reserve’s October Beige Book, released Oct. 20, noted that M&A lending picked up in some areas.
There is pent-up demand for smaller deals even if banks are unwilling to commit tens of billions of dollars in financing, according to Hiter Harris, managing director and co-founder of Harris Williams Co. in Richmond, Virginia, whose firm specializes in advising on transactions valued at less than $1 billion.
“The middle-market deal flow is a six- to nine-month leading indicator for the rest of the market and the economy,” said Harris, who expects more deals will top $25 billion in 2011.
Banks are willing to lend to creditworthy buyers, as evidenced by the $45 billion of loans Melbourne-based BHP Billiton obtained for its Potash bid. Potash rejected the $40 billion offer, excluding debt, as too low.
‘Story of Ego’
Other potential targets may also be balking at offers because they anticipate their valuations will rise, according to Sachin Shah, a special situations and merger arbitrage strategist at Capstone Global Markets LLC in New York.
“This is a story of ego,” said Shah. “Boards are saying, ’I’m a $25 billion company, I’m not the prey, I’m a survivor, I’m the predator.’”
Buyers don’t appear to be looking for transformational opportunities, according to Richard Hurowitz, chairman and chief executive officer at Octavian Advisors LP, who invests in risk arbitrage. Instead, they are actively seeking strategic deals with more “reasonable” valuations, he said.
International Business Machines Corp.’s pending takeover of Netezza Corp. for $1.67 billion and Unilever’s agreement to buy Alberto-Culver Co. for $3.7 billion are two examples of same- industry, all-cash deals announced since the beginning of September.
Biggest Deals
While deals between $5 billion and $25 billion have increased from last year, both in total number and in overall value, they are still below levels from 2005 to 2008, data show.
None of the three biggest deals this year have involved a U.S. company. The country’s unemployment rate is hovering at 9.6 percent and consumer confidence unexpectedly fell in October.
Aside from BHP, the other announced offers topping $25 billion this year are GDF Suez SA’s $25.8 billion bid for London-based International Power Plc and America Movil SAB’s $25.7 billion proposed purchase of Carso Global Telecom SAB. Both of those companies are controlled by billionaire Carlos Slim.
The compiled data include net debt and exclude terminated deals, such as this year’s $35.5 billion bid by London-based Prudential Plc to buy Hong Kong-based AIA Group Ltd.
A potential change in capital gains tax rates has also fueled smaller acquisitions, said Harris. President Barack Obama has proposed raising long-term capital-gain rates to 20 percent from 15 percent for individuals who earn more than $200,000 and couples that earn more than $250,000.
“The possible change in rates is a significant event for middle-market companies, but if you’re a $25 billion company, you’re probably not as focused on the changes,” Harris said.
To contact the reporter on this story: Alex Sherman in New York at asherman6@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net.

What Recent Deals May Say About M.&A.’s Future

2010-10-19T07:39:00.002-05:00

NYT DealBook, October 18, 2010, The Deal Professor, Steven M. Davidoff:
Where is the market for mergers and acquisitions going? After a summer of prominent deal announcements and increased M.&A. activity, investment bankers are speculating that the market will grow 15 percent to 30 percent in the next year. Bankers tend to talk their book, but this time it looks like the market is likely to support a modest upswing, albeit one not as big as the bankers hope for.
While many chief executives continue to remain wary of M.&A. transactions and the risk they entail, credit today is relatively easy and cheap, providing real incentives to make asset purchases. But whether or not the upturn is coming, the more interesting question is what this market will look like over the next year.
Go to the Deal Professor from DealBook »

Headaches Can Crop Up After Private Deals Close, M&A Study Finds

2010-10-18T07:51:00.001-05:00

Amy Miller, The Recorder, 10-18-2010:
It's not easy to sell a privately held tech company these days. But the real headaches sometimes begin after the deal closes, according to a new study by Shareholder Representative Service, which manages the post-closing process in M&A transactions for its clients.
The post-closing period can be "long, risky, and complex," the study found. Claims related to deals can be filed over an extended period of time, even after closing. Meanwhile, shareholders are increasingly demanding that certain conditions, such as performance goals, be met before the privately held company can cash out.
The study looked at more than 100 transactions that Shareholder Representative Services handled recently in which the terms were not publicly reported. The value of the deals, which involved primarily software, electronics, and telecommunications companies, ranged from about $25 million to $200 million.
According to the study, nearly two thirds of the deals allowed for possible changes to the final purchase price after closing.
Two thirds of the deals also set aside a portion of the merger consideration in escrow for more than a year, and more than half of the transactions had escrows that exceeded 10 percent of the deal value.
Even when the escrow period closes, consideration is still at risk. About 95 percent of the deals also had "carve outs," or exceptions, built into their terms that allowed claims against the transaction to be brought well after the deal closed.
And a quarter of the deals had "earnout," or performance hurdles, attached to them before shareholders could fully reap the full value of a sale. Such agreements are most common in life science or pharmaceutical deals, said SRS managing director Paul Koenig.
For example, the full value of deal to buy a pharmaceutical company might not be realized unless a particular drug gets approved by the Food and Drug Administration.
"Sometimes those are extremely complicated," Koenig said.
But in general, buyers across all industries have more leverage than in the past because the IPO window has closed for a lot of start-up companies. In the Silicon Valley tech world, it means that big companies like Google, Hewlett-Packard and Oracle can dictate the terms of a deal, and the target companies have little choice but to accept them.
Even if the economy improves and it becomes easier for start ups to go public, the trend isn't likely to change, Koenig said.
"My guess is these complicated structures are here to stay," he said. "Deals are going to remain more complicated than they were 10 to 15 years ago."

V.C. Funding Drops in 3Q, Mainly in Clean-Tech

2010-10-15T09:22:00.000-05:00

October 15, 2010, 7:15 am — Updated: 7:15 am -->
Venture capitalists poured less money into U.S. start-ups in the third quarter and split this among more companies, signaling that investors are trying to be more economical with their funds, Reuters reported.
According to a study set to be released Friday, start-up investments declined 7 percent to $4.8 billion in the July-September period, compared with $5.2 billion invested during the same three-month period in 2009. A total of 780 start-ups received funding during the quarter — 9 percent more than the 716 companies that took slices of the investment pie last year.
The study, which was conducted by PriceWaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters, said that much of the decline stemmed from a drop in large investments in clean technology. Funding in clean-tech start-ups, which include alternative energy, recycling, conservation and power supply companies, has been mercurial lately. It fell every quarter last year compared with the previous year, but has been climbing this year — until the third quarter.
Despite the third-quarter funding drop, though, funding for the full year still looks to be higher than it was in 2009. So far this year, venture capitalists have invested $16.7 billion in 2,497 start-ups; in all of 2009, $18.3 billion was funneled into 2,916 start-ups.
Go to Article from The Associated Press via The New York Times »

Is Deal Making Back in a Groove?

2010-10-12T13:59:00.002-05:00

WSJ Deal Journal, Oct. 12, 2010:
By Shira Ovide
That at least is one takeaway from the prognosticators at Standard & Poor’s.
S&P Valuation and Risk Strategies said since 1998, fourth-quarter deal volume has risen an average of nearly 15% from the prior three months. Capital IQ reported $185 billion of deals announced in the third quarter. S&P said that assuming the average historical trend for October to December, the deal volume for the fourth quarter could “reasonably exceed” $211 billion.
Already the fourth quarter has seen a string of solid, if not blockbuster, deals. GE made a $3 billion bid for energy infrastructure firm Dresser, Gymboree is slated to be bought for $1.8 billion by Bain Capital, and today Pfizer announced a $3.6 billion offer, or $14.25 a share, for King Pharmaceuticals.
At $211 billion, the fourth quarter would be the most active period for deal making this year. Of course, that could be said to be damning with faint praise, as that would be down about 11% from the fourth quarter of 2009 and well below the $447 billion of deals announced in the fourth quarter of 2006, the year with the most active fourth quarter for deals, according to S&P’s analysis of Capital IQ data.
To be sure, past performance isn’t predictive of future results. “A shock to the system could put this forecast on hold,” S&P director Richard Peterson cautioned. But please forgive battered investment houses for hoping S&P is right.

Deal Makers Cautious

2010-09-30T12:30:00.001-05:00

September 30, 2010, 12:41 pm — Updated: 1:16 pm -->
Deal Makers Cautious Despite Uptick in M.&A.
A pickup in mergers and acquisitions over the last two months has the bulls on Wall Street thinking that the deal market is back in full force. But many senior deal makers remain cautious about the increase in M.&A. activity, given the continued uncertainty in the direction of the economy.
“Basically, M.&A. is a function of a market economy, and there are so many factors that come into play that there is no way to predict what will happen in the future,” Martin Lipton, one of the founding partners of the law firm Wachtell Lipton Rosen & Katz told DealBook at the Bloomberg Dealmakers Summit on Thursday in New York. “Yes, there has been a significant increase in activity lately — sometimes that portends an increase in deals, sometimes it doesn’t.”
M.&A. activity did pump up in August, which is normally one of the slowest months for deals of the year. That enthusiasm carried over into September with a number a major transactions announced, including Southwest Airlines’ announcement on Monday that it would acquire AirTran, a rival budget airline, for nearly $1.4 billion. Global M.&A. volume totaled nearly $730 billion in the the third quarter, up 43 percent from a year earlier, according to data from Dealogic.
But this past performance is not impressing deal makers. While they are seeing more deals in the pipeline these days, they are only seeing the strongest and largest companies emerge with completed transactions.
“The system is in a state of slow recovery,” Roger C. Altman, the founder and chairman of Evercore Partners, said at the conference. “Parts of it are functioning very well in relation to where it was and other parts of it, like middle-market lending, are functioning very poorly and are a very, very long way from recovery.
“If you look at the amount of commercial investment loans outstanding, they have been relentlessly declining for almost two years, and you know you cannot have a true healthy economic recovery with bank credit lending like that.”
But Timothy Ingrassia, the head of mergers and acquisitions for Goldman Sachs in the Americas, believes that while financing may still be an obstacle in doing some deals, the main obstacle he sees has shifted from debt to the equity side of the transaction.
“If you think about a $10 billion deal that requires $4 billion of equity, you are talking about multiple private equity firms that have to get together,” Mr. Ingrassia said at the conference. “Right now, that dynamic, creating consortia and having buyers back in unity to get something done, may be the most difficult piece of the deal, while six months ago I would absolutely say that financing was the most difficult part of the deal.”
Despite the difficulties in arranging club deals, Blair Effron, a partner at Centerview Partners, believes strongly that private equity will probably be the biggest part of the deal market in the next year. Many private equity firms will need to exit their investments and so that could mean a large uptick in deal activity there.
Regulatory changes that would increase the amount of taxes that private equity firms would have to pay to exit certain deals is likely to determine whether some new deals get done. But there seems to be only modest concern from deal makers, or their clients, about the impact that the sweeping new financial regulatory law will on their business.
“I find that general legislation like Sarbanes-Oxely and Dodd-Frank does not that much of an impact,” Mr. Lipton told DealBook. “Dodd-Frank has more of an impact on financial transactions, but if there is an opportune transaction, Dodd-Frank will not interfere with them going forward.”
– Cyrus Sanati
Copyright 2010 The New York Times Company

Middle Market M&A on the Rise

2010-09-13T12:06:00.000-05:00

Prices are rising, and deal volume is getting closer to precrisis levels. Is this a true recovery or a blip on the M&A screen?By KEN TARBOUS, Investment Dealers' Digest
September 12, 2010
Ridgemont Equity Partners, a Charlotte, N.C., financial sponsor, has been an active buyer of companies worth $10 million to $100 million this summer and it has plenty of company.
Last month, Mill Road Capital of Greenwich, Conn., completed a $91 million acquisition of Rubio's Restaurants Inc. of Carlsbad, Calif., and Austin Ventures snapped up YRC Logistics, a Kansas unit of YRC Worldwide, for $38.7 million.
Dealmaking has picked up from a year ago and it is expected to remain lively at least for the rest of this year. Sponsors are allocating more money to lower-middle-market businesses, and improved debt markets are allowing buyers to borrow more. Also, some market players cite concerns about potential changes in federal tax policy as a reason for the pickup in the pace of transactions.
According to Thomson Reuters, there were 72 deals worth $4.8 billion in the lower middle market last month, compared with 65 deals worth $3.7 billion in August 2009. (These mergers and acquisitions generally involve companies worth $10 million to $250 million.)
Private-equity firms have $400 billion of capital on hand to invest, according to Deloitte Corporate Finance LLC, and more than 75% of the firms that have raised funds this year are targeting middle-market companies.
"We've got improved debt markets, you've got an inventory of deals that has built up during the economic downturn that people couldn't really sell, and you've got an improving economy that's incentivizing people to take that inventory out to the market," said Travis Hain, a partner at Ridgemont. "And finally, you've got potential tax incentives, depending on one's views on capital gains, and obviously there's a predominant view that capital gains is going up."
His firm, which Bank of America Corp. spun off last month, invests in basic industries, consumer and retail, energy, financial services, health care, and telecommunications, media and technology. This week, it announced it had bought a majority interest in the data network provider Unite Private Networks, and last week it said it had sold its interest in the fiber-optic broadband provider Fibertech Networks.To some degree, the pickup in activity may be exaggerated by the sharp decline in M&A transactions that took place during the credit crisis; while the debt market conditions have improved, there is a cap on how much a sponsor firm can borrow. Others say the activity is being propelled by the simple fact private-equity funds get paid to put money to work.
In the second quarter, according to Thomson Reuters, there were 257 U.S. deals worth $17.7 billion involving companies with enterprise values of between $10 million and $250 million. A year earlier there were 199 such deals worth $10.7 billion.
GF Data Resources, which collects data from more than 150 private-equity firms on transactions valued between $10 million and $250 million, reported a similar pattern among the financial sponsors it covers. In the second quarter, these sponsors closed 26 deals in the lower middle market, versus 16 in the first quarter and 15 in the second quarter of last year.
Private-equity sponsors and M&A bankers say that even though this year's volume does not match that of the heady days of 2005 to 2007 (a three-year period when, by some industry estimates, buyouts totaled more than $1.6 trillion), there are "record or near record" numbers of companies up for sale now, and those companies have a goal of closing deals this quarter or the next.
"If even a fraction of these deals get done, it will be a very interesting couple months," said Justin Abelow, a managing director of the financial sponsors coverage group in the New York office of Houlihan Lokey. "I think one of the things that's going to happen is that there'll be a tension between getting some of these deals done as M&A deals and just doing dividend recaps of one sort or another, particularly where people think they are not going to get their prices."
Hain says the backlog and the rush to market have a positive side.
"The good news for everybody is that this inventory of deals that built up over two or three years, they're all quality companies," he said. "The first companies that come out in this environment are the best companies. We're tending to see better companies, and there are some companies that, in certain circumstances, you can afford to pay higher prices for, depending on what a buyer thinks that you can add to the equation as a buyer and investor."
Valuations are returning to what dealmakers call more realistic levels. The multiples paid for companies in the lower middle market are on the rise, according to GF Data. The average multiple climbed from 5.1 times EBITDA in the third quarter of last year to 5.2 in each of the following two quarters to 5.6 in the second quarter of this year. Companies sold in the second quarter of last year fetched an average of 6.7 times EBITDA.
Hain says improved conditions in the debt markets have provided an impetus for deals this year. "The debt markets are facilitating transactions very actively, whereas the debt markets were a real impediment to deals last year."
In addition, the equity and debt structure of the deals has been stabilizing. Debt as a percentage of the average deal's capital structure increased to 42.4% in the first half of this year, versus 28.2% for all of last year, according to GF Data.
The equity percentage dropped from 59.0% last year to 53.3% in the first half of this year, but that's still "a high number by any kind of historical standard, so it shows that the overhang of equity capital that is still to be invested that has been raised by these private-equity sponsors, that there's a lot of pressure to deploy that capital," said Graeme Frazier, principal and co-founder of GF Data.
Market participants, citing proprietary data, pitch count and new assignments, say there might not be enough middle-market bankers and private-equity professionals to handle the plethora of deals in the market, and processes may be truncated as a result.
"This is as busy as that market has ever been, after a time of relative inactivity, and there may not be as many people in all parts of that market as there used to be, but there is much more activity," said one market participant, who asked not to be identified. "I think people are trying to push a lot of water through a relatively narrow pipe, and I think that pipe is near a bursting point."

Banks, Bosses Benefit from U.S. Supreme Court's Tougher Lawsuit Standards

2010-09-09T07:40:00.002-05:00

By Thom Weidlich - Bloomberg.com, Sep 9, 2010
Two U.S. Supreme Court decisions making it tougher to pursue lawsuits may have begun to bear fruit for corporations fighting investor claims or employee litigation.
Where once it was enough to give a defendant “fair notice” of a claim and the grounds on which it rested, the high court’s 2007 holding in Bell Atlantic Corp. v. Twombly required an antitrust complaint to contain enough facts to show a claim that is “plausible on its face.” Two years later, in Ashcroft v. Iqbal, the court applied Twombly to all federal civil suits.
The Supreme court rulings mean that someone who wants to sue in federal court “should not subject a defendant to the costs and burdens of litigation when there is no plausible basis for their claims,” Lisa Rickard, president of the U.S. Chamber of Commerce’s Institute for Legal Reform, said in an e-mail. The Washington-based business advocacy group filed a friend-of-the- court brief in Twombly.
The rule aided financial-services companies after the February 2008 collapse of the $330 billion auction-rate securities market.
Judges cited Twombly alongside the 1995 Private Securities Litigation Reform Act, which also added hurdles to investor cases, in dismissing suits against Citigroup Inc. and Bank of America Corp.’s Merrill Lynch unit over the sale of the securities.
‘Keys to the Courthouse’
“Implausible conclusory allegations are no longer keys to the courthouse,” Scott D. Musoff, a partner at Skadden, Arps, Slate, Meagher & Flom LLP in New York and a lawyer for Merrill Lynch in the auction-rate litigation, said in an e-mail. “This is especially important in the wake of a financial crisis when people are looking for someone to blame for their losses even if they have no factual basis to support their claims.”
Musoff wouldn’t comment specifically on Merrill’s auction- rate case.
Plaintiffs’ lawyers say the justices’ new threshold unfairly closes the courthouse to their clients or increases their costs by forcing them to gather facts before suing, often before they can gain access to key information. Fred T. Isquith, a plaintiffs’ lawyer in class actions, criticized the Twombly court for trying to cut caseloads at the expense of litigants seeking redress.
“It is the most fundamental task of government to administer justice and provide judgment,” Isquith, a partner at Wolf Haldenstein Adler Freeman & Herz LLP in New York, said in an e-mail. “Dismissing cases is not the solution; the solution is more judges and more money for the court system.”
Waste Management
In tossing out James Stenger’s age-bias lawsuit against his employer, a waste management firm owned by Zurich-based Credit Suisse Group AG, U.S. District Judge Eric F. Melgren in Kansas City, Kansas, said the claim didn’t raise enough facts to cross the line “from conceivable to plausible.”
Melgren allowed Stenger, 55, a former customer-relations worker at Shawnee, Kansas-based Deffenbaugh Industries Inc., to refile his complaint with more detail. Deffenbaugh again asked the judge to dismiss. He has yet to rule.
Twombly and Iqbal supplanted the standard set by the Supreme Court in Conley v. Gibson in 1957. Under Conley, a suit could be dismissed if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief.”
Federal civil cases typically proceed from the complaint to the motion to dismiss, followed by an evidence-gathering stage known as discovery, then summary judgment if there are no facts in dispute that would require a trial to resolve.
Earlier Disposal
Twombly and Iqbal are part of a trend to dispose of suits earlier in the process, said Arthur R. Miller, a professor at New York University School of Law. In 1986, the Supreme Court made it easier to decide a lawsuit between discovery and trial.
“Twombly-Iqbal now moves it to the motion to dismiss based on a single document, the complaint, with no opportunity for discovery,” said Miller, who is also special counsel to New York-based law firm Milberg LLP, which represents plaintiffs in securities litigation. “It’s becoming a big battle.”
The Chamber of Commerce says suits deserve more scrutiny in part because of the expense incurred by defendants in discovery. A report the group co-sponsored this year found that the discovery cost in 20 cases involving “major” companies averaged $621,880 in 2008, up from $488,847 for 15 cases in 2004.
Some U.S. lawmakers are seeking a return to the old, less restrictive standard. Pennsylvania Senator Arlen Specter’s bill, S. 1504, specifically mentions Conley. New York Representative Jerrold Nadler’s, H.R. 4115, refers to the “no set of facts” standard. Both Democrats’ bills are in committee.
Dollar General
In August 2009, U.S. District Judge Norman K. Moon in Lynchburg, Virginia, threw out a complaint brought by Holly Branham for injuries she allegedly sustained after slipping on liquid in a Dollar General Corp. store in Amherst, Virginia, while shopping for clothespins. Branham sought $300,000.
Citing Twombly and Iqbal, Moon said Branham “failed to allege any facts that show how the liquid came to be on the floor, whether the defendant knew or should have known of the presence of the liquid or how the plaintiff’s accident occurred.”
The judge let Branham amend the complaint to add the fact that an assistant manager had just mopped the floor. Dollar General, based in Goodlettsville, Tennessee, didn’t seek dismissal and the parties settled.
“It clearly does push forward the cost for the plaintiff side to look into a situation that might give rise to a claim, but I just have not seen that quantified,” said Richard A. Nagareda, a professor at Vanderbilt University Law School in Nashville, Tennessee, who discusses Twombly and Iqbal in an article due to be published in the DePaul Law Review next year.
Monitoring Consequences
The Advisory Committee on Civil Rules of the Judicial Conference of the U.S., the federal courts’ policy-making group, is monitoring the consequences of Twombly and Iqbal.
The effects of the decisions were debated at a May conference at Duke Law School in Durham, North Carolina, and the committee plans to present a report on the discussion to U.S. Chief Justice John Roberts before the Judicial Conference meets Sept. 14, said John Rabiej, chief of the Rules Committee Support Office.
Patricia W. Hatamyar, a professor at the St. Thomas University School of Law in Miami Gardens, Florida, analyzed a sample of federal cases and found it four times more likely for a motion to dismiss to be granted under Iqbal than under Conley.
Sample of Cases
In another sample of cases, dismissals were granted 38 percent of the time they were requested in both the four months before Twombly and the four months after Iqbal, according to an Aug. 12 report by the Administrative Office of the U.S. Courts, the support agency for the federal system.
“The case law to date does not appear to indicate that Iqbal has dramatically changed the application of the standards used to determine pleading sufficiency,” according to a July 26 Judicial Conference public memorandum.
The cases include Stenger v. Deffenbaugh Industries Inc., 09-cv-2422, U.S. District Court, District of Kansas (Kansas City); and Branham v. Dolgencorp Inc., 09-cv-00037, U.S. District Court, Western District of Virginia (Lynchburg).
To contact the reporter on this story: Thom Weidlich in Brooklyn, New York, federal court at tweidlich@bloomberg.net.
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August Deal Activity

2010-09-01T08:19:00.001-05:00

August’s unseasonable burst of dealmaking — the busiest in over a decade — could herald a wider rebound in M&A for the remainder of the year as low interest rates, record cash piles and low stock-market values encourage chief executives to strike deals, Reuters writes.
Previously deal-starved bankers and lawyers canceled holiday plans and worked through vacations in August, as companies had the gusto to launch hostile bids or fight over target companies.
Announced deals and offers during the typically slow month of August surged to $262 billion worldwide, according to Thomson Reuters data.
It is the highest value of deals and offers announced during an August since 1999 when the value reached $275 billion. Still, by number of deals, it ranks lower than last August.
The nascent mergers and acquisitions rebound, already spanning various sectors and countries, could pick up further when the traditional busy period starts, after the U.S. Labor Day holiday and the United Kingdom’s August bank holiday, bankers predict.
“What you have seen in August, that took people by surprise, is that there are some CEOs that have the confidence to pull the trigger and embark on a hostile transaction, or jump an agreed transaction,” said Chris Young, head of takeover defense at Credit Suisse in New York. “It is a bullish sign for the rest of the year.”
Go to Article from Reuters via The New York Times »

As I.P.O.’s Stall, M.&A. Thrives

2010-08-30T08:01:00.000-05:00

Languishing stock prices have put a brake on companies’ bids to tap public markets for new capital, while sparking a whirlwind of mergers and acquisitions from firms rushing to take advantage of cheap valuations, Reuters reported.
A number of United States companies have delayed their plans for an initial public offering after recent issues suffered in a weak stock market and forced a steep I.P.O. discount, bankers said, adding that more companies are engaging in a dual-track I.P.O. and M.&A. process.
The prospect of a continued fragile economy and choppy stock market conditions is making I.P.O.’s a less attractive way to raise capital, and more companies are considering a sale instead, bankers said.
“If the I.P.O. market is choppy, that gives a leg up to M&A and more of those (deals) may end up converting to M&A opportunities,” said Richard Truesdell, co-head of the global capital markets group at law firm Davis Polk & Wardwell.
Go to Article from Reuters »

For Big Firms, It’s Been Light in August

2010-08-27T10:46:00.000-05:00

A wave of deals in what is typically a sleepy summer month is keeping bankers and analysts very busy. Yet the giants in M.&A. advisory work have seen their shares of the market slump in August, according to Thomson Reuters data.
Goldman Sachs, at the top of the league table for August with 27 global deals worth $97.7 billion, has had a decline of 6.9 percent in the dollar value of deals for the month, compared with the month a year ago, Thomson Reuters says. That came even amid a 28 percent increase in the number of deals on which Goldman advised.
Morgan Stanley — the second-leading adviser in August — has had a 17 percent drop-off from a year ago. JPMorgan Chase saw a decline of 2.2 percent, while Citigroup experienced a 16.9 percent fall .
Among the top banks, only Barclays Capital has enjoyed a pickup in deal activity, with a 3.3 percent gain from August 2009, enabling it to move up to seventh place in the league table for the month from 12th a year ago.
More but smaller deals, of course, mean more, but smaller fees for the investment banks. And the bulk of the advisory fees are typically not paid until the transaction closes, many months from now.
At that point, August will be just a fading summer memory.
Go to Related DealBook Column by Andrew Ross Sorkin »Go to Related Article from DealBook

Pension Funds Drawing Up List of Targets

2010-08-25T07:54:00.001-05:00

Shareholders may soon get more power to shake up corporate boardrooms in the United States after the financial crisis exposed glaring weaknesses in how companies were managed, Reuters reports.
The Securities and Exchange Commission will meet at 10:00 a.m. eastern time on Wednesday to decide whether to adopt a rule that would give shareholders an easier way to nominate corporate board directors.
Giving shareholders the ability to place their director nominees on the corporate proxy statement has long been sought by big activist shareholders who want more say on how their companies are run.
Awaiting those new regulations, big activist pension funds are gearing up to compile a short-list of target companies in the next month, The Financial Times reported.
The move is part of a drive to shake up underperformers and will likely see the list come together after the September meeting of the Council of Institutional Investors –- a group whose pension funds have total assets of more than $3 trillion.
The proposal that would give shareholders the ability to seat their own nominees at the board of directors’ table is expected to be approved by the Securities and Exchange Commission on Wednesday.
Go to Article from Reuters via The New York Times »Go to Article from The Financial Times (Subscription Required) »Go to Article from The New York Post »

Are Mergers Back? Well, Sort Of

2010-08-24T08:13:00.000-05:00

While this August has seen an unexpected resurgence in deals — huge deals — the banking business still hasn’t made up its mind where the trend is going, The New York Times’s Andrew Ross Sorkin writes in his latest DealBook column.
There are plenty of reasons to think that this boom can’t be sustained without a matching lift in consumer spending, but still, people are working through the night in Manhattan, their hands trembling as they tweak their final calculations over an 11th can of Red Bull.
What’s behind it? Companies chasing synergies, or locking in natural resources, or using up spare cash, Mr. Sorkin writes. But more importantly: how long can it last?
Read the column here.

The M&A Recession: A Recovery Is Still a Ways Away

2010-08-04T08:08:00.000-05:00

By Stephen Grocer, WSJ DealJournal, August 4, 2010:
Let us know if we have asked this before, but is the M&A market in for a recovery in second half?
A rash of deals in the last two weeks of July pushed the month’s global announced deal volume to $224.6 billion–the highest monthly total this year. As such, the data sparked a bit of optimism about the prospects for deal making for the second half.
Overall, global M&A is up 13% this year, and deal making last month was higher in every region. After two years of falling deal volume, that is welcome news to M&A professionals.
Yet hopes for a M&A recovery have been dashed before. M&A activity jumped in the fourth quarter last year. But the recovery proved fragile. What was the first half’s biggest transaction–Prudential PLC’s purchase of AIA–fell apart. Europe’s debt crisis put a frost on deal making as worries that the global economic recovery would falter grew.
While concerns about Europe have retreated somewhat thanks to the stress tests on the Continent’s banks, handwringing about the strength of any economic recovery hasn’t. A host of economic data this week has suggested that the recovery is weaker than previously forecast. On top of that, a number of well-known investors are preparing for a period of falling prices.
Also, a closer look at the M&A data provides a less-than-overwhelming picture that a robust recovery is around the corner. For example, two of the biggest deals–BP’s sale of oil and gas fields to Apache for $7 billion and Caja Madrid’s acquisition of Bancaja–were driven more by the distress of the seller was by the confidence of the buyer. And U.S. M&A activity remains sluggish, down 5% from the same period last year.
As Deal Journal has said before, until companies gain more confidence in prospects for the global economic recovery, M&A is likely to remain muted. July didn’t dissuade deal watchers of this view.

New Report Asks: ‘Private Equity, Public Loss?’

2010-07-26T09:50:00.001-05:00

NYT DealBook blog, Monday, July 26, 2010:
Just what’s going on with private equity? Activity in the industry is on the rise, so a fresh report on the industry is timely.
Enter Peter Morris’s “Private Equity, Public Loss?”, a report written for the Center for the Study of Financial Innovation, which highlights the basic misapprehensions that Mr. Morris believes many hold of the industry.
In the report, Mr. Morris says many investors are mislead to believe “interests are aligned,” a belief belied by a reality that is more complex.
The report’s chief points are these:
Realised returns are lower than advertised, even for top-quartile managers.
The quality is also lower: excluding high debt levels and general stock market performance, managerial skill accounts for only a fraction of the total return.
This calls into question fee structures, which may remove all the gains attributable toskill.
Conflicts of interest between investors and managers remain real and substantial.
Investors’ apparent failure to question the level and make-up of returns, and fees, raises questions about their collective status as “sophisticated investors”.
Perverse incentives in private equity may distort wider markets.
At the very least, private equity firms’ results should be measured more rigorouslyand made more transparent.
Go to Related Article from The Financial Times (Subscription Required) »
Go to C.S.F.I. Web site »

Private Equity Rides Again

2010-07-07T08:10:00.000-05:00

NYT DealBook, Jul 07, 2010:
With an increase in secondary buyouts and a stock market more friendly toward initial public offerings, the private equity industry seems headed for something of a revival after grinding to near a stand-still during the financial crisis, The Deal Magazine writes.
As the New York Times noted in an article last month, among private equity players, competition for buyout targets has heated up and while prices are rising, from a historical standpoint, they remain attractive. Prices are well below the stratospheric levels of 2007 and 2008, according to Capital IQ.
Coupled with loosening up of credit, the industry is enjoying resuscitated dealmaking and profit taking, according to The Deal. Domestic leveraged buyout activity, which had dropped as low as $10.4 billion in the first half of 2009, passed $37 billion through June, the publication noted.
Yet, despite some pretty strong signs of recovery, private equity may not be headed to a 2007 redux, The Deal writes:
…the fact that the bidders managed to line up $10 billion in debt financing from various banks was a clear demonstration of the astonishing financial firepower that sponsors once again were able to marshal for the right deal. The debt harked back to the boom times, when $10 billion-plus LBOs proliferated. Could another era of supersized buyouts be in the offing?
The answer, all experts we spoke to agree, is no, because banks by and large remain constrained in what they can and will lend to buyouts. Nevertheless, the return of a semblance of normalcy to the business is heartening to many industry players.
Go to Article from The Deal »

Venture-Backed I.P.O.s Show Rebound as M&A Slips

2010-07-02T08:21:00.000-05:00

From NYT DealBook, July 2, 2010:
Venture-backed initial public offerings are the highest since before the financial crisis, even as venture-backed M&A activity is slipping, according to a survey by Thomson Reuters and the National Venture Capital Association.
I.P.O.s have always been a key exit strategy for venture capital funds, a path that was essentially closed off by the moribund stock market in much of 2008 and early 2009, Reuters reported.
The number of venture-backed I.P.O.s in the second quarter is the highest it has been since the fourth quarter of 2007, according to the survey. There were 17 venture-backed I.P.O.s worth $1.3 billion in the second quarter, which was the third consecutive quarterly increase in volume and the second in dollar amount.
Electric carmaker Tesla Motors, which raised $226 million, was the largest deal of the quarter and rose more than 40 percent in its debut.
But there are still signs of uncertainty. Only five of the 17 I.P.O.s in the second quarter were trading at or above their I.P.O. prices at the close of markets on Wednesday and the deal flow is still far below historic highs. There were 86 venture- backed I.P.O.s worth $10.33 billion in the fourth quarter of 2007, the most recent peak in the venture-backed I.P.O. market.
Go to Article from Reuters »

The Double Dip M&A Recession

2010-07-01T11:43:00.000-05:00

By Michael Corkery, WSJ DealJournal, June 30, 2010:
Coming on a turbulent week like this, the title of the Boston Consulting Group’s latest report seems a tad optimistic: “Accelerating out of the Great Recession: Seize Opportunities in M&A” reads the headline of the report released today.
In reality, deal activity appears to be doing anything but accelerating. If anything, it appears to be scraping along the bottom. U.S. announced deal volume is down 13% in the first six months of the year from the same period last year, according to Dealogic date released today. In Europe, deal volume is down 5%.
The numbers are even more depressing considering the year-over-year comparison stretches back to a period in 2009 when economy was reeling from the worst financial crisis since the Great Depression.
Still, BCG is optimistic that the conditions for a recovery are in place. Among them: Stable capital and debt markets (despite European problems), and an expanding global economy (though the Chinese juggernaut shows signs of slowing).
The folks at BCG aren’t alone in their optimism, though. The Organization for Economic Cooperation and Development declares in a report today that “International Investment Free Fall Comes to an End.”
OECD concludes that international M&A activity is on track to match last year’s totals:
International M&A investment in 2010 totals $300 billion, putting it on track to reach 2009 levels, ending a two year streak of steep declines in 2008 (down 21% from the previous year and 2009 (down 53%). This “could signal that the bottom on the cycle has been reached,’’ the OCED report concludes.
It was only a year ago that bankers and consultants were making similar optimistic pronouncements amid last summer’s M&A doldrums. But after a short uptick in the fourth quarter–thanks to big deals like Kraft Foods’s acquisition of Cadbury– the bulls turned out to be wrong.
There may be some debate whether the global economy is headed for a double dip recession. The picture seems much clearer in the M&A world. By most measures, it appears that M&A is mired in the second dip of a double dip hiatus.

M.&A. Activity Up Globally, but Regions Lag

2010-06-30T08:00:00.001-05:00

NYT DealBook, June 30, 2010:
Mergermarket, an M.&A. intelligence service, reported a 2.9 percent increase to the number of deals going on globally in the first half, marking their total value at $828.9 billion, compared to $805.9 billion at the same time in 2009, The Financial Times said.
Greater increases in M.&A. activity were seen in the developing world, making a leap of 44 percent on last year’s level to $218.5 billion, The FT reported.
Mergermarket’s data offers a mixed picture of European deal-making: In the area of emerging markets, European buyers appeared in the highest volume, contributing to 61.2 percent of inbound M.&A.
However, the second quarter was noted by Mergermarket as the worst period for European M.&A. since the data firm’s records began 12 years ago, The FT said.
In the U.S., the firm’s findings were not much better, with M.&A. activity in the first two quarters dropping 18.8 percent across the region, putting the total worth of deals at $313.3 billion, the worst result since 2003, The newspaper reported.
Go to Article from The Financial Times (Subscription Requires) »

IPOs – Reason for Optimism?

2010-06-30T07:48:00.003-05:00

From Piper Jaffray Private Equity Partners Market Update, Second Quarter 2010:
The IPO market in 2010 is off to a pretty good start. Year-to-date, there have been 53 IPOs, raising a total of $8.4 billion. This compares to 11 IPOs for $2.2 billion for the same period last year.
Early in the year, you could sense the optimism within the private equity community that the IPO window would reopen in 2010. While January and February were a little slow, March, April and May each produced a minimum of 11 IPOs and $1.3 billion raised. So far, June is slightly behind that pace (seven IPOs pricing through June 25) due to the market turmoil caused by the European debt crisis and perhaps recent post-IPO price performance. The class of 2010 IPOs is down an average of 3.5 percent versus a virtually flat year-to-date return for the S&P 500. Twenty-one of the 53 IPOs so far in 2010 are down more than 10 percent from the offer price and only 22 have traded up (as of June 25).
Regardless, the IPO backlog of companies in registration continues to grow, a sign that bankers and sponsors expect a robust IPO market in the coming months. There are currently 127 IPOs in registration, up from a low of 33 in August 2009. Most of them look viable. Less than 30 percent of the backlog is growing stale (more than four months old).
We have learned the following from recent discussions with institutional buyers of IPOs:
There is a strong demand for growth stories, which should bode well for VCs.
There appears to be less interest for LBO-backed IPOs. While institutional investors are still willing to participate in LBO-backed IPOs, they have become very price-sensitive. During the 2006–2007 boom of LBO-backed IPOs, the buyers were more apt to accept the valuation being pitched by the bankers. Today, investors are crunching the numbers themselves and telling the bankers where the deal needs to price. This is evidenced by nearly 50 percent of IPOs in 2010 pricing below their filing range, the highest percentage in years.
With few exceptions, the bar remains high for an IPO. Growth, profitability and predictability are the ingredients investors require. Median revenue for 2010 IPOs remains over $100 million while the median EBITDA is $24 million.
We anticipate the IPO market to remain choppy as investors continue to digest news of the global economy and the price performance of recent IPOs. An uptick in either category may add the necessary confidence to both issuers and investors to create a more steady flow of IPOs in the second half of the year.
Read entire article with charts at: http://www.piperjaffray.com/private/pdf/MarketUpdate_Q2_2010.pdf

On Wall Street, So Much Cash, So Little Time

2010-06-24T07:52:00.001-05:00

By JULIE CRESWELL, New York Times, June 23, 2010:

Private equity firms, where corporate takeovers are planned and plotted, today sit atop an estimated $500 billion. But the deal makers are desperate to find deals worth doing, and the clock is ticking.
The stores of money inside the private equity industry have ramifications far beyond the bid-’em-up crowd on Wall Street. Millions of Americans — investors, employees, retirees — have a stake in the game too.
Go to article: http://www.nytimes.com/2010/06/24/business/24private.html?th&emc=th

A Rise in M.&A. Activity Is Seen in the Near Future

2010-06-23T12:24:00.000-05:00

NYT DealBook, June 23,2010:
Deal-making has been subdued in the first half of the year, partly because of the recent turbulence in the stock market. But mergers and acquisitions are likely to pick up as the year progresses, Ernst & Young forecasts.
“We’re seeing a strong deal pipeline,” Rich Jeanneret, Americas vice chairman for Ernst & Young Transaction Advisory Services, said in the firm’s midyear mergers and acquisitions report. “As we look towards the second half of 2010, we expect to see well-capitalized corporations and private equity firms continuing to put their money to work in select growth markets.”
According to a recent Ernst & Young study of more than 800 senior executives around the world, 57 percent of businesses say they are likely or highly likely to acquire other companies in the next 12 months, almost double that of the 33 percent surveyed in November 2009. The study also found that 47 percent expected to make the move in the next six months, compared with 25 percent when surveyed eight months ago
The deal market will be defined by smaller, higher-quality deals fueled by low interest rates and corporate cash stockpiles, said Steve Krouskos, Americas markets leader for E.&Y.’s Transaction Advisory Services. In addition, Mr. Krouskos believes strong growth prospects in such markets as Brazil and China will lead to a pick-up in deal volume, despite concerns over instability in other developing markets.
The first half of the year started strong but began to fade as the sovereign debt crisis in Europe put some deals on hold. Global M.&A. deal value totaled $810.3 billion so far during the first half of 2010, similar to where it was during the comparable period last year at $814.6 billion. But much of the deals done in the first half of 2009 involved government activity in the banking system. This year, the deals took place across a range of industries, as private equity firms and other companies took advantage of the thawed credit markets and strong equity markets.
Looking towards the second half of 2010, Ernst & Young believes M.&A. activity should continue to grow, as well-capitalized firms seek to expand through mergers and acquisitions and from the strengthening of the credit markets (assuming the economy stabilizes).
Fortune 1,000 companies have a combined $1.8 trillion in cash, a huge stockpile that can be used for acquisitions. Ernst & Young expects companies to seek smaller deals, but “higher quality” transactions, as well-capitalized companies hunt for acquisitions that complement their strengths.
– Cyrus Sanati

Google and Twitter Go to Bat for Theflyonthewall

2010-06-22T07:46:00.000-05:00

Google and Twitter have asked an appeals court to overturn a lower court’s decision to bar Theflyonthewall.com from issuing immediate news on analyst research from several Wall Street banks, Reuters reported, citing court documents.
Theflyonthewall.com posted headlines from research reports and press releases on its website, often before banks could share their recommendations with their clients.
In March, U.S. District Judge Denise Cote said Theflyonthewall.com engaged in “systematic misappropriation,” essentially getting a “free ride” from its quick publication of upgrades and downgrades that can move stocks higher and lower. The ruling was made in favor of Bank of America’s Merrill Lynch unit, Barclays and Morgan Stanley, which had earlier sought court intervention to ban Theflyonthewall from using their research reports.
However, in a filing with an appeals court late on Monday, Google and Twitter argued that in the age of Internet and instantaneous communication, banning of Theflyonthewall.com’s immediate news dissemination was “obsolete.” Google and Twitter argued that upholding the district court’s decision would give those who obtained the news first strong incentives to block others from obtaining the same information.
“News reporting always has been a complex ecosystem, where what is ‘news’ is often driven by certain influential news organizations, with others republishing or broadcasting those facts — all to the benefit of the public,” Reuters cited the companies as saying in the filing.
Go to Article from Reuters via The New York Times »

In Deal-Making, Flat Is the New Up

2010-06-14T07:17:00.000-05:00

NYT DealBook, Monday, June 14, 2010:
Some bankers made rosy predictions for a big bounce-back in mergers and acquisitions this year. Yet deal volumes in the United States are recovering as if the recession just endured was run of the mill, Breakingviews says.
After two down years, the value of American corporate match-making is flat in 2010. That’s no boom — but if history is any guide, it’s also nothing for bankers to complain about, the publication says.
After declines of 41 percent in 2008 and 22 percent in 2009, the value of announced deals in the United States so far in 2010, at $322 billion, is just a fraction off last year’s pace. That pattern is in line with the last two recessions, according to Thomson Reuters data. The downturn of the early 1990s had three dry years, and the dot-com bust brought two.
So considering the depth of the latest recession, flat is the new up, Breakingviews argues. True, some on Wall Street had forecast a more robust rebound. Goldman Sachs predicted “a perfect storm for M.& A.” late last year, pointing to cash-stuffed corporate coffers — now at a record, according to the Federal Reserve — and benign capital markets. Greenhill & Company also predicted 2010 would be big for deal-makers.
But while last year’s fourth quarter showed a promising return of deal-making — like TPG’s buyout of IMS Health and Berkshire Hathaway’s acquisition of Burlington Northern Santa Fe — the momentum hasn’t continued, Breakingviews says.
Some may find that surprising. After all, while many companies achieved profit targets through cost-cutting during the economic downturn, the juice has probably been squeezed from that lemon. Acquiring competitors and eliminating overlap is another way to find cost reductions. For instance, while CenturyTel and Qwest have been cutting costs on their own, they now hope their merger will yield more than $600 million more in fresh savings.
The trouble is that even though the United States economy has stopped contracting, big risks still weigh on the animal spirits of executives, Breakingviews argues. Job growth is anemic and credit markets have had renewed volatility in the wake of Europe’s sovereign debt crisis. Such market turmoil may have played a role in scuttling Prudential’s bid for the American International Group’s Asian insurance business, and a $15 billion leveraged buyout of Fidelity National Information Services, the publication suggests.
Put it all together, and deal makers pining for more action should probably just consider themselves lucky to have any at all, Breakingviews says.
Go to Article from Breakingviews via The New York Times »

Private Equity’s $445 Billion Problem

2010-06-11T08:03:00.001-05:00

NYT DealBook, Friday, June 11, 2010:
The private equity industry has $445 billion burning a hole in its pocket and it could soon turn into a problem, Investor’s Business Daily writes.
Buyout shops have raised — though are yet to deploy — that figure from institutional investors, according to the publication.
And if they can’t unload it in the near future, they may face a host a problems.
Investor’s Business Daily writes:
To realize the outsize profits investors expect, private equity firms would have to borrow two or three times that amount. But for the most part, credit spigots for such deals are still dry. At the same time, pinning down buyout targets is not that easy. Many potential sellers are balking at parting with corporate assets in the midst of a serious downturn.
Worst of all, the clock is ticking on that near-half-trillion war chest.
“Most funds legally have five or six years to invest that capital,” said Andrea Auerbach, managing director at Cambridge Associates, a consultant to institutional investors based in Boston. “It’s use it or lose it.”
If P.E. doesn’t start to spend that committed capital soon, investors may begin to pull out, the publication notes. At the same time deals that are done only to use the capital risk being ill thought through and potentially not very profitable.
Go to Article from Investor’s Business Daily »

Business Broker Chicago: The Importance of Reasonableness When Selling Your Business

2010-06-10T12:22:00.003-05:00

Link to excellent article posted by Dave Kauppi:
http://businessbrokerchicago.blogspot.com/2010/06/importance-of-reasonableness-when.html

And You Thought M&A Was Slow Last Year…

2010-06-07T07:31:00.002-05:00

By Stephen Grocer, WSJ Deal Journal, June 7, 2010:
M&A recovery? Deals just around the corner?
That may be what Wall Street wants you to believe.
But the numbers tell a different story. The volume of deal-making during 2010 has been weak. Very weak.
U.S. announced deal volume is down 14.7% from the same period last year, according to Dealogic. In Europe, it’s off 6%.
Those numbers are made only more stark given the year-over-year comparison stretches back to a period in 2009 when economy was still mired in the worse financial crisis since the Great Depression.
Perhaps more troubling is the dearth of large deals. So far only seven deals valued above $10 billion have been announced globally, the lowest total in the past five years. Seven transactions rank as the lowest total in the past five years.
With so few big deals, the average deal size both world-wide and in the U.S. has plummeted to its lowest levels since 2003. The U.S. saw the steepest decline. Last year the average deal size in the U.S. was $309 million through the first five months. This year it’s nearly half that.
The only thing keeping the M&A business going is activity in the developing world. Deal volume in Latin America is up nearly two-fold, and 175% in India (admittedly off of small bases from 2009).
Perhaps the late Bruce Wasserstein will prove prophetic. Last summer the legendary deal maker said deal activty would not return to peak levels until 2013, and that the four years in between would see only a gradual increase.
Just consider today’s unemployment figures and consider this: If companies aren’t confident enough to hire, are they confident enough to pull a trigger on a deal?

Latest ACG-Thomson Reuters Survey Shows Dealmakers Increased Optimism

2010-05-25T12:14:00.000-05:00

After 18 months of pervasive gloom, dealmakers are increasingly more positive about the M&A environment, according to the twice yearly ACG-Thomson Reuters DealMakers Survey. The latest survey results, released at ACG InterGrowth® 2010 on May 5, reveal a sunnier sentiment about the dealmaking environment. While the last three surveys were consistently dreary, with more than 80% of dealmakers reporting a fair to poor M&A environment, the most recent survey reports that 85% of dealmakers expect an increase in M&A activity in the next six months. A year ago, only 56% predicted an increase. The survey, by the ACG and Thomson Reuters reflects responses from nearly 700 investment bankers, private equity professionals, corporate development officers, lawyers, accountants and business consultants in March and April 2010. Here are a few highlights:
Eighty percent of survey respondents identified the current environment as a buyer's market. 97% of corporate professionals expect strategic investments to accelerate in 2010.
The greatest drag on M&A activity today is sellers unwilling to sell at multiples offered, according to 38% of dealmakers. This is followed by the credit crunch, which has steadily decreased in importance as the biggest obstacle to M&A activity (27% today vs. 29% at year-end 2009, 33% one year ago and 43% 18 months ago.)
Thirty percent of private equity executives say that this year they expect the majority of their portfolio companies to experience job growth.
In the past 12 months, 35% of private equity firms say they have marked down their portfolio company values, 43% have held values steady, and 22% have marked them up.
Portfolio companies are showing signs of improvement. Seventy-four percent are performing above their prior year EBITDA, while 26% are performing below last year's EBITDA.
Some 53% of private equity respondents are concerned about the public's perception of private equity. This is an increase from 47% in December 2009.
Three quarters of private equity firms are concerned about a draft U.S. bill that would require advisors of private equity funds and hedge funds to register with the SEC, thus forcing more disclosure to regulators and investors.
A complete report on the survey results may be viewed here.

M&A deals steady as credit, bottom lines improve

2010-05-24T08:08:00.002-05:00

Crain's Cleveland Business, Monday May 24, 2010:
Mark Filippell, managing director of investment banking firm Western Reserve Partners, likened the increased activity he sees in the mergers and acquisitions market to the baby boom following World War II.
“The numbers are going to pop. M&A deals are happening,” he said. “It's like in 1946, when the soldiers are back for six months and someone says, ‘No babies are being born.' Well, look down the street; you see a lot of pregnant women.”
Mr. Filippell and others who spend their days looking at deals say that as credit has loosened and bad quarters start to roll off companies' books, the appetite of both buyers and sellers in M&A deals has risen dramatically.
While that pickup still doesn't translate into a pre-recession flow of transactions, it does mean buyers and sellers are pushing forward on deals they could not or would not entertain for the past year and a half or more.
Mr. Filippell said he has seen a number of letters of intent and that Western Reserve Partners “is running flat out” working on transactions, as are a number of M&A attorneys to whom he has spoken.
Stewart Kohl, co-CEO of private equity firm The Riverside Co., said the momentum really picked up in March, after incrementally improving for most of the second half of 2009. Both the number of companies for sale and the quality of those companies have been on the rise.
“What's beginning as a spring thaw is becoming a summer and fall avalanche,” said Mr. Kohl, whose own firm has made seven acquisition so far in 2010. “We're going to see more and more.”
Investment firm William Blair and Co., in Chicago, also noted that activity seemed to increase in March. In an April commentary, the firm said there had been 982 transactions announced in the United States for that month, a nearly 32% increase from March 2009.
Indeed, March marked the fifth consecutive month that the number of transactions increased as compared to the prior year. And the disclosed dollar volume of the announced transactions in March, $140.1 billion, was 72% higher than it was a year ago, according to William Blair.
The reasons for the increase, Mr. Kohl said, include the need for other private equity firms to make exits so they can reinvest their capital; small business owners who are getting older, sicker or simply want to retire to spend more time on the beach; a pending increase in capital gains tax rates that would reward owners who sold before year's end; and increased bank lending that make deals easier to complete.
Tire kickers abound
The deal flow is still “choppy,” said Doug Neary, corporate group chair at Cleveland law firm Calfee, Halter & Griswold, but it's increasing at a steady pace.
Mr. Neary, who also co-chairs Calfee's M&A practice, said earnings are getting better, increasing companies' worth, and proving to potential acquirers that the businesses are strong enough to ride out a bad economy.
The general consensus, he said, is that there will continue to be an increase in activity throughout 2010; Mr. Neary said he expects a “frenzy” by the end of the year.
Nonetheless, he said buyers remain cautious and are “kicking the tires more diligently, now that they see what a downturn can do.”
Linsalata Capital Partners vice president and partner Michael Moran said the increased appetite is coming from all matter of sources.“
After a long time in a very quiet market, we're starting to see some re-emergence of deal activity over the past month,” Mr. Moran said.
A 'rising tide'
Gordon Kaiser, a partner and former head of the corporate practice group at the law firm Squire, Sanders & Dempsey, said strategic buyers with capital on hand are looking for ways to spend it, and banks are more willing to lend for private equity deals.
Mr. Filippell, at Western Reserve Partners, said private equity firms also are willing to put increasing amounts of equity into deals, fearful that they will not find sufficient opportunities before they need to return capital to investors.
Stan Gorom, business practice chair at law firm Hahn Loeser & Parks, said he continues to see particular interest in distressed companies and has seen asset purchase agreements and letters of intent on the rise. However, he said people remain conservative, even as they seek to deploy unused capital.
“It's nascent, it's just beginning,” Mr. Gorom said. “I've seen a few deals, which gives hope.”
Likewise, Megan Mehalko, chair of the corporate and securities practice group at Benesch Friedlander Coplan & Aronoff, said she is “reasonably optimistic” that M&A activity will continue to rise as companies that have a “strong desire to invest and grow and capitalize” take advantage of the improved economic climate.
For most of 2009, Ms. Mehalko said, she was struggling on a monthly basis. From the start of 2010, though, she could see the pipeline of deals going as far as three quarters in the future.
James Dougherty, mergers and acquisitions partner at Jones Day, said increased confidence is a large reason for the change. When a global financial meltdown was a “legitimate concern,” he said, companies did not have a rosy picture of the future and were loath to make acquisitions.“
Although now, it's not 2006, 2007, deals make sense and financing is available,” he said. “There's a marked improvement from last year at this time.”

Ohio Dealmakers Optimistic About M&A

2010-05-06T08:34:00.001-05:00

May 6, 2010 6:40 a.m.CLEVELAND -- After 18 months of pervasive gloom, dealmakers from Ohio are increasingly more positive about the mergers and acquisitions environment, according to the latest DealMakers Survey by the Association for Corporate Growth and Thomson Reuters. While the last three surveys were consistently dreary, 94% of Ohio dealmakers now expect an increase in mergers and acquisition activity in the next six months.“We’ve seen an increase in the quality of the deals in 2010 as compared to last year,” said Thomas Littman, president and senior managing partner of middle-market private equity firm Kirtland Capital Partners. “While we’re not back to the crazy days of 2007 to 2008, we are bullish on the outlook for the M&A market for the rest of 2010.”The survey polled investment bankers, private equity professionals, corporate development officers, lawyers, accountants and business consultants. Respondents expect the most merger activity in the manufacturing and distribution sector (cited by 33%), followed by health care/life sciences (18%), technology (15%) and consumer products and services (9%).“Many factors are contributing to the increased M&A activity, including the greater willingness of business owners to consider a sale because their businesses have stabilized, significant improvement in the debt markets over the last six months and the potential change in the capital gains tax rate in 2011,” Littman noted.Fully 82% of respondents identified the current environment as a buyer’s market, and 94% expect strategic investments to accelerate in 2010. The greatest drag on M&A activity today is the number of sellers unwilling to sell at multiples offered, according to 46% of dealmakers. This is followed by the credit crunch (20%).According to Thomson Reuters, the volume of all worldwide mergers and acquisitions totaled $573.3 billion during the first quarter of 2010, a 21% increase over the first quarter of 2009.
Published by The Business Journal, Youngstown, Ohio

Spitzer & Black: Questions from the Goldman Scandal

2010-04-26T10:45:00.001-05:00

By Eliot Spitzer and Bill Black, cross posted from New Deal 2.0:
Spitzer and Black argue that the Goldman revelations underscore the need for serious financial reform.
For those who have spent years investigating fraud, it was no surprise to hear that Goldman Sachs, the (self-described) jewel of Wall Street, is the latest firm to emerge from the financial crisis with tarnished reputation. According to a lawsuit brought by the Securities and Exchange Commission, Goldman misrepresented to its customers the quality of the toxic assets underlying a complex financial derivative known as a “synthetic collateralized debt obligation (CDO).”
As you may now have heard, the story involves a pair of Paulsons. As CEO of Goldman, Hank Paulson oversaw the buying of large amounts of CDOs backed by largely fraudulent “liar’s loans.” When he became U.S. Treasury Secretary, he went on to launch a successful war against securities and banking regulation. Hank Paulson’s successors at Goldman saw the writing on the wall and began to “short” CDOs. They realized that they had an unusual, brief window of opportunity to unload their losers on their customers. Being the very model of a modern investment banking firm, they thought that blowing up their customers would be fine sport.
John Paulson (unrelated), who controls a large hedge fund, also wanted to short CDOs and he, too, recognized that there was a narrow window for doing so. The reason there was a profit opportunity was that the “market” for toxic mortgages only appeared to be a functioning market. It was, in reality, a massive bubble in which ratings and “market” prices were grotesquely inflated. The inflated prices were continuing only because the huge players knew that the prices and races were fictional and were covering it up through the financial equivalent of “don’t ask; don’t tell.” According to the SEC complaint:
In January 2007, a Paulson employee explained the company’s view, saying that “rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while ‘real money’ investors have neither the analytical tools nor the institutional framework to take action.”
We know from Bankruptcy Examiner Valukas’ report on Lehman that the Federal Reserve knew that the “market” prices were delusional and refused to require entities like Lehman to recognize their losses on “liar’s loans” for fear that it would expose the cover up of the losses. Valukas reports that Geithner explained to him when interviewed (p. 1502) that:
The challenge for the Government, and for troubled firms like Lehman, was to reduce risk exposure, and the act of reducing risk by selling assets could result in “collateral damage” by demonstrating weakness and exposing “air” in the marks.
Goldman and John Paulson worked together. One of the key things to understand about shorting is that it is extremely valuable if other major players short similar targets at the same time. By helping Paulson take advantage of Goldman’s customers (the ones that lacked “the analytical tools” to avoid being hosed), Goldman not only earned a substantial fee, but also aided its overall strategy of shorting the toxic paper.
Goldman created a deal in which John Paulson played a major role in selecting the toxic paper that would underlie the investment. He picked assets “most likely to fail - quickly” and studies show that he was particularly good at picking the losers. At this juncture, there is some dispute as to whether ACA was complicit with John Paulson and Goldman in picking losers (ACA initially invested in the synthetic CDO, but then transferred the risk of loss to German and English taxpayers).
What isn’t in dispute is that Goldman, ACA, and Paulson all failed to disclose to purchasers of the synthetic CDO that it was designed to be most likely to fail. The representation was the opposite: that the assets were picked by an independent entity with their interests at heart (ACA). Goldman claims it’s a victim because while it intended to sell its entire position in the synthetic CDO to its customers, it was unable to sell a chunk. One feels the firm’s pain. Goldman tried to blow up its customers to the tune of over $1 billion, but were unable to sell them the last $90 million in exposure.
The Goldman scandal raises several important questions: Did John Paulson and ACA know that Goldman was making these false disclosures to the CDO purchasers? Did they “aid and abet” what the SEC alleges was Goldman’s fraud? Why have there been no criminal charges? Why did the SEC only name a relatively low-level Goldman officer in its complaint? Where are the prosecutors?
In a December New York Times op ed, we, along with Frank Partnoy, asked for the public disclosure of AIG emails and key documents so that we can investigate the deceptive practices exposed by the Goldman case. Goldman used AIG to provide the CDS on most of these synthetic CDO deals (though not the particular one that is the subject of the SEC complaint), and Hank Paulson used tax payer money to secretly bail out Goldman when AIG’s deceptive practices drove it to failure.
The SEC’s Goldman fraud complaint points to fundamental problem in the financial sector that has been at the root of the financial crisis — one that still exists today. The market is not transparent. It has been fraudulently manipulated to enrich managers. Investors lack clear information to make decisions about what they are buying. A continuing absence of real consumer protections makes people like those trying to obtain mortgages before the crash understand that they were, in many cases, being ripped off. According to internal Goldman Sachs e-mails, the company vice president, 31-year old Fabrice Tourre, did not really understand the complex deals he was making. And yet we note that many of these Goldman-style deals were “insured” by AIG. Without transparency, regulators cannot properly see all these kinds of deals in the aggregate. So they can neither stop the fraud nor prevent catastrophic results.
We applaud the SEC lawsuit, but it will not solve the problem. Unless our financial system is reformed to put adequate protections and checks and balances in place, we can expect this kind of fraud to continue. Financial executives will continue to take risks they do not understand. Those who control the flow of capital will continue to churn out profits with socially disastrous consequences.

Justice and F.T.C. Propose New Merger Guidelines

2010-04-21T07:31:00.000-05:00

Antitrust enforcers have released proposed new guidelines describing how they approach mergers between rivals, with a range of experts describing the revisions as providing greater clarity and giving officials more discretion, Reuters reported.
The stated goal of the 34-page guidelines — which can be found at www.ftc.gov — is to update the merger guidelines to ensure they reflect the current review process.
The revision was done jointly by the Justice Department and Federal Trade Commission, which divide the work of antitrust enforcement, the news service said.
“Eighteen years have passed since the Horizontal Merger Guidelines were revised. During that time the agencies’ approach has evolved significantly, and the guidelines should reflect that,” said F.T.C. Chairman Jon Leibowitz in a statement.
Go to Article from Reuters »

M & A: Live from Tulane: Deal-Making Returns

2010-04-16T08:00:00.001-05:00

NYT DealBook, Friday, April 16, 2010:
Hello from New Orleans, where DealBook has been covering Tulane University's Corporate Law Institute, the annual gathering of top deal-making lawyers. The mood here is markedly more optimistic than last year, as professionals predict deal-making is ready to grow. Go to DealBook's Coverage of Tulane University's 2010 Corporate Law Institute>>
Kicking off the conference, JPMorgan Chase's Douglas Braunstein says that the signs are present for renewed deal-making in 2010. Go to Item from DealBook» Just because calls have grown louder for the government to increase its regulation of companies doesn't mean that it should, a commissioner at the Securities and Exchange Commission said Thursday. Go to Item from DealBook»
A panel on public company mergers at the Corporate Law Institute mixed the serious with the sarcastic, perhaps an inevitable mix when Delaware Chancery Court Vice Chancellor Leo Strine is on hand. Go to Item from DealBook»

Signs of Confidence Growing in M.&A. Market

2010-04-15T08:22:00.000-05:00

NYT DealBook, April 14, 2010:
Corporate executives from around the globe feel more confident about making deals, with many of them planning mergers and acquisitions in the near future, according to a new survey of business confidence by Ernst & Young and the Economist Intelligence Unit.
The Capital Confidence Barometer, a survey of more than 800 professionals worldwide, found that 57 percent of businesses say they are likely or highly likely to acquire a rival in the next 12 months, with 47 percent expecting to reach a deal in the next six months. That compares with six months ago when the biannual survey found that just 33 percent were planning acquisitions over the coming 12 months, with 25 percent expecting deals in the coming six months.
The biannual survey complements another look at mergers and acquisitions released on Wednesday by the Brunswick Group, a corporate communications firm. That survey showed top bankers and lawyers were even more optimistic, with two-thirds saying they thought deal-making activity was on the increase.
The Ernst & Young study also found that confidence in credit conditions was improving, as 62 percent of respondents said they could obtain financing for major capital projects and acquisitions in the next 12 months. Up to now, most deals have been cash-based because of the lack of bank financing.
“Improving market conditions have more companies shopping again and those with capital to deploy are ahead of the game,” Richard Jeanneret, vice chairman of transaction advisory services at Ernst & Young, said in a statement. “There’s a greater focus on growth opportunities and M.&A. is one way to achieve that goal.”
The survey, which was conducted in late March, also found that 76 percent of businesses were now focused on growth, compared with 56 percent six months ago. Those executives in the automotive sector were the most confident of growth, with 81 percent of respondents expecting their businesses to expand — a result that makes sense given the pounding that the auto industry took during the financial crisis.
Meanwhile, executives in the energy and pharmaceuticals sectors said that they were very likely to focus on mergers and acquisitions, as well as divestitures. About 69 percent of oil and gas companies said they were planning to sell a piece of their businesses in the next six months.
But while there was a pickup in sentiment concerning deals, the outlook for the broader economy remained somewhat weak. with just 40 percent of respondents expecting the economic downturn to end within 12 months.
There was a wide dispersion of confidence related to the economy depending on where the respondents were based. The most optimistic countries were Australia at 93 percent, India at 91 percent, Brazil at 83 percent and China at 80 percent.
The Western developed markets were among the least confident of the group, with France at 44 percent, the United States at 56 percent and Britain at 57 percent.
– Cyrus Sanati

Deal Outlook Is Rosy Ahead of Tulane M.&A. Conference

2010-04-14T08:06:00.000-05:00

NYT DealBook, April 14, 2010:
Deal-makers are feeling good about their business again ahead of Tulane University Law School’s annual Corporate Law Institute in New Orleans, which begins Thursday. (DealBook will be on the ground to give you an inside look.)
More than two-thirds of top bankers and lawyers who orchestrate mergers and acquisitions believe that deal-making activity will rise again, according to a survey released Wednesday by the Brunswick Group, a corporate communications firm.
That’s a big change from last year’s results, in only 29 percent of respondents forecast signs of recovery within 18 months.
“This year’s results reveal a substantial change in sentiment in the M.&A. world and advisors appear to be quite optimistic that the deal activity we’ve seen in the first quarter of the year will continue and potentially accelerate during the remainder of 2010,” Steven Lipin, a Brunswick senior partner, said in a statement. “While it may be premature to sing Bon Temps Rouler, overall the community is feeling much more positive.”
While the economic recovery has certainly helped propel deal-making — as DealBook noted earlier this month, mergers volumes remain up more than 18 percent from last year — deal-makers said that psychological factors will help greatly. About 36 percent of respondents said that the confidence of chief executives and corporate boards will provide the biggest boost to deal-making, more than healthy credit markets and booming stock prices.
The vast majority of respondents said that domestic mergers will dominate the landscape, and deals involving a mix of cash and stock will be the norm.Brunswick Group’s M.&A. Survey 2010

Financial Deal-Making May Rise in 2010, PwC Says

2010-04-08T08:41:00.000-05:00

NYT DealBook, April 8, 2010.
The first instances of consolidation among financial services firms began in earnest during the height of the financial crisis, when Bank of America purchased Merrill Lynch and Barclays Capital acquired the bulk of the failed Lehman Brothers.
More than two years later, financial services firms are still expected to partake in mergers and acquisitions, according to a report released Thursday by PricewaterhouseCoopers.
Bank auctions by the Federal Deposit Insurance Corporation, consolidation among asset management firms and possibly some deals among insurers are all expected to take place over the rest of 2010, the accounting firm said.
Already, two of the biggest deals of the year were in the financial space: the sales of two international units of the American International Group, as the insurer trudges toward recovery after its near-collapse during the financial crisis.
“We believe the current market presents a significant number of potential opportunities in the banking, asset management and insurance sectors for investors that have the liquidity and capital strength to be acquisitive and the infrastructure and capabilities to realize potential synergies,” Gary Tillett, PricewaterhouseCoopers’ financial services leader, transaction services, said in a statement.
The report cites several factors for continued deal-making among financial players. While the economy has recovered, some firms — like banks and property and casualty insurance providers — may continue to struggle with returning to big profits. And asset managers may still face pricing pressures.
Go to PricewaterhouseCoopers Press Release »
Go to PricewaterhouseCoopers Report (PDF) »

Tech M.&A. Shows More Signs of Rebounding

2010-04-05T11:41:00.000-05:00

NYT DealBook, April 5, 2010:
The number of technology mergers and acquisitions announced in the first quarter of the year rose to its highest level since the financial crisis first gripped the market, according to the 451 Group, a technology investment research firm.. But the aggregate value of the transactions fell from the previous quarter as there were only a handful of big-ticket deals announced.
Nevertheless, many technology companies are still sitting on the sidelines with large cash reserves, so deal activity could increase as the economy improves.
Deal makers were busy in Silicon Valley last quarter, announcing 841 deals, the highest number since the second quarter of 2007, the 451 Group reports. The makeup of deals varied from a bevy of small bolt on acquisitions to some larger deals with big-name players, including CA, Google, I.B.M. and Oracle. They all announced at least three acquisitions in the just-completed quarter, including, I.B.M.’s acquisition of Initiate Systems and CA’s acquisition of Nimsoft.
But while the quarter saw 12 deals that exceeded $1 billion, the majority of deals were smaller eight- or seven-figure deals. In fact, a third of the deals volume announced originated with just one deal, Bharti Airtel $9 billion acquisition of the Zain Group’s mobile phone businesses in Africa, which skews more into the telecommunications sector rather than the pure-play technology space.
Meanwhile, smaller technology companies continued to rack up deals. The quarter saw purchases from SGI, Unica and Nuance Communications. These three companies have a combined market capitalization of $5.2 billion and more than $600 million of cash on hand, so they still have plenty of money to make further deals in the coming quarters.
In addition to acquisitions, there were also a number of money-losing divestitures from companies attempted to raise cash, like the jettisoning of HotJobs and Zimbra by Yahoo. The 451 Groups says those deals probably returned only about 50 cents on the dollar for Yahoo.
One reason for the weakness came from the lack of private equity money invested in technology deals. Private equity firms invested just $6.6 billion in technology in the first quarter, 451 Group tabulated, which was down about a third from the $9.9 billion invested by those firms in the fourth quarter of 2009.
Despite the drop in private equity interest, there were some signs that private equity firms were willing to take more risks in technology as a consortium of companies including Berkshire Partners, Bain Capital and Advent International teamed up last quarter to put forward a combined $1.1 billion for the Irish electronic education company SkillSoft. It was one of the first private equity deals that broke the $1 billion mark in nearly two and a half years, the 451 Group said.
– Cyrus Sanati
Go to Report from the 451 Group »

The Pace of Deal-Making Picks Up

2010-04-01T08:26:00.000-05:00

By MICHAEL J. de la MERCED, NYT DealBook blog, April 1, 2010:
CORPORATE buyers are intensifying their hunt for deals — and they’re becoming a bit bolder.
More than two years past the start of the financial crisis, deal-making is continuing an ascent as companies seek to bolster their growth through mergers and acquisitions. And as their collective appetite grows, so too does their willingness to consider more aggressive international transactions or unsolicited bids.
The last few months have brought a welter of multibillion-dollar deals, like Comcast’s purchase of a majority stake in NBC Universal, Kraft’s successful $19 billion takeover of Cadbury of Britain and the American International Group’s $51.4 billion sale of two major units. And a spate of unsolicited hostile offers has emerged, notably the Simon Property Group’s $10 billion bid for General Growth Properties, which had filed for bankruptcy.
“The next two quarters will probably be defined as a very aggressive period of speed-dating, where companies will try out different combinations to see if they make strategic sense and are actionable,” said Paul G. Parker, head of global mergers and acquisitions for Barclays Capital.
Worldwide deal volumes swelled to about $564 billion for the three months ended March 31, according to data from Thomson Reuters, 18.4 percent higher than the same time last year. That is a little over half the deal volume of the first quarter of 2007 (which was nearly the peak of mergers activity), but deal-makers say they do not expect to reach those levels for some time.
“The economy’s far from ideal, but companies now have more confidence than they have had in the last 18 months,” said Victor I. Lewkow, a partner at the law firm Cleary Gottlieb Steen & Hamilton.

The conditions that foster successful deal-making are continuing to improve. The stock markets have largely stabilized, with the Standard & Poor’s 500-stock index rising almost 5 percent for the quarter, providing greater clarity into how much companies are worth and helping instill confidence in management teams about potential deals they may be considering.
Just as important, robust stock and credit markets have continued to make financing available for buyers contemplating a takeover. Interest rates remain low, and many strategic companies are drawing upon hoards of cash they stockpiled over the past year.
“The debt markets are wide open,” said Mark Shafir, Citigroup’s global head of mergers and acquisitions. “There’s a lot of capacity in the marketplace.”
Whereas mergers activity last year was dominated primarily by health care and financial services companies, deal-makers say now they are spending time on a broad range of industries.
“It’s across the board,” said Eduardo G. Mestre, vice chairman of Evercore Partners. “I have a very hard time saying that one sector is more active than another sector.”
The economic recovery has also helped alter the dynamics of buyers and sellers. The average worldwide deal premium has fallen nearly 5 percentage points, to 27.5 percent, for the first quarter, according to Thomson Reuters, although it rose 25 percent for transactions in the United States.
While buyers have gained more confidence in pursuing their targets, companies eyed as acquisitions have gotten a better sense of how much they are worth — and more are deciding that the best way to grow is to sell themselves.
“Many companies have moved toward new 52-week highs,” said Chris Ventresca, a co-head of North America mergers and acquisitions at JPMorgan Chase. “They still have uncertainty with regard to their business outlook and don’t see a catalyst for significant stock price appreciation. That provides some basis for sellers to think about traditional premiums over their current stock performance.”
Still, other potential acquisitions say that they are better equipped to grow alone, leaving insistent suitors to ponder whether to try a hostile takeover. Beyond Simon, Air Products and Chemicals, Astellas Pharma, Carl C. Icahn and Elliott Management are among those that have chosen to make unfriendly bids.
The improvement in the debt markets has also helped the private equity industry — largely relegated to the margins in 2009 — assert itself as an active presence once again. Leveraged buyout firms struck about $31.7 billion worth of deals during the first quarter of 2010, amounting to about 5.6 percent of all mergers activity worldwide.
Private equity firms like the Blackstone Group and Kohlberg Kravis Roberts have spoken of their billions of dollars in “dry powder,” or committed investor capital, for some time. Now, with banks proving willing to lend and investors comfortable with riskier bond and loan offerings, such firms are expected to push for bigger deals again, though not as large as the immense leveraged buyouts of three years ago.
Some are also finding buyers for some of their portfolio companies, like Apax Partners’ $3 billion sale of Tommy Hilfiger to Phillips-Van Heusen and Oak Hill Capital Partners’ $1.1 billion sale of Duane Reade to Walgreen. These sales help the buyout firms generate profit and clear room for future acquisitions.
“Private equity firms spent most of last year helping their portfolio companies,” said Randi C. Lesnick, a partner at the law firm Jones Day. “What we’ve been seeing and hearing is an uptick in their interest in new deals.”
Deals have also taken on a more international character: Cross-border transactions added up to about 36.6 percent of all mergers for the first quarter, nearly doubling last year’s number. Deal-makers point to a wide array of mergers, like the Kraft-Cadbury deal and the takeover of A.I.G.’s Asian life insurance arm by Prudential of Britain.
Emerging markets like China and Brazil have proved a font of deal activity: they accounted for $181.7 billion of deals this quarter, according to Thomson Reuters, or 32.2 percent of worldwide volume.
Their expanding presence in mergers and acquisitions has manifested itself both directly, as in Geely of China’s agreement to pay $1.8 billion for Volvo, and indirectly, as in Prudential’s effort to expand its Asian presence through its A.I.G. deal and Kraft’s desire for Cadbury’s footprint in India, Russia and other countries. (A few deals, including Sichuan Tengzhong Heavy Industrial Machines’ $150 million offer for Hummer, fell apart, reportedly because of regulatory troubles.)
Deal-makers say that as China and other developing countries continue to seek natural resources and to put their swelling coffers to good use, they will be seeking even bigger pieces of the mergers pie. “They are emerged markets,” said Antonio Weiss, Lazard’s global head of investment banking. “It’s become old-fashioned to think of these regions as emerging.”
Go to DealBook’s Spring 2010 Special Section »

Four Thoughts About the Return of Merger Monday

2010-03-01T13:02:00.001-05:00

From WSJ DealJournal, March 1, 2010:

By Michael Corkery
Merger Monday is back, at least for a week. There were six big deals, totaling $49.2 billion, unveiled this morning, from hostile pharmaceutical bids to the $35.5 billion sale of American International Group’s Asian life insurance unit.
So, what does today’s flood of deals say about the economy, the state of M&A and future deal making? Here are four takeaways:
Good things come to sellers who wait. When the stock market swooned last spring, the government decided to hold off on AIG’s asset sales in hopes of avoiding a fire sale. In the case of selling its Asian life insurance business, that strategy appears to have paid off. Assuming the deal closes, the $35.5 billion that Prudential is paying for the AIG business unit is nearly half as much as other suitors were offering for the business last spring, according to people familiar with the matter. Likewise, in another deal announced this morning, Millipore’s $7.2 billion acquisition by Germany’s Merck, the per-share price of $107 is nearly double the Massachusetts biotechnology-supply company’s 52-week low of about $55 last March.
USA, USA, USA – Ok, so maybe the U.S. has only the No. 2 hockey team in the world. Still, some large overseas companies are making big bets on U.S. companies. Germany’s Merck is spending $7.2 billion to acquire Millipore, while Japan’s Astellas Pharma has launched a hostile $3.5 billion bid for OSI Pharmaceuticals, of Melville, N.Y. Both deals involve large premiums to where the stocks were trading before the deals were announced–50% for Millipore and 40% for OSI. The high prices also speak to confidence in U.S. drug and bio-tech manufacturing and its American customer base.
Playing it safe: Those deal watchers longing for the blockbuster deals that were common earlier in the decade will be sorely disappointed by the deals of late. Recent deals are driven by strategy, like Coke’s purchase last week of its biggest bottler, Coca-Cola Enterprises, or by necessity, as in AIG’s sale of its life insurance unit to raise cash to pay back the U.S. government. Gone for now it seems are “transformative” mergers like AOL-Time Warner. Today’s deals also are focused on fulfilling term goals. For example, Astellas and Merck are being driven by an urgent need to replenish their pharmaceutical pipelines.
Pocket Change: With the exception of the AIA sale, today’s deals are each valued at less than $10 billion. So while there is a steady stream of deals, they aren’t carrying large price tags. With the economy still on shaky ground, few companies are taking risks and throwing expensive “Hail Mary” passes.

Corporate America Is More Pessimistic Than You Know

2010-02-10T13:17:00.000-05:00

from Deal Journal - WSJ.com by Michael Corkery
Looking for an explanation for the deep freeze in merger & acquisition activity and the jittery stock market? Just ask the boards overseeing U.S. companies.
A whopping 66% of 1,200 corporate board members surveyed recently said U.S. companies wouldn’t return to “business as usual” until at least 2013, and will operate till then in an environment of sluggish sales and growth. Roughly 45% said the economy would n’t return to pre-crisis levels in terms of investment, employment and productivity before 2013, according to the survey, conducted by KPMG LLP, while 22% said it would come beyond 2014.
“Not withstanding what economists are saying about the recovery, we are hearing from board members that they just don’t see it,’’ says Mary Pat McCarthy, a KPMG vice chairwoman who oversaw the survey of directors at publicly traded companies of varying sizes across the U.S.
McCarthy spoke to Deal Journal this morning from Miami where KPMG is hosting a conference of primarily audit committee members of corporate boards. “We are hearing a steady drumbeat down here that a recovery is a way’s off,” she said.
Another concern among board members: That the cost cutting and layoffs that have helped boost corporate profits is going to hurt the companies in the long term. The survey found that 67% of the respondents said were most concerned that cost cutting would drain the company’s employee talent.
Other concerns: 36% said they worried that the cost cutting would weaken internal controls, 25% said it could raise the risk of fraud and 22% said they thought the integrity of financial reporting could suffer in the hands of leaner staffs.
Bankers, perpetual optimists by nature, have been saying recently that companies seem willing to contemplate deals and they expect M&A to bounce back this year. In light of the bleak portrait containted in the KPMG survey, the question is, just who are these bankers talking to?

I.P.O. Market Begins to Regain Its Luster

2010-01-29T16:33:00.001-05:00

NYT DealBook, January 29, 2010, 4:10 pm — Updated: 4:10 pm -->

The I.P.O. pipeline in the United States is filling up as companies once afraid of braving the capital markets are now lining up to for initial public offerings. A fair number of these companies, especially in the financial industry, are looking to spin off businesses at lucrative prices.
The drought in I.P.O.’s reached its peak earlier last year during the financial crisis, with weeks and months going by without one offering hitting the market. Companies feared that the volatility and uncertainty in the financial markets meant that any offering, no matter how strong, would probably get hammered.
But by the fourth quarter, things were looking up. A total of 53 companies seeking to raise a collective $10.3 billion filed registration statements in the fourth quarter expressing their desire to go public, a two-year high, meeting pre-recession levels, according to Ernst & Young. And 32 companies hit the market in the fourth quarter, raising a sizable $17.4 billion, compared to just one company that went public in the fourth quarter of 2008, raising a tiny $144 million.
The upward trend does not seem to be a fluke, as Dealogic reported Friday that there were now 75 I.P.O.s in the pipeline looking to raise $13.6 billion. But what could be even more interesting is the number of companies getting ready to file.
“We have a pent-up demand to serve companies that are preparing for or are considering an I.P.O.,” Maria Pinelli, the Americans director of Ernst & Young’s strategic growth markets division, told DealBook.
Currently, technology companies are leading the I.P.O. market, but financial services companies could be a major contributor to future offerings, Ms. Pinelli said. While she would not talk specifically about any one company her firm is working with, Ms. Pinelli did say that many large companies were considering spin-offs of strong parts of their businesses to take to the stock market over the next two quarters.
Large financial firms may see spinning off a business unit as a better way to unlock its value than selling it to rival at a reduced price. Both Citigroup and the American International Group have said that they want to sell parts of their businesses to raise money to pay off government bailout money, but that they are waiting to do so when the time was right. That time may be coming soon via the stock market.
– Cyrus Sanati

Brrrr. M&A Volume Still Caught in the Deep Freeze

2010-01-29T16:27:00.001-05:00

WSJ, Deal Journal, Jan. 29, 2010:
Where is that M&A recovery?
Global deal volume through Jan. 28 is down 17% from the year-earlier month. And the U.S. was the worst performing region, down 72% and on par with the lows of last summer, according to Dealogic.
True, the year-earlier month included Pfizer’s $68 billion purchase of Wyeth, accounting for 31% of that month’s volume. Still, wasn’t 2010 supposed to be the year the deal market began its comeback? So what does this mean?
As Deal Journal has said before, the deal market is unlikely to come roaring back. Instead, the M&A market should show a “gentle recovery” in 2010. Sure, there are plenty of positive signs: Many corporate buyers are sitting on hordes of cash; the credit markets have improved, and banks are lending again for M&A, albeit selectively. Also, private equity should be more active as both buyers and sellers, and, perhaps more importantly, corporate executives are increasingly considering M&A.
Still, there is one large caveat: Deal activity will go the way of economy–both on the upside and downside.
So what will the M&A market look like this year? Probably a bit like 2004, according to a Robert W. Baird study. That was the year Cingular snagged AT&T Wireless, J.P. Morgan bought Bank One and BofA scooped up Fleet.
Anyway, here are some tidbits from Dealogic’s monthly M&A data:
The Latin American and Caribbean deal market has been the hottest, up 573%, thanks to the America Movil’s acquisition of Carso Global and Heineken’s purchase of FEMSA.
Overall, M&A activity in emerging markets is up 170%.
Credit Suisse Group stands atop the global league tables; Citigroup is atop the U.S. rankings.
Energy investment bank Tudor, Pickering Holt & Co. sits third in the U.S. league tables and sixth world-wide. It advised on Williams Cos.’s deal to merge two of its natural-gas pipeline and energy-processing affiliates.
The value of announced deals involving Chinese targets is up 93%.
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

M&A Downtrend Buoyed By Strategic Bargains

2009-12-28T12:46:00.001-05:00

Abstracted from: Down But Not Out By: Russ Banham, CFO - Vol. 25, No. 9, Pgs. 50-54
Credit crunch hammers deals.
It comes as no surprise to dealmakers: M&A activity took a precipitous drop in late 2008 and early 2009. Global volume was down over 47% in the first half of 2009, and deal values almost 44%. In the first half of the year, US volume dropped nearly 37%, while deal values plummeted 85%. US volume was down over 40% in the first eight months of 2009, compared to the previous year; August's volume of $13 billion hit a 15-year low. Russ Banham's sources attribute much of this decline to credit's unavailability. Credit has constricted dramatically, and many buyers still have large outstanding loans for acquisitions made before the recession hit. Private equity has $400 billion in credit due by 2014, and no one knows what refinancing options might be available if needed, or indeed what a reasonable current valuation might be. The general lack of available credit has certainly tamped down M&A activity, but the economic climate played an equal role in restraining buyers from making deals.
Uncertain economy clouds decisions.
Buyers are probably not yet ready to bet that the fog has lifted. A number of large companies and private equity firms have stockpiled cash for future acquisitions, but few seem confident about future performance for themselves or their targets if the recession lingers. Performance, in turn, impacts pricing. Many targets today are selling for a fraction of their price a few years ago, but valuations could continue to drop unless the business climate changes. Potential buyers are watching and waiting for a clear bottom so they can buy on the upswing when the economy shows clear expansion. With a new accounting rule—FAS 141 (R)—in place that requires acquirors to publish ongoing valuations of acquisitions, 44% of the executives in one Deloitte survey indicated that they are reconsidering purchases. No one wants to publish results on the downswing. Only the highest probability deals are being pursued, the author reports. Interestingly, these deals are beating the odds: a Towers Perrin study shows that in 204 large global deals occurring between September 2008 and May 2009, 75% of the acquirors are now outperforming their tight-fisted peers by over 6%.
Strategic deals and bargains dominate.
Perhaps those strategic buyers recognized that acquisitions can generate growth when business is otherwise less than robust. Strategic buyers expanded their markets by picking up bargains, such as Radware's $18 million acquisition of Alteon from Nortel, which had paid $7.8 billion for it in 2000. Radware expanded its market and added 10,000 customers for a very cost-effective sum. When targets fit particularly well with the buyer, credit is still available, the author suggests. Beckman Coulter bought Olympus's diagnostic lab business, financing the deal with two notes and a stock offering while still keeping the rating agencies happy. The investors responded positively. M&A activity should rebound as buyers focus on quality, strategic fit, and advantageous pricing; sellers develop realistic exit valuations; and a few more quarters of solid earnings restores buyers' confidence.
Abstracted from CFO, published by CFO Publishing Corp., 253 Summer Street, Boston MA 02210. To subscribe, call (800) 877-5416; or visit www.cfo.com.

Upbeat CEOs to Drive '10 M&A

2009-12-22T10:39:00.002-05:00

Dealmakers expect worldwide M&A transaction volume to rise 20% to 30% next year if credit markets stay healthy
By Aleksandrs Rozens and Kelly Holman, IDDmagazine.com
December 17, 2009
The pace of mergers and acquisitions declined this year, but the dollar volume of activity will likely bounce back to over $3 trillion next year, according to an informal survey of the market by IDD. Market participants believe that Wall Street investment banks will see an increase in fee income not only from M&A advisory work but various other engagements like raising money to finance these deals.
The M&A chill eased early in the summer when debt markets were on surer footing. By fall, sentiment in corporate America had improved enough to spark a steady flow of transactions that is expected to carry on into 2010.
http://www.iddmagazine.com/issues/2009_47/upbeat-ceos-to-drive-10-ma-200990-1.html?partner=thestreet

Tech M.&A. Expected to Rebound After Weak Year

2009-12-16T13:40:00.001-05:00

from dealbook.blogs.nytimes.com, December 16, 2009:
Mergers and acquisitions languished in the technology sector this year as company valuations fluctuated wildly with the economy. But with the valuation gap closing and deal activity rising, bankers and corporate executives expect 2010 to be quite a busy year as technology companies seek to raise capital, divest noncore assets and acquire rivals.
To say it has been a quiet year for technology deals would be an understatement. In the first 11 months of the year, there were only 31 technology transactions valued at $1 billion or more, which is less than half the level of the boom years from 2005-2007, according to the 451 Group, a technology investment research firm.
But M.&A. spending in the technology sector is making a comeback. Spending in the second half of the year is running 50 percent higher than the combined spending in the first two quarters. That has been driven by a number of large transactions announced since last summer that probably would have been inconceivable earlier this year, like Hewlett-Packard’s $3.1 billion acquisition of 3Com and Xerox’s deal for Affiliated Computer Services.
The year’s slowdown in deal activity stemmed mostly from the inability of buyers and sellers to agree on a price. It was hard to project future cash flows for companies during the height of the financial crisis earlier this year. Technology start-ups, for example, were being valued at 0.9 times revenue in January but were fetching about 1.4 times revenue by the fourth quarter, according to the 451 Group.
“That’s a not-insignificant increase when compared to where valuations were earlier this year,” the 451 Group said in a research report. “Put into real-world terms, a start-up that was running at $10 million in revenue that sold for $9 million in early 2009 was worth $14 million closer to the end of the year.”
In a survey of industry professionals conducted by the 451 Group, eight out of 10 investment bankers said that the valuation gap would have little or no impact on deal-making in the coming year. About two-thirds of these bankers believe that company valuations will move higher next year and that the higher prices will not deter deals.
But eight out of 10 corporate development executives said that bridging the valuation gap would remain difficult. Nevertheless, the corporate officers still believe that there would be more movement on the part of companies next year on price and that more deals should be expected.
So what kind of deals is the market likely to see? The analysts at the 451 Group believe that there will continue to be a blurring of hardware and software offerings, like in the case of Oracle’s still-pending $7.4 billion acquisition of Sun Microsystems. Companies are trying to control the entire technology value chain now from parts to programs to services, so expect more vertically integrated deals.
There also seems to be a shift in technology alliances as companies move to intergrate across the value chain. For instance, Hewlett-Packard’s $3.1 billion acquisition of 3Com in November would have been almost inconceivable if Cisco Systems hadn’t antagonized its longtime ally by introducing its own blade server a half-year earlier, the 451 Group said. More deals that cross what were sacrosanct division lines between friends should be expected.
– Cyrus Sanati

Looking Ahead to 2010’s Deal Landscape

2009-12-14T08:56:00.001-05:00

dealbook.blogs.nytimes.com, Monday, December 14, 2009:
Small deals will continue to dominate the mergers and acquisitions landscape in 2010, but their size and number will grow, Ernst & Young said in its annual deal outlook report on Monday.
Cash will remain a major component in acquisitions as the credit markets continue to improve, E&Y said. Meanwhile, the report predicts that private equity firms will reassert themselves as significant players both through opportunistic deals and divestitures of their own portfolio companies.
Only 145 completed deals broke the $1 billion mark in 2009, compared to 400 last year and 609 in 2007. “Mega-deals” of $5 billion or more are likely to be far and few between, E&Y said.
Still, the number of deals is expected to increase in 2010, according to the firm, which surveyed nearly 500 senior executives. Its study found that 25 percent of businesses are likely or highly likely to make an acquisition in the next six months, rising to 33 percent in the next 12 months and 41 percent within the next 24 months.
“We’re seeing signs of life emerge in the deal markets as the decade closes,” Rich Jeanneret, Americas vice chair for Ernst & Young’s transaction advisory services business, told DealBook in an interview.
The E&Y survey found that 53 percent of companies are conducting more rigorous due diligence as potential buyers adopt a more conservative approach to deal-making.
A large number of companies have record-breaking levels of cash on hand. Fortune 1000 companies have more than $1.8 trillion in cash on hand, a $271 billion increase from last year.
And private equity firms have about $400 billion in dry powder, making the leveraged buyout industry well-positioned to strike deals, the report said. E&Y forecasts that these firms will seek to refinance their portfolio companies, or build them through bolt-on acquisitions. Global divestitures may grow in the second half of 2009 as firms look to shed underperformers.
Still, financing will remain an impediment, the study found. About 62 percent of companies cited an inability to borrow enough money as a key issue preventing mergers from being completed in 2009. A loosening of credit markets should help boost deal volume somewhat next year, though the easy money of yesteryear is gone for now.
“While it is likely that deal activity may not return to pre-crisis levels within the next few years, there is some cause for optimism when looking at the three drivers of deal activity: confidence, credit and cash,” Steve Krouskos, Americas markets leader for Ernst & Young transaction advisory services said in a statement.
“Market fundamentals are strengthening, and deal activity is stabilizing,” he added. “Still, the market is full of mixed signals, which are expected to temper recovery.”
While E&Y doesn’t foresee any red-hot sectors ripe for mergers activity, some may see more action than others. The health care industry, for example, may prove popular given the stimulus money available to providers for the meaningful use of electronic health records. Integrated delivery systems, including hospital buying nursing homes and health care agencies, may also continue to grow in popularity.
In the financial sector, deals for asset managers may continue, in the wake of 2009 mergers like BlackRock’s acquisition of Barclays Global Investors.
Software and services companies will remain major targets, especially by strategic players seeking to advance their product portfolios.
– Cyrus Sanati

Dealmakers cautious on 2010 M&A uptick

2009-12-08T20:56:00.001-05:00

TheDeal.com, December 8, 2009:
While the M&A environment remains moribund (down 33% over last year), a recent survey by the Association for Corporate Growth and Thomson Reuters found that M&A professionals are guardedly optimistic about a pickup in the first half of next year with strategic deals and distressed sales leading the way.

The twice-yearly survey, which polled 921 investment bankers, private equity professionals, corporate development officers, lawyers, accountants and consultants in October and November, found that negative sentiment about the dealmaking environment hasn't changed over the last year, with 87% saying the environment is fair or poor. Over the next six months, however, the percentage of dealmakers who expect an increase in merger activity jumped to 82% from 56% six months ago.

About 80% of survey respondents identified the current environment as a buyer's market while 74% of respondents said the current market favors strategic investors, and 94% expect strategic investments to accelerate in 2010.

"Dealmaking continues to be caught in the doldrums with limited activity outside of distressed sales and select strategic investments, but the fact that merger professionals express heightened optimism about 2010 is a hopeful sign that a freshening wind will arise," said Dennis White, ACG chairman and senior counsel at McDermott, Will & Emery LLP.

While the credit crunch has decreased in importance as the biggest obstacle to M&A activity, the gap between bid and ask has been rising. And while average middle-market Ebitda multiples have fallen to 8.4 today from a high of 10.1 in 2007, dealmakers are still looking for bargains: 80% expect to pay no more than 5 times Ebitda for companies over the next six months.

"Business owners are slowly realizing that valuations will not return to what they were several years ago. Private equity and strategic buyers are all too aware of this and are patiently waiting for sellers to come to grips with the new valuation paradigm and to take some money off the table," said Harris Smith, ACG immediate past chairman and managing partner of private equity and strategic relationships at Grant Thornton LLP.

Dealmakers expect that healthcare/life sciences, manufacturing and distribution, financial services and technology will experience the most merger activity in the first half of 2010. And while they see improved debt markets, 56% expect more equity in deals, with 54% saying they expect to invest 40% or more in equity.

Of the private equity folks, 54% said they are actively pursuing distressed and undervalued companies, noting that the best opportunities for buyouts include manufacturing and distribution, business services and healthcare/life sciences, and for distressed investing manufacturing and distribution, real estate, consumer products and services, and financial services. Get ready. - Claire Poole

Finally, a Month for Giving M&A Thanks

2009-12-04T08:43:00.001-05:00

By Stephen Grocer, WSJ Deal Journal, December 1, 2009:
The recovery in the M&A market may have finally gained some traction.
November ranks as the best month for deal making in more than a year. Global M&A volume hit $287.75 billion, more than double the year-earlier month’s total, according to Dealogic. Of course, November 2008 was the worst month for deal making in the past three years. But last month also marked a 93% increase over October and a 32% jump from September. U.S. deal volume, at $83 billion, more than quadrupled from a year earlier and nearly tripled from October.
More important than the numbers, though, were the signs that recovery in deal making just might be sustainable this time around. November’s M&A activity, for instance, wasn’t dominated by one large transaction. In fact, there were 40 deals valued at more that $1 billion announced in November, the highest total in more than a year, including three deals above $10 billion, according to the data.
That has all been helped by Wall Street’s willingness to once again open its checkbook. Nearly $30 billion in loans were announced this month to fund acquisitions or leveraged buyouts. Eight of the biggest announced financing deals were for heavily leveraged companies, signaling a higher risk appetite at banks.
The takeover battle for Cadbury is a prime example of this willingness to finance deals again. Nine banks have stepped in to provide $9.3 billion in financing commitments for Kraft Foods’ pursuit of the U.K. chocolatier. If Hershey decides to make a rival bid for Cadbury, both J.P. Morgan Chase and Bank of America Merrill Lynch are willing to provide $5 billion apiece in financing.
The willingness to lend also extended to PE firms. Two private-equity deals landed among the top 10 deals last month, and already private-equity deal volume is at its highest levels world-wide since the third quarter of 2008.
As the worst of the Great Recession recedes and stocks contiue to rally, companies are becoming more willing to deal. In a survey published last month by Ernst & Young, a quarter of 490 company executives polled said that they planned to do a deal within the next six months, and a third said they had M&A plans for the next 12 months. That sentiment comes at a time when the ability of firms to increase profits through cost cutting is becoming increasingly limited, leaving M&A as one of the few routes to increase revenue and profits.
That said, there are still dark clouds hanging over the M&A industry. The same Ernst & Young survey found that even though executives realize the present opportunity, 62% feel their ability to act will be constrained by the lack of available financing, among other reasons.

Ohio Sues Credit Rating Agencies

2009-11-20T14:29:00.000-05:00

Ohio’s attorney general sued Standard & Poor’s, Moody’s and Fitch Ratings on Friday, asserting that they provided misleading credit ratings that led to hundreds of millions of losses for state funds.
The official, Richard Cordray, filed the lawsuit in United States District Court for the Southern District of Ohio on behalf of five Ohio funds that assert they lost more than $457 million because of “false and misleading ratings” of mortgage-backed securities by the ratings agencies.
Officials at Moody’s and Standard & Poor’s, which is owned by McGraw-Hill, could not be immediately reached for comment. A spokesman for Fitch Ratings, which is owned by Fimalac S.A., had no immediate comment.
Ohio’s lawsuit is the latest in a string of actions against the ratings agencies, which have been criticized for feeding the housing slump and credit market turmoil by assigning high ratings to risky securities that later tumbled in value.
Attorney General Andrew Cuomo of New York ended an investigation of rating agencies last year by striking a pact that changed the way they charge fees for reviewing mortgage-backed securities.
Attorney General Richard Blumenthal of Connecticut has also investigated the rating agencies.
Mr. Cordray’s lawsuit was filed on behalf of five major funds — the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the Ohio Police & Fire Pension Fund, the School Employees Retirement System of Ohio and the Ohio Public Employees Deferred Compensation Program.
Go to Article from Reuters via The New York Times »

Mid-Market Deal Trends

2009-11-19T08:27:00.001-05:00

The post-lunch panel at The Deal Economy 2010 conference in New York City on Wednesday discussed the middle-market sector, where M&A has been on the rise.
Nathaniel Baker, a senior editor at The Deal, moderated the panel, which included Steve Deedy, a managing director at Alix Partners;Ken Hanau, a managing partner at 3i U.S.; Jim Epstein, a partner with Pepper Hamilton LLP; and Randy Schwimmer, senior managing director and head of capital markets at Churchill Financial.
Baker began the panel by noting his recent feature story Waiting to exhale in The Deal magazine, which explores how dealmakers are cautiously optimistic but fearful that the continuing paucity of credit could derail any middle-market rebound before it gets properly started.
Baker then asked the panel a series of questions:
Where is middle-market M&A dealflow, and what are some of the major issues affecting it?
Will lenders stay focused on middle-market deals?
What are the prospects for private equity investments and add-on acquisitions?
Which industry sectors and regions will remain vibrant?
Will cross-border and inbound investment continue?
Epstein addressed Baker's first question about middle-market M&A dealflow and some of the major issues affecting it. Epstein explained Pepper Hamilton splits midmarket into two categories: deals under and over $100 million.
"Of course, there's more credit available for small deals. LBOs are difficult above the $300 million to $400 million mark, but at least valuation gaps are shrinking," Epstein continued.
3i U.S.'s Hanau responded, "We've come a long way since March. People were fearful, but we're seeing a thawing out of credit markets. There is still caution, but the mindset is around growth."
Deedy said of the downturn, "PE firms were tending to focus on making portfolio companies healthy, but we're seeing a willingness to expand lately."
Baker followed up his question: "It sounds like there are plenty of buyers and sellers, and they're even willing to meet at a point in the middle. But where is debt financing these days?"
Churchill's Schwimmer responded, "There's definitely financing for small deals."
3i U.S.'s Hanau also offered a response, "There was so much liquidity on the sidelines. Valuations have not come off that much, and that's driven by the amount of capital on the sidelines that's waiting to be deployed."
Pepper Hamilton's Epstein explained PE is "still loathe to go to banks."
Schwimmer added, "People are still doing their credit homework. This isn't 2006."
Alix Partner's Deedy chimed in, "I agree there's a lot of money on the sidelines. Building products companies have been hit hard so it makes sense to go in there and get something on the cheap. But everyone's flocking to the same deals. Caution is also called for on future performance." Baker turned the panel's attention to lending. He asked: Who are the new lenders, and what types of terms are they offering?
Schwimmer opined, "The identity of midmarket investors has changed. A lot of banks have gone out of the midmarket lending business, but small banks are being adventurous. We'll see where they are in two years. Golub is one of a few colleagues that's still active. And of course special dedicated funds have cropped up in the past six months." It's worth noting as a side note that CLOs have been a bit discouraging.
Epstein said another area of access to debt is seller financing. "I've been involved in a couple deals that were purely seller financing."
Hanau thinks we shouldn't be concerned too much: "Like Randy said, banks are coming to the market, and we'll see more of that."
Baker recalled that building materials were mentioned as an attractive sector for dealmaking. He followed the segue by asking, "Are there others?"
3i's Hanau responded, "Well, our main reason is to go for U.S. companies that are global, such as in technology or industrials, tech and somewhat in healthcare."
Deedy said, "Building materials,, I think is just an opportunistic sector. You should also look at the 'green' space." He also mentions that there's not a lot of money chasing retail because of the volatility.
Schwimmer suggested you should "ask yourself what is going to be the consumer model -- where will they buy and where will businesses sell? Business services is a big growth area. Of course, healthcare is a big area, but it's hard to figure what small companies focus on. Then there's the overhang of Obamacare."
Epstein noted that you can also "look at this from a transactions perspective. Look at the GE-Universal deal. On a much smaller scale, you will find a lot off opportunities to benefit from regarding corporate carve outs."
Baker asked if there is any concern about consumer spending?
Alix Partners' Deedy said the consumer is important, and "2010 probably won't be big for three reasons: 1) Personal savings rates will be high; 2) unemployment will be high, there's no hockey stick-type recovery to look out for; and 3) politically, things will be hard, throwing money at it will be difficult."
Hanau said, "We're definitely cautious, even though Asia is doing well."
Schwimmer responded that "it's fascinating to see some headlines, to see retail sales being up. Businesses are raising the optics of value."
"What about strategic acquirers?" Baker asked.
Hanau said they will come back. They have better looking balance sheets than financial buyers, meaning private equity.
Epstein pointed out, "Corporates can use stock as currency and the markets have been headed in the right direction."
Schwimmer added that "smaller companies are raising their hands and saying 'Hey we can't do this alone.' As a No. 3 or No. 4 player, they're reaching out. They're banding together, and it will be competitive."
Hanau also noted, "You can't cut your way to glory. You do cost cutting for one reason -- to grow."
(Corporate Dealmaker has a string of stories noting how strategics have been cutting costs, such as jobs, while acquiring companies at the same time.)
Baker asked, "Where is financing?"
Schwimmer responded with his own question: "Does anybody remember what happened to that $280 billion deal pipeline? People love to have looming things over their heads, like ''2012' (referring to the movie). There's a high yield boom. Deals will get financed somehow."
Hanau added, "Yeah, we're already talking dividends. This will work itself out."
Epstein said to "look for the extension concept. You hit a maturity date, but the company is performing." Banks will give some leeway.
Deedy talked about "kicking the can down the road. There will be money out there. Also, there is the end of covenant-lite deals. Companies will have to be run more tightly. Rates will be higher; covenants will be more restricted."
Epstein said, "I think banks are going to take a second look at whether they will call default."
Baker opened the floor to questions from the audience, and one member asked about emerging markets.
Hanau answered, "Look at Asia and Brazil, Eastern Europe. Money will chase growth, but with growth comes risk. China and India are also areas for opportunity." - Baz Hiralal

No Bankruptcy M&A Slowdown

2009-11-19T08:25:00.000-05:00

When people talk about dealflow slowing down, they're not referring to a slowdown in bankruptcy M&A," Anthony Baldo, editor of newsletters and databases at The Deal, said while moderating a panel on distressed debt at The Deal Economy 2010 conference in New York on Wednesday.
According to The Deal Pipeline, there have already been 527 deals in the bankruptcy space worth an aggregate $255 billion year to date. Last year at this time, there were 396 deals worth only $43.3 billion. In 2007, there were 289 deals worth $51 billion. This data shows that the marketplace is expanding.
This year, we've also seen:
398 "363 bankruptcy" sales worth almost $80 billion.
57 auctions involving credit bids, closed for more than $55 billion.
246 deals won by strategic buyers for a total of $45 billion.
One notable change from six months ago is there has been an uptick in prepackaged bankruptcies with a change of control element to them. One reason for this, according to Scott Winn, senior managing director at Zolfo Cooper, is that investors fear that bankruptcy will be too costly and will amount to a loss of control.
Prepackaged bankruptcies, whether they result in a debt-for-equity exchange or whether they result in an M&A transaction, shorten a company's time in Chapter 11, where adviser and counsel fees are being accrued, Winn said.
"Being in bankruptcy for four to five years can be very detrimental and risky," added Andrew Horrocks, managing director at Moelis & Co.
However, "the downside is that the underlying operating fix to a company does not occur [in a prepackaged bankruptcy], or at least it does not occur in context of restructuring," Winn concluded.
When looking for places to invest, Maria Boyazny, managing director at Siguler Guff & Co., suggested looking across five different categories."The distressed opportunity is very broad, compared to past distressed cycles, which focused on one or two areas," she said. "Looking around, spreads are at wide levels compared to historical standards, so distressed opportunities must be looked at comprehensively."
Those categories are:
Residential-mortgage-backed securities and home loan market, an $11 trillion market.
Commercial real estate and commercial debt market, a $3.5 trillion market in the U.S.
Corporate distressed debt leveraged loan market and the high-yield market, a $1.6 trillion and $1.1 trillion market, respectively, in the U.S.
Consumer debt, including student loans, auto debt and credit card debt, a $2.5 trillion market.
Municipal debt market.- Sara Behunek

Private Equity Fires Back at Moody's

2009-11-06T08:58:00.001-05:00

NYT DealBook, November 5, 2009, 5:45 pm — Updated: 7:51 am -->
Moody’s Investors Service seems to have touched quite a nerve with a new report that was critical of the private equity industry. The Private Equity Council, the main lobbying group for the industry, fired back on Thursday afternoon, noting that the report’s conclusions were open to “significant interpretation.”
The Moody’s report concludes that companies backed by private equity investors defaulted at a higher rate during the 21 months ending in October than similarly financed public companies. It contends that private equity firms invest virtually no capital in the companies they buy, especially those in distress.
The report also warns that many of the companies owned by private equity face significant refinancing risks in the next one to three years as more debt comes due.
The Private Equity Council noted that half of the private equity-backed company defaults examined in the study were not traditional defaults, but rather “opportunistic transactions to deleverage companies.”
If one filters out those transactions, the council said, the percentage of private equity companies in the sample that defaulted over the 21-month period falls to 10.2 percent. When annualizing this figure, it said, the annual default rate falls to 5.97 percent.
Stripping out these “opportunistic transactions” also has an effect on private-equity backed companies that have a speculative or “junk” credit rating, the council said. The adjusted speculative default rate was 8.4 percent, which is 29 percent lower than the overall American speculative-grade default rate for the 12 months ending in August, it said.
The Private Equity Council also took issue with its default rate in the 21 months covered in the report. While it acknowledged that the default rate was about 5 percent, the council said that annualized to a default rate of 2.91 percent, which is below the 3.5 percent annual default rate for speculative grade issuers from 1920-2008 and slightly higher than the estimated 1.6 percent annual private equity-backed company default rate.
The council also asserted that that Moody’s contention that private equity sponsors had not injected capital into their companies was “untrue.” The council cited data from Preqin, an alternative asset data provider, which noted that private equity funds had raised and invested $3.3 billion of equity capital to support their existing portfolio companies.
The council went on to note that Moody’s criticism ignored evidence that debt buybacks, which Moody’s classifies as defaults, could “do more to reduce a company’s leverage ratio than equity.”
– Cyrus Sanati

Options Action During Mergers

2009-10-13T09:42:00.000-05:00

October 13, 2009, 2:57 am — Updated: 3:57 am -->
Several U.S. companies have awarded stock options to top executives while engaged in merger negotiations, The Wall Street Journal said, citing an academic research paper and its own review of company filings.
The practice of awarding options, though legal, has resulted in the target company’s executives reaping a bigger payout when the deal is closed, the paper said.
The paper said its survey of company filings found stock options had been awarded to executives in a half dozen large mergers since 2007, including Adobe Systems‘ deal to buy Web analytics firm Omniture and Walt Disney’s purchase of Marvel Entertainment.
Marvel and Omniture could not be immediately reached for comment by Reuters outside regular U.S. business hours.
Go to Article from The Wall Street Journal »
Go to Article from Reuters via The New York Times »

M&A Is Back! Well, Almost. Maybe

2009-10-05T12:31:00.002-05:00

From: WSJ October 01, 2009:
By JEFFREY MCCRACKEN and DANA CIMILLUCA
Bankers and lawyers feared the third quarter would be a rough period for mergers and acquisitions. There was economic uncertainty, limited deal financing and little corporate confidence to make acquisitions.
They were right to worry.
But after a two-year decline in activity, a late spate of big-name mergers gave them hope that the deal-making drought was nearing an end.
The evidence isn't in the numbers. The dollar volume of deals world-wide fell 41% from last year's third quarter to $478.3 billion, while the 8,124 deals represented a 20% drop, according to data provider Dealogic. Compared with this year's second quarter, dollar volume slid 19% and the number of deals was off 6%.
The third quarter was the slowest period as measured by dollar value since the third quarter of 2004.
In the U.S., announced deal volume tumbled 61% to $103.9 billion from $270.2 billion a year earlier, according to Dealogic. The number of announced deals fell 30% to 1,594 deals from 2,282. It was the eighth consecutive quarter that the value of U.S. deals fell from a year-earlier period, and it was down 43% from the second quarter.In Europe, the trends mirrored the global trajectory, with the dollar volume of deals falling both year over year and quarter over quarter. There were $160 billion of acquisitions of European companies announced in the third quarter, down 17% from the second quarter and down 55% from a year earlier, according to Dealogic
The Asian-Pacific region was a relative bright spot. Excluding Japan, there were $105 billion of deals announced in the quarter, down 36% from the second quarter but up 30% from a year earlier. China's thirst for natural-resource assets kept bankers in Asia busy, on deals including Yanzhou Coal Mining Co.'s $2.76 billion deal for Australian coal miner Felix Resources Ltd.
In Japan, which Dealogic breaks out because the investment banks look at the country as if it were its own region, the dollar volume of deals was $43.4 billion, up from both the second quarter and the year-earlier period. Besides financial firms, consumer companies were among the most-active Japanese deal makers. Highlighting the trend, beverage company Suntory Holdings Ltd. agreed to pay $3.82 billion for Orangina Schweppes, the French soft-drink maker, while at the same time holding talks with Kirin Holdings Co. for a deal that would create a food and beverage giant with combined sales of $40 billion.
But unlike in recent quarters, deal makers seem more willing to declare that M&A activity is back. The standard banker line that "deals are in the pipeline" is becoming more common.
"I think we hit a bottom over the summer. Since about the third week of August, we noticed a pickup in activity," said Bruce Evans, head of M&A for the Americas at Deutsche Bank AG. "A lot is driven by companies having a view of the future....It is no longer just about fixing their balance sheets."
Kraft Foods Inc.'s proposal to acquire Cadbury PLC was the largest announced deal of the period, though Cadbury rejected the $16.66 billion bid and it is likely to be weeks before Kraft submits a formal offer. Other big deals included Abbott Laboratories' $7.05 billion purchase of a Belgian pharmaceutical business, Dell Inc.'s $3.88 billion acquisition of Perot Systems Corp. and Walt Disney Co.'s $3.92 billion deal to buy Marvel Entertainment Inc.
"With general sentiment improving, together with equity and financing markets, companies are pushing forward with deals they've been thinking about all year but were reluctant to proceed with until now," said Adrian Mee, head of European M&A at Nomura Holdings Inc. in London.
Such deals still were few and far between. Year to date, U.S. M&A volume is down 34% to $505.4 billion from $759.8 billion a year earlier.
One sector that has more than held its own is health care, which has accounted for 32% of U.S. deal volume this year, up from 16% a year earlier.
"Health care was resilient because it's not affected by the economy the way a retailer or an industrial company is," said Jeffrey Stute, co-head of North American M&A at J.P. Morgan Chase & Co. "In addition, most health-care deals were not driven by [debt financing]. So financing drying up was not as much of an issue."
Mr. Stute and other bankers said a true M&A comeback will take hold when companies in other segments, such as technology, oil and gas, and consumer products, jump into the fray.
"Every segment has some pent-up demand, especially in industrials and technology. Behind the scenes, we are seeing lots of work getting done across all sectors," said Paul Parker, head of global M&A at Barclays PLC's Barclays Capital. "As we see [gross domestic product] growth turn up, I can guarantee you will see M&A turn. Each sector will have a signature transaction and then others will respond."
Bankers in Europe also express optimism that the worst is over. Still, few predict an imminent return to the deal frenzy of before the financial crisis, and many cite the possibility that the incipient recovery could be dashed by a double-dip recession.
"I'm personally optimistic that the rebound is here to stay, but there is an acute awareness that a W-shaped recovery could be around the corner," said Carlo Calabria, head of International M&A and Financial Sponsors at Bank of America Merrill Lynch in London.
In recent weeks, a number of long-lingering European deals were announced, such as the €1.28 billion ($1.88 billion) sale of Sara Lee Corp.'s European personal-care business to Unilever, announced Sept. 25. Sara Lee put the business up for sale more than six months ago, an unusually long period for an auction. Likewise, Belgian conglomerate Solvay SA found a buyer for its pharmaceutical division six months after officially putting it up for sale, selling the division for €4.8 billion to Abbott.
Even if the M&A recovery endures, some bankers predict it will be more restrained than what followed the bursting of the technology and telecommunications bubble in 2000. Takeovers also may be more focused on cost savings than growth, a sign of conservatism among deal makers.
"If one assumes that consumer growth will be muted for the foreseeable future," said Wilhelm Schulz, the head of European M&A at Citigroup Inc., "there is an argument that future deal activity may be more focused on driving economies of scale in the core business."
In the rankings of global merger advisers, Goldman Sachs Group Inc. maintained a slight edge on Morgan Stanley. J.P. Morgan was third, followed by Citigroup and Bank of America Corp.'s Bank of America Merrill Lynch. In the U.S., the top spots were flipped, with Morgan Stanley in first, followed by Goldman and J.P. Morgan.

Signs of an Upswing in Merger Activity

2009-09-08T07:20:00.000-05:00

From NYT DealBook, Sept. 8, 2009:
Merger mania may not be quite in full swing, but the pace of deal-making is showing signs of coming back to life after nearly a year.
Kraft Foods‘ hostile bid for Cadbury on Monday was only the latest potential blockbuster deal in recent days. In the last week, several multibillion-dollar deals have been announced, including those involving prominent companies like Walt Disney and eBay, The New York Times’s Michael J. de la Merced writes.
Yet many of the bankers and lawyers who piece these mergers together, well versed in reading economic tea leaves for signs of an industry’s health, caution that for now, deal-making is likely to rise only in fits and starts.
“The clouds have broken a little bit, and there’s a little bit of sunshine,” Douglas L. Braunstein, the head of investment banking for JPMorgan Chase, told The Times. “But it’s too early to say the storm’s over.”
Deal activity remains far below the giddy heights of only a few years ago. About $1.32 trillion worth of deals have been announced this year through Monday, according to data from Thomson Reuters. That figure is down 37 percent from the same point last year and 56 percent from 2007. (It also includes deals that have yet to close.)
In fact, until last week, August shaped up to be the slowest month for deals since 1994, according to Thomson Reuters. Now, it is just the slowest month since last November.
Still, there was hope that Merger Monday — so called because of companies’ tendencies to announce deals at the beginning of the week — seemed to be back in full force last week. Its presence had largely disappeared since the onset of the financial crisis.
Since the beginning of the year, the conditions that foster deal-making activity have largely improved. The stock markets have rallied, helping to establish a perceived floor for share prices. The broad economic recovery has inspired confidence in corporate boards that the worst is over.
Many of the announced deals through Monday, including Kraft’s offer, Disney’s $4 billion purchase of Marvel Entertainment and eBay’s sale of a majority stake in its Skype unit, also involved different types of activity, from hostile bids to corporate mergers to private equity transactions.
“We see this as the beginning of the next upturn,” Roger C. Altman, the chairman of Evercore Partners, the boutique investment bank, told The Times. He added that in his view, upturns tended to last five to seven years, while downturns, like the one that began in the second half of 2007, last on average about two to three years.
And management teams have regained confidence in pursuing targets they have eyed for some time. That has even meant hostile bids, like PepsiCo’s pursuit of its two largest North American bottlers, which the company completed last month. For many buyers, Mr. Braunstein said, the fundamental question is not whether deal-making is possible, but this: should I be doing something in this environment?
“It was just a matter of time before buyers returned,” Boon Sim, Credit Suisse’s head of mergers and acquisitions for the Americas, told The Times. “The general thinking seems to be, if you do not do something now, prices will be higher 12 to 18 months from now. So why wait?”
Just as crucial for deal-making, banks have slowly become willing to open up their wallets to finance transactions for a broad range of companies, beyond blue-chip acquirers like Pfizer and Disney. Several merger advisers pointed to the acquisition of Skype and the sale of Procter & Gamble’s prescription drugs business to Warner Chilcott as signs that bankers and other financiers were willing to back riskier deals, involving borrowed money from companies with less-than-sterling credit ratings.
Bankers and lawyers agree that the financing markets will most likely never return to the frothy heights of the credit boom in 2007, which enabled private equity firms to borrow liberally and often outbid corporate rivals. The ensuing financial fallout has left many companies with debt they are hard-pressed to pay, forcing some to seek bankruptcy protection.
But even the troubled deals of yesterday have led to opportunities for companies and private equity firms, which are snatching up targets out of Chapter 11. The number of bankruptcy-related mergers and acquisitions has risen to 241 this year through August, a 65 percent increase over the same time in 2008, according to Thomson Reuters data.
For months, the lack of financing has hurt private equity firms’ stock-in-trade of buying companies. Even now, many of these firms have been forced to borrow less to strike their deals, cutting into their returns, according to Richard E. Climan, a partner at the law firm Dewey & LeBoeuf who worked on the Skype deal.
While merger activity has risen over the last 30 years, the path back to a healthier deal-making industry is likely to be a slow one over the next several months, advisers say. What lies in store is mostly expected to be more of what has transpired this year: opportunistic purchases by corporations with healthy credit ratings, stock values and cash.
“There will be more deals next year versus this year,” Mr. Sim, of Credit Suisse, told The Times. “But I don’t think the floodgates are going to open until the fundamentals improve materially.”
Go to Article from The New York Times »

July in M&A

2009-07-31T15:38:00.001-05:00

From WSJ DealJournal, July 31, 2009:
By Stephen Grocer
Every time it seems the U.S. M&A market can’t go any lower, it goes lower. So when will the U.S. M&A market hit bottom?
If we have learned anything in the global financial crisis, it is that calling the market is a quick way to look foolish. Still, one thing is clear from the July data: The M&A market remains in a slump. The total value of announced mergers and acquisitions of U.S. targets was just $23 billion in July. That is off 41% from June, 85% from July 2008 and back to the lows of November and December, when the financial world seemed to be falling apart.
July’s deal volume figures highlight the shrinking role of the U.S. in the global M&A marketplace. For the second consecutive month, U.S. M&A activity was significantly lower than that of both Europe and Asia, with $56.1 billion and $42 billion, respectively. Global M&A volume fell to $137 million from $258 billion in June and $401 billion last July, according to Dealogic.
That is quite a comedown. Historically, the U.S. has been the leading M&A market. A decade ago U.S. deal volume was 16% higher than the combined volume of Europe and Asia and accounted for nearly 50% of all deal activity. But beginning in the M&A boom of 2006 and 2007, Europe began topping the U.S., while other regions began to catch up. In July, U.S. deal volume accounted for just 17% of global activity, according to Dealogic.
One interesting point of note with August marking what is widely considered the two-year anniversary of the beginning of the credit crisis: In the 24 months since, U.S. deal volume has topped $100 billion just four times, according to Dealogic. In the 19 months before that, it came in above $100 billion 11 times.

The M&A Confidence Game: No Bottom In Sight Yet

2009-07-15T08:31:00.003-05:00

WSJ Deal Journal blog, July 14, 2009, 3:30 PM ET

In a post last week, Wall Street Journal reporter Jeff McCracken put a simple question to the heads of the M&A practices at banks and law firms across New York City: Has the mergers-and-acquisitions market bottomed out?
The answer was a near-unanimous no. (Just one banker said yes.) Among the reasons given was the fact that consumer confidence remains low. Not surprising, of course. The American consumer is the backbone of the economy and with confidence low that average American is unlikely to spend money. That in turn means corporate earnings will remain strained and companies will remain less comfortable doing deals.
But there also is the confidence of another type of consumer to consider–the corporate executive. A recent study by J.P. Morgan Chase and Thomson Reuters found a strong correlation between confidence and M&A. In other words, M&A often is confidence driven rather than opportunity driven. That explains in part why M&A takes off at the same time the economy is strengthening and the equity markets begin to rise.
Those running the companies aren’t all that different from that average consumer. When someone’s 401(k) is soaring and he feels secure in his job, he is more likely to feel comfortable enough to make big-ticket purchases. The same goes for CEOs. With a soaring share price and the company’s future not in doubt, a CEO is more likely to pursue a big acquisition.
So there is a slight bit of optimistic news from a recent study by Ernst & Young. As of last month, corporate executives at more than 570 companies surveyed are feeling, if not a bit more confident at least a little less pessimistic. In January, 82% of executives said the focus of their business was on restructuring to deal with the recession and 74% were looking merely at survival of their present operations. Those figures have since declined to 74% and 65%, respectively.
Still, amid the gloom 69% of the executives surveyed said they were “taking advantage of the recession to pursue new market operations,” an increase from the previous 59%.
In fact, more than a third of executives said business conditions have become more conducive to deal-making. “We have had a lot of our clients tell us that they missed taking advantage of the 2001 downturn,” said Michael Rogers, a principal for Ernst & Young’s Transaction Advisory Services group. “And now with some of their competitors trading at lower levels, they really do need to take a look and see if they can make something happen at this time.”
This isn’t to say an uptick in M&A is around the corner. Many of the executives surveyed don’t expect to see signs of life in the global economy until the second half of 2010 and only 18% of respondents said cash isn’t an issue (down from 25% in January).
“They all say they want to do opportunistic M&A and let’s face it, who wouldn’t want to buy something at a low price or 50% off,” Rogers said. “We love to buy our own personal goods like that, but until we know that our job is safe and our employer is safe, we are not going to make those big-ticket decisions. I think that is the same way a lot of corporations are thinking, because if you do the math, it’s telling you now is the time to try and get deals done.”
So, despite the bluster, it would seem that we’re backed where we started: The M&A market is too linked to overall confidence to show much improvement. Next stop, bottom.
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved

An End to Management Fees at Buy-Out Shops?

2009-07-06T11:14:00.002-05:00

From TheDeal.com, July 6, 2009:

With tight debt markets putting the squeeze on the ability of private equity firms to make investments and score profitable exits, the limited partners providing the dealmaking capital have begun pushing back on the fees they've doled out to LBO shops for decades. Squarely in their sights is the 2% management fee that has acted as as an industry benchmark. (Buyouts also typically take 20% of the profits when they sell portfolio companies as well.) Three of the largest limited partners in the world -- giant pension plan the California Public Employees' Retirement System; fund-of-funds AlpInvest Partners NV, Europe's largest backer of private equity; and HarbourVest Partners LLC -- are all pressing for a reduction or end to the fee, according to Bloomberg. With performance down across the board, LPs finally have some leverage of their own when it comes to the fee structure, and the management fee was likely the first to come up because it's paid whether or not the buyout fund turns a profit for its investors. Until now LBO firms have been fairly successful at keeping their fee structures intact, instead making concessions in other areas such as capital commitments. TPG Capital, Permira Advisers LLP and Bain Capital LLC have all allowed their LPs to reduce the size of their capital commitments in megafunds. (The Deal Pipeline subscribers can read the full story here.)And with many LPs facing their own cash crunch, they are increasingly looking to reduce their allocation to private equity. Mark A. Coleman of Laurus Transaction Advisors recently wrote in The Deal magazine about the importance of communicating with LPs on the performance of portfolio companies. He writes: The troubled banking industry and pressure on limited partners to rebalance their investment portfolios, specifically their allocations to private equity, have made it critical that private equity firms be more proactive about keeping these parties informed on how portfolio companies are faring. Many firms have even added senior operating personnel and functional specialists at the fund level to more closely monitor performance and provide on-call support for portfolio company executive teams -- with an overriding objective of preserving value.Additionally, with leveraged lending still tight as drum, private equity firms are finding it very difficult to get profitable exits from portfolio companies. Even worse, the recession has sent a record number of LBO-backed companies into bankruptcy as their debt loads weigh them down and prove expensive to refinance. - George White
See Bloomberg story SeeThe Deal Pipeline story (subscription required)
See The Deal magazine story - Finger on the Pulse
See Dealwatch on PE-backed bankruptcies
See Dealwatch on PE/VC fundraising

40% Drop in M&A Deals in First Half

2009-07-02T09:01:00.002-05:00

From DealBook blog, July 2, 2009:
The dearth of big takeover deals continues in the chilly M.&A. market. The first half of this year, which ended on Tuesday, marked the worst such period for global dealmaking since 2004, according to a new report from Thomson Reuters. The total volume of announced mergers and acquisitions worldwide fell 40 percent from last year to $941 billion, according to the report.
The Thomson Reuters report of a sharp decline in M.&A. activity followed a preliminary estimate by Dealogic last week, which showed that overall deal volume fell 36 percent worldwide in the first half. The two data providers differed somewhat in their methodologies for counting deals.
The biggest transaction of the first half was the drug giant Pfizer’s $68.1 billion acquisition of Wyeth followed by Rio Tinto’s $58 billion bid for rival mining company, BHP Billiton. The federal government comes in at No. 5 on Dealogic’s list of biggest deals with its $25 billion stake in Citigroup.
Private equity firms continued to be relatively silent in the first half with only $32.9 billion in announced global deals, the worst six month period of activity since 1997.
Link to Thompson Reuters report:
http://www.scribd.com/doc/17014240/Thomson-Reuters-MA-Review
– Zachery Kouwe

Study Projects Upsurge in M.& A. Activity

2009-06-17T14:05:00.001-05:00

From DealBook.blog, June 17, 2009:

The market for mergers and acquisitions could see some real growth in the coming months after more than a year of declining deal volume, according to a new joint study published on Tuesday by Thomson Reuters and JPMorgan Chase.
The study, which examines trends in the M.& A. sector, predicts that the current down cycle in deal activity could turn around in the second half of this year, tracking the expected upward growth in the world’s gross domestic product.
Deal activity is very closely related to economic growth. When people are feeling confident and money is available, deal volumes jump. Conversely, when the economy is on the downswing and money is tight, deal activity craters.
Deal volume as a percentage of G.D.P. peaked at the top of the last two economic bubbles: the dotcom bubble in 2000 at about 11 percent and the credit bubble in 2007 at about 8 percent.
Deal activity fell to nearly 4 percent in 2008 and continued to fall in the first half of 2009.
The study found that during the downturn in deals that followed the dotcom bust, M.& A. activity contracted for approximately eight quarters before it rebounded. The credit crunch cycle has so far gone through seven quarters of contraction. As such, total activity in mergers and acquisitions could bottom out during the current quarter, the study found.
Based on their hypothesis that the pattern between M.& A. growth and G.D.P. growth will repeat itself and rebound together, Thomson Reuters and JPMorgan project that global deal activity as a percentage of G.D.P. could reach 3.6 percent in 2009, 3.7 percent in 2010 and 4.5 percent in 2011, mirroring the upturn of 2002, 2003 and 2004.
When the data is matched with the International Monetary Fund’s forecast for global G.D.P. growth in the same years, deal volume could reach $2.6 trillion by 2011.
But the argument for such a spectacular recovery is based on trends seen since 1995, when the easy money policies instituted by the Federal Reserve and other central banks fueled growth and economic bubbles. A tighter monetary policy and stronger financial regulation limiting risk could return growth in the M.& A. market to levels below 2 percent that were seen during the early part of the 1990s.
– Cyrus Sanati
Go to Study from Thomson Reuters and JPMorgan »

Distressed deals: Strategics coming on strong

2009-06-15T11:29:00.001-05:00

From The Deal.com, June 15, 2009:
It's been nearly six months since we reported in The Deal magazine that more and more corporate acquirers were eying the distressed market for potential targets. So, did they arrive? If we narrow the definition of distressed deals to transactions involving a bankrupt seller, the answer is yes. According to The Deal Pipeline's bankruptcy M&A database, 79 corporations have acquired or been approved to buy assets from a bankrupt seller so far this year. That compares to 51 similar transactions in the same period last year, and 102 total in 2008. Looking more closely at this year's numbers, it's no surprise the automotive industry has seen the most action from corporate buyers of distressed assets. There have been 12 bankruptcy M&A deals involving a strategic buyer since Jan. 1. Highlights include:
Hertz Global Holdings Inc.'s (NYSE:HTZ) acquisition of Advantage Rent A Car Inc.
Lazy Days RV Center Inc.'s acquisition of 154 Fleetwood Enterprises Inc. trailer units
Penske Automotive Group Inc.'s (NYSE:PAG) acquisition of General Motor Corp.'s Saturn brand Workhorse International Holding Co.'s acquisition of Monaco Coach Corp.'s recreational vehicle divisionRetail was the next most active industry for corporate buyers, with nine transactions, including:
Winter Sky Retail Ltd.'s acquisition of Madhouse Ltd
Aurora Fashions Ltd.'s acquisition of Mosaic Fashion Ltd.
Sleepy's Inc.'s acquisition of Dial-A-Mattress Operating Corp.Strategic acquirers were also active in the media and energy industries, with six and seven transactions, respectively.For corporate acquires that have yet to dive into the deepening pool of bankrupt assets, be aware that the learning curve is steep. As Sullivan & Cromwell LLP partner Frank Aquila told us recently, even prenegotiated terms will likely be revisited in a bankruptcy sale. Still, as the data above indicates, the opportunities available may be too good to keep many strategics sidelined for long. - Suzanne Stevens

Deal Activity Is Down 40% So Far This Year

2009-06-04T09:18:00.000-05:00

From DealBook, June 4, 2009:

Mergers and acquisitions activity continues to languish this year as the fallout from the economic crisis lingers.
There have been $751.6 billion worth of deals announced so far this year, a steep 40 percent drop from the comparable period last year, according to Thomson Reuters. This decline represents the worst drop in deal activity for the period since 2001, when the recession then sent deal volumes down 52 percent from the prior year.
Regionally, European M.&A. showed the largest fall from the previous year, 48 percent, as investors balked at doing deals on the Continent. Meanwhile, the decline in deals in the United States was not quite so steep, falling 33 percent to $266 billion.
Global deal activity picked up a bit in May, with $186 billion in announced deals, up strongly from April when there was only $118 billion in announced deals.
But the majority of deals announced so far this year continued to be in the first quarter, when there were several huge deals announced involving pharmaceutical companies and government stakes in banks.
In fact, the two largest deals so far this year continue to be drug-related, with Pfizer’s $64 billion takeover bid for Wyeth and Merck’s $45 billion takeover bid for Schering-Plough.
The next two largest deals involve the British government’s taking stakes in two of Britain’s troubled banking giants, the Lloyds Banking Group at $22.3 billion and Royal Bank of Scotland at $18.6 billion.
Meanwhile, investment bankers are seeing a severe drop-off in their fees, which is sure to depress this year’s bonus pool. Global M.&A. fees for transactions completed in 2009 stand at $6.7 billion, according to Thomson Reuters estimates. That’s a 58 percent decline from a year earlier, when fees totaled $15.9 billion.
– Cyrus Sanati

Buyout Firms Face $400 Billion Overhang

2009-06-03T08:50:00.000-05:00

DealBook.blog, June 3, 2009:
Private equity firms may be sitting on a record amount of dry powder, but that isn’t stopping them from continuing to stockpile for a future when deal-making comes back into fashion.
The private equity “overhang” — the difference capital raised and capital invested — stood at $400 billion as of April, an all-time high, according a report by the Alliance of Merger & Acquisition Advisors and PitchBook Data.
The capital backlog ballooned in 2008 when the credit crisis burst the buyout bubble, putting an end to the kind of high-flying deals that took Hilton Hotels and TXU private, but private equity firms kept racking up new capital commitments.
The mismatch between fund-raising and deal-making underscores the unsettled state of the industry. Buyout funds remain popular with investors, such as pension funds and institutions, but they have been distracted by troubled credit markets and problems at existing portfolio companies.
“This historic high of capital yet to be deployed by private equity creates a new deal paradigm and a challenge,” David Cohn, an A.M.&A.A. advisory board member and managing director at Mosaic Capital, said in a statement. “Deal-makers have to put down their pencils and dispense with historical spreadsheet analysis.”
Despite their bulging coffers, buyout shops haven’t slowed their fund-raising pace, according to The Deal. Private equity firms have raised about $30 billion in April alone, while fund-of-funds ponied up another $5.1 billion in fresh capital to invest over the past two months, the publication said, citing data from its Deal Pipeline.
So when will private equity firms start deploying the cash piling up in their war chests?
“The fourth quarter is going to tell the story,” Mr. Cohn predicted. “This summer is the time for a ‘boot camp’ for both private equity and intermediaries to refresh their deal flow and be prepared for the fall.”
Of course, private equity funds traditionally use two sources of funds to buy their portfolio companies: equity from their investors, and loans from banks. The latter is hard to come by these days.
So buyout chiefs may need to be creative as they seek to deploy the equity they’ve raised — at least, until banks turn the spigot back on again.
Go to Article from The Deal.com »
Go to Article from VentureBeat »
Go to Press Release from The Alliance of Merger & Acquisition Advisors and Pitchbook Data via BusinessWire »

BCG on M&A: It's a jungle out there

2009-05-22T12:25:00.001-05:00

From TheDeal.com, May 22, 2009:

Dealmakers trying to cash in on companies hurt by the recession have been fighting with said targets over valuation issues. And they may be running out of time to do deals on the cheap. That was made evident in a white paper by Boston Consulting Group Inc., titled "The Clock Is Ticking: Preparing to Seize M&A Opportunities While They Last."
The paper says there are signs the M&A tide could soon turn as equity values stabilize and debt markets show life. BCG isn't urging dealmakers to rush into acquisitions, instead it offers a stress test of sorts about where a company stands in the M&A jungle.
According to a BCG analysis of 281 companies in the S&P 500, just one-fifth of them have a sufficiently robust balance sheet and other financial credentials to engage in M&A (the haves), while another fifth are now so weak and vulnerable that their only course of action is to focus on surviving the downturn (the have-nots).
The paper offers a "predator-prey matrix" to clarify a company's M&A strategy, mapping operational stability against financial stability.
Get to BCG's white paper here. - Baz Hiralal

Dealmakers Expect M&A Activity to Pick Up in Second Half of 2009

2009-05-15T07:56:00.000-05:00

ACG-Thomson Reuters Mid-Year 2009 DealMakers Survey Reveals Obstacles and Opportunities for M&A and Private Equity Investing
- - - - - - -
Private Equity Firms Concentrating on Portfolio Company Improvements

CHICAGO, May 13, 2009 – Middle market merger professionals are close to unanimous as to the current state of the M&A market – it is not good. Yet most anticipate it will improve in the second half of 2009, led by distressed sales and by mergers in healthcare and life sciences, manufacturing and distribution, and financial services. The mid-year 2009 survey results were announced today at ACG InterGrowth, Wynn Las Vegas.

The latest twice-yearly survey of by the Association for Corporate Growth (ACG) and Thomson Reuters reveals the most negative outlook in the five-year history of the survey, with 88% of dealmakers saying the current M&A environment is fair or poor, compared to 86% in December 2008.

Over the next six months, the 703 middle market investment bankers, private equity professionals, corporate development officers, lawyers, accountants and business consultants polled expect the number of M&A transactions to:
Increase (56%)
Remain the same (34%)
Slow further (10%)

For links to the complete report, go to http://chapters.acg.org/global/default.aspx

Administration Plans to Strengthen Antitrust Rules

2009-05-11T09:57:00.003-05:00

WASHINGTON — President Obama’s top antitrust official this week plans to restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market share.
The new enforcement policy would reverse the Bush administration’s approach, which strongly favored defendants against antitrust claims. It would restore a policy that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s.
Ms. Varney is expected to say that the administration rejects the impulse to go easy on antitrust enforcement during weak economic times.
She will assert instead that severe recessions can provide dangerous incentives for large and dominating companies to engage in predatory behavior that harms consumers and weakens competition. The announcement is aimed at making sure that no court or party to a lawsuit can cite the Bush administration policy as the government’s official view in any pending cases.
Ms. Varney is expected to say that the Obama administration will be guided by the view that it was a major mistake during the outset of the Great Depression to relax antitrust enforcement, only to try to catch up and become more vigorous later. She will say the mistake enabled many large companies to engage in pricing, wage and collusive practices that harmed consumers and took years to reverse.
See complete article at: http://www.nytimes.com/2009/05/11/business/11antitrust.html

SEC Enforcement: Past, Present and Future

2009-05-07T09:02:00.003-05:00

by Dave Lynn, Editor of TheCorporateCounsel.net, May 7, 2009:

SEC Enforcement: Past, Present and Future
Before we all move on with the next phase of the SEC’s revived enforcement efforts, we still have occasion to review what may have helped get use into this mess. As reported in this Bloomberg story from yesterday, the GAO released a report at the end of March outlining the headwinds faced by the Enforcement Staff over the past several years. (Broc mentioned the report in the blog last month.) Today, the Senate Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs will hold a hearing on strengthening the SEC’s enforcement responsibilities.
The Bloomberg story points out how the GAO found that the SEC instituted policies that “slowed cases and led enforcement-unit lawyers to conclude commissioners opposed fining companies.” As one unidentified Staffer put it, there was a feeling that the Commissioners prevented Enforcement from “doing its job.” The findings of the GAO’s report bear out my own experience during those years, not only with respect to Enforcement but also with respect to all other regulatory matters - hostility toward the Staff and its recommendations became institutionalized, which served to not only demoralize the Staff but also to result bad decisions being made at all levels.
The report also notes the use of executive sessions during former Chairman Cox’s tenure, where some Enforcement Staff were barred from participating. The report indicates that executive sessions occurred on 40% of the days when the SEC met to vote in closed Commission meetings in 2008, more than three times the rate in 2005 when Cox was appointed Chairman (but equal to the rate from 2003 and 2004).
As for the future of Enforcement, Chairman Schapiro reiterated her agenda for the Division of Enforcement in an address last week to the Society of American Business Editors and Writers. She noted that she has streamlined SEC enforcement procedures by no longer requiring full Commission approval to launch an investigation, and eliminating the need for approval by the full Commission before negotiating a settlement. She stated “before these directives, enforcement attorneys will tell you that they worried about red lights at every turn — now they see green.” This is sure to mean many more inquiries and, in all likelihood, much speedier cases as the - SEC Enforcement: Past, Present and Future
Before we all move on with the next phase of the SEC’s revived enforcement efforts, we still have occasion to review what may have helped get use into this mess. As reported in this Bloomberg story from yesterday, the GAO released a report at the end of March outlining the headwinds faced by the Enforcement Staff over the past several years. (Broc mentioned the report in the blog last month.) Today, the Senate Subcommittee on Securities, Insurance, and Investment of the Committee on Banking, Housing, and Urban Affairs will hold a hearing on strengthening the SEC’s enforcement responsibilities.
The Bloomberg story points out how the GAO found that the SEC instituted policies that “slowed cases and led enforcement-unit lawyers to conclude commissioners opposed fining companies.” As one unidentified Staffer put it, there was a feeling that the Commissioners prevented Enforcement from “doing its job.” The findings of the GAO’s report bear out my own experience during those years, not only with respect to Enforcement but also with respect to all other regulatory matters - hostility toward the Staff and its recommendations became institutionalized, which served to not only demoralize the Staff but also to result bad decisions being made at all levels.
The report also notes the use of executive sessions during former Chairman Cox’s tenure, where some Enforcement Staff were barred from participating. The report indicates that executive sessions occurred on 40% of the days when the SEC met to vote in closed Commission meetings in 2008, more than three times the rate in 2005 when Cox was appointed Chairman (but equal to the rate from 2003 and 2004).
As for the future of Enforcement, Chairman Schapiro reiterated her agenda for the Division of Enforcement in an address last week to the Society of American Business Editors and Writers. She noted that she has streamlined SEC enforcement procedures by no longer requiring full Commission approval to launch an investigation, and eliminating the need for approval by the full Commission before negotiating a settlement. She stated “before these directives, enforcement attorneys will tell you that they worried about red lights at every turn — now they see green.” This is sure to mean many more inquiries and, in all likelihood, much speedier cases as the Enforcement Division ramps up again.
...
- Dave Lynn

NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry

2009-04-30T08:46:00.001-05:00

Check out this SlideShare Presentation:

NVCA 4-Pillar Plan to Restore Liquidity in the U.S. Venture Capital Industry

View more presentations from NVCA.

Another View: A Bailout for the Plaintiff’s Bar

2009-04-29T13:51:00.001-05:00

DealBook, NYT, April 29, 2009
In January 2008, I saw a rock musical in Los Angeles called “Blood, Bloody Andrew Jackson.” The refrain from the main number was “pop-u-li-sm: yeah, yeah!” By early 2009, thanks in no small part to the likes of the Troubled Asset Relief Fund, John A. Thain of Merrill Lynch and the American International Group’s bonus babies, that chorus spread east, enveloped the country and galvanized The People.
Such atrocities as banker bonuses and Mr. Thain’s bathroom redecoration have made delicious targets of contempt. It was the liberal media’s dream: a chance to position the lowly taxpayer, the outraged face of TARP, against the mustache-twirling titans of Wall Street.
Taxpayer vs. corporate bad guy is a good one. But how about taxpayer vs. shareholder?
That, surprisingly, is a story that’s largely evaded the news pages, despite the fact that settlements resulting from the scores of shareholder suits against TARP entities will stretch into the stratosphere.
Sure, through TARP, taxpayer money may be used to pay off mortgages and fund bonus pools. But, in what will amount to a far more expensive proposition, TARP money will also be used to line the pockets of allegedly aggrieved shareholders and the lawyers who, wrapped smugly in the flag of corporate governance, are in the process of making a billion-dollar cottage industry out of filing strike suits.
Take the villainous Merrill Lynch. On Jan. 16, the government announced it would invest $20 billion of TARP money in Bank of America and guarantee $118 billion of assets in order to help it absorb its acquisition of Merrill. On that same day, Merrill announced it would shell out $550 million to settle claims by shareholders that it misled investors about assets backed by subprime mortgages.
Where is that settlement money going to come from? At the minimum, settlements like this one mean Bank of America is less able to pay back TARP money. At the worst, the bank must cut into its TARP allotment in order to settle up. In either case, shareholders of companies that would have gone bankrupt but for TARP are instead getting their settlements funded by bailout money.
And there will be more. Thirty-two TARP recipients had received $1 billion or more in federal money as of April 15, according to the Treasury’s Web site. And 19 of those companies have been sued since January 2008, according to data accumulated by the Stanford Securities Class Action Clearinghouse. Put otherwise, of the more than $300 billion that’s been paid out in TARP money, nearly $240 billion of it, or 78 percent, is subject to shareholder suits.
Even in flush times, the shareholder class action is a controversial legal mechanism. Its backers claim that these suits keep companies honest by deterring corporate malfeasance and making the bad guys pay. (Yes, believe it or not, some will argue that even with the Department of Justice, the Securities and Exchange Commission and Attorney General Andrew M. Cuomo of New York patrolling Wall Street, we still need shareholder suits to keep companies honest.) But even in a typical, TARP-free paradigm, the bad guys don’t pay. Instead, shareholders wind up paying each other.
The shareholder class action is a “circular and costly” process, according to Adam Pritchard, a professor at the University of Michigan Law School. He explains: “It’s the company’s dollar that gets paid out in these suits. Shareholders effectively take a dollar from one pocket, pay about half of that dollar to lawyers on both sides, and then put the leftover change in their other pocket.”
But now, in the world according to TARP, that settlement money is no longer coming from the corporation or its insurance plan. It’s coming from you.
“At the end of day, you can’t avoid the fact that, in settling these cases, you will inevitably be taxing the taxpayer, as you shift tax money to the plaintiff-shareholder class,” says Joseph Grundfest, a professor at Stanford Law School and a former S.E.C. commissioner.
Ironically, by appearing to provide shareholders with a real remedy, class actions have long been billed as corporate law’s most populist event. But when taxpayer money, rather than the corporate coffer, is being used to fund the resulting settlements, whose bad behavior are we really punishing?
Dan Slater, a former litigator, is a freelance journalist in New York.

Report Sees Signs Bankruptcy-Related M&A Deals on the Rise

2009-04-14T07:27:00.003-05:00

Brian Baxter, 04-14-2009
Citing data compiled by Thomson Reuters, the Financial Times reports that bankruptcy-related M&A deals have hit their highest level globally since August 2004. With the economic downturn forcing more companies into sales of distressed assets, it seems likely the trend will continue.
"We've only just begun," Skadden, Arps, Slate, Meagher & Flom restructuring Co-chair J. Gregory Milmoe told the Financial Times. "Given the dearth of capital and the substantial increase in the number of companies that will be troubled, one would expect the M&A rate to increase dramatically."
A few weeks ago we posted on the rise in section 363 asset sales and liquidations occurring in bankruptcy, citing pending sales by BearingPoint and The Greenbrier Hotel.
"[Section 363s] are a capital markets-driven phenomenon; there's less DIP financing to stay in the ordinary course of operations and support a standalone [bankruptcy] plan," Willkie Farr & Gallagher business reorganization Chair Marc Abrams told us. "And there are equally reduced levels of exit financing that would permit a company, once it comes up with a stand-alone plan, to emerge from bankruptcy."
The Financial Times points to the $350 million BearingPoint deal and the decision by auto parts manufacturer Delphi to sell its brakes business to a Chinese company for $100 million as evidence that bankruptcy-related M&A is on the rise.
Thomson Reuters identified 34 such deals in March alone and 67 so far this year. The bulk of those deals were in the U.S. and Japan, the Financial Times reports, because of the length of time both countries have been in recession and more liberal bankruptcy rules that allow companies to operate while they restructure.
According to Thomson Reuters data, monthly totals for bankruptcy-related M&A peaked at 87 such deals in July 2002 and dwindled to a mere seven in May 2007, shortly before the onset of the global recession.
While many of the deals of the last downturn involved telecoms and tech startups being acquired by strategic and private equity buyers, this time around, the private equity money has remained on the sidelines because debt has become more expensive.
Since insolvencies tend to peak 12 to 18 months after the beginning of a recession, Thomson Reuters data suggest that more bankruptcy-related M&A work will emerge later this year, the Financial Times reports.

This article first appeared on The Am Law Daily blog on AmericanLawyer.com.
Copyright 2009. Incisive Media US Properties, LLC. All rights reserved.

Q1 Worldwide M&A League Table

2009-04-10T08:00:00.001-05:00

Here's Thomson Reuters' Q1 Worldwide M&A league table.
Announced deals 01/01/09 - 31/03/2009
1. Morgan Stanley - $218.6bn deal volume, 70 deals
2. JPMorgan - $203.3bn, 70
3. Citi - $182.7bn, 59
4. Goldman Sachs - $160.2bn, 37
5. Deutsche Bank - $133.4bn, 50
6. Credit Suisse - $116.2bn, 50
7. Bank of America / Merrill Lynch - $99.2bn, 42
8. UBS - $93.1bn, 42
9. Barclays Capital - $69.7bn, 11
10. Evercore Partners - $67.3bn, 6
11. Lazard - $41.6bn, 39
12. Rothschild - $35.4bn, 52
13. Nomura - $31.9bn, 58
14. Santander - $28.3bn, 16
15. RBC Capital Markets - $26.1bn, 23
16. Mediobanca - $21.5bn, 10
17. China Int Capital Co - $20.1bn, 11
18. Blackstone Group - $19.3bn, 11
19. CIBC World Markets - $19.0bn, 8
20. BNP Paribas - $12.1bn, 17
21. ING - $11.9bn, 9
22. RBS - $11.1bn, 13
23. NIBC NV - $10.8bn, 2
24. Scotia Bank / Bank of Nova Scotia - $7.9bn, 9
25. Grant Samuel - $7.6bn, 7
Source - Thomson Reuters

Nail the Shorts?

2009-04-09T07:55:00.000-05:00

Floyd Norris, NYT, Notions on High and Low Finance, April 8, 2009:

The S.E.C. is putting out for comment a bunch of possible short-selling restrictions today. There are several variations on two ideas. First is an uptick rule, like one we used to have, that bars short-selling at a price lower than the last different price. Second is some type of circuit breaker, like barring further short sales of a particular stock on a day that stock has fallen 10 percent.
I assume the commission will eventually adopt something. The pressure from Congress, and the public, is great.
And I suspect that the eventual impact of what they adopt will be modest, at best.
Listening to the five commissioners speak was refreshing, in contrast to the unlamented S.E.C. during the chairmanship of Christopher Cox. Last fall, the S.E.C. introduced panic measure after panic measure to halt or reduce short-selling. There was little effort to carefully consider whether there was any evidence to support the measures, which seemed to change every hour or two. Then they had to be tweaked as unanticipated consequences piled up.
This time, all five commissioners, led by Chairwoman Mary Schapiro, seemed to understand that there is no empirical evidence to support the belief that short-sellers are to blame for much of anything, even if there is public outrage. Whatever rule is adopted will be chosen after everyone has a chance to comment and point out unintended consequences.
It sounds as if panic is receding at the commission.

Will the stimulus package stimulate M&A?

2009-04-01T14:16:00.001-05:00

Posted on April 1, 2009 at 1:26 PM, TheDeal.com:
M&A advisers don't see such a rosy future for their business, at least not in the near term, according to an annual survey by communications firm Brunswick Group LLC. Only 29% of the 59 respondents -- including bankers, lawyers and other market players -- maintain there will be signs of recovery in "a year to eighteen months" -- down from 52% who shared that view in April 2008. Indeed, 69% believe it will take up to five years to return to the level of M&A activity seen in 2007, up 28% from last year's survey. Respondents cited the lack of credit (39%), slowing economy (26%), lack of CEO confidence (26%) and equity market decline (9%) as the most significant factors stifling M&A. Asked about the likely impact of the stimulus package on dealmaking, 44% believe the package will have a positive affect on M&A if it is able to "restore confidence" and "ease credit" while 46% believe the package will have a neutral effect. "While advisers caution that recovery will take time, the survey indicates some areas where we can expect activity in 2009," Brunswick senior partner Steven Lipin said in a statement. "Lower company valuations as well as the potential impact of the stimulus package on both credit and confidence could drive domestic deals, especially in the healthcare and financial sectors, and prompt unsolicited transactions."Topping the list of sectors considered ripe for consolidation are healthcare (25%), financial services (24%), energy (15%) and consumer goods/retail (14%). - Claire Poole

Angel Investors’ Wings Are Being Clipped

2009-04-01T07:45:00.001-05:00

From Claire Cain Miller at Bits:
Entrepreneurs had a harder time getting angel funding to get their start-up idea off the ground last year, according to a new report from the Center for Venture Research at the University of New Hampshire. In 2008, angel investors funded young companies at the same pace as they did the year before, but they invested significantly less in each start-up.
Angels invested $19.2 billion in start-ups in 2008, a decrease of 26 percent from $26 billion in 2007. Still, they financed 55,480 ideas, only a slight decrease of 3 percent from 57,120 the year before. As a result, the average deal size for 2008 fell 24 percent from 2007. MORE »

Naked Short Selling

2009-03-16T08:36:00.002-05:00

A Few (Negative) Words about Naked Short Selling
TheCorporateCounsel.Net blog, March 16, 2009, by Broc Romanek:

When the market surged 6% last Tuesday, it was allegedly due to the rumor that the SEC would bring back the "uptick" rule (on Friday, the SEC announced it will hold an April 8th Commission meeting to propose a new uptick rule). The use of short selling by hedgies to move markets for their own gain was discussed during the conversation between Jon Stewart and Jim Cramer on Thursday. Add us to the chorus that something has to be done about short-selling. And something different than the SEC's emergency short-selling restrictions implemented last Fall, which some argue had no impact.
We've always believed that naked short selling is a form of manipulation, particularly when it occurs near the market's opening and close (even if it's part of a hedging strategy, it's often still manipulative). There now have been a number of stories revealing what short sellers have been doing over the past few years and it's clear that this is destructive behavior.
It's time that the SEC and other regulators step up. Otherwise, this is one more aspect of "deregulation" that will continue to allow some to artificially manipulate stock prices - and feed the widespread belief that the markets aren't safe.

Mark-to-Market Accounting Now on the Regulatory Fast Track

2009-03-13T09:16:00.001-05:00

From TheCorporateCounsel.net Blog, March 13, 2009:

Yesterday’s House hearing on mark-to-market issues seemed to light a fire under the SEC and FASB, prompting commitments from FASB Chairman Robert Herz and the SEC’s Acting Chief Accountant Jim Kroeker to provide guidance on fair value accounting within three weeks.
As Edith Orenstein notes in the FEI Financial Reporting Blog, the members of the Committee pressed for immediate action:
“Rep. Paul Kanjorski (D-PA), chair of the Capital Markets Subcommittee of the House Financial Services Committee, noted in his opening remarks, “Mark-to-market accounting did not create our economic crisis, and altering it will not end the crisis. But improving the application of a fundamentally sound principle that is having profound adverse implications in a time of global financial distress is imperative. Therefore, our hearing today is about getting Financial Accounting Standards Board and the Securities and Exchange Commission to do the jobs they are required to do.” He added, “Emergency situations require expeditious action, not academic treatises. They must act quickly.”
“There are three pieces of legislation presently pending in Congress,” noted Kanjorski, with respect to mark-to-market accounting or accounting standard-setting generally (e.g. HR 1349 co-sponsored by Rep. Ed Perlmutter (D-CO) and Rep. Frank Lucas (R-OK) which would create a Federal Accounting Oversight Board). Kanjorski added, “I guarantee you one of those pieces of legislation is going to become law before early April.
Rep. Gary Ackerman (D-NY) responded to FASB’s current timetable, ‘If you are going to act, you’ve got to do it real quick.’”
The FASB Chairman ultimately responded, “We could have the guidance in three weeks; whether it will fix things, I don’t know.”
Also on the fast track are efforts to reinstate the “uptick rule” applicable to short selling. As noted in this Business Week article, SEC Chairman Mary Schapiro indicated in her testimony before the House appropriations committee earlier this week that the SEC hopes to propose reinstatement of the uptick rule some time in April.

Buffett on Private Equity

2009-03-02T15:28:00.000-05:00

Excerpt From Berkshire Hathaway’s 2008 Annual Report
Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker).
Our record matches our rhetoric.
Most buyers competing against us, however, follow a different path. For them, acquisitions are “merchandise.” Before the ink dries on their purchase contracts, these operators arecontemplating “exit strategies.” We have a decided advantage, therefore, when we encounter sellers who truly care about the future of their businesses.
Some years back our competitors were known as “leveraged-buyout operators.” But LBO became abad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.
Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private equityfirms, it should be noted, are not rushing in to inject the equity their wards now desperately need.Instead, they’re keeping their remaining funds very private.
In the regulated utility field there are no large family-owned businesses. Here, Berkshire hopes to be the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of purchasers when transactions are proposed.
There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business, including a willingness to commit adequate equity capital.
When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in the six new states wewould be serving immediately checked our record in Iowa. They also carefully evaluated our financing plans and capabilities. We passed this examination, just as we expect to pass future ones.
There are two reasons for our confidence. First, Dave Sokol and Greg Abel are going to run anybusinesses with which they are associated in a first-class manner. They don’t know of any other way to operate.
Beyond that is the fact that we hope to buy more regulated utilities in the future – and we know that our business behavior in jurisdictions where we are operating today will determine how we are welcomed by new jurisdictions tomorrow.

VCs challenge Obama plan to up carried interest tax

2009-03-02T09:46:00.001-05:00

By CAMILLE RICKETTS, VentureBeat
Earlier this week, president Obama announced his intention to raise taxes on carried interest for hedge funds and private equity firms as part of his bold new budget plan. Not surprisingly, members of the venture capital community have been quick to speak out against the change, arguing that it will discourage investors from taking risks on potentially important startups, and ultimately weaken the economy.
Obama’s proposal would hike the tax on carried interest (the percentage earned on investment profits used to pay general partners at firms) — from the current 15 percent capital gains rate to 39 percent, more than the regular income tax rate, starting in 2011. Mark Heesen, president of the National Venture Capital Association, estimates that about 500 venture capitalists received carried interest checks in the last year. This might not seem like a lot, but further substracting from this number could dissuade bright young business minds from choosing private equity as a career, he says.
Beyond brain drain, he suggests the shift in policy could fundamentally change the types of companies investors choose to back. “When you look at venture capital, we are investing for the very long term in technologies that may or may not play out — ironically, the very technology that the administration is saying we need more of than ever, lifescience and cleantech,” Heesen says. “But as a VC, if you are going to get ordinary income tax on your carry, there is much less incentive to wait around for seven, eight, nine years.” The capital gains rate essentially gave firms a buffer to weather failures while waiting for something like Google or Genentech to hit the bigtime.
This has been the general consensus among investors, who say the industry will probably place its bets on safer, less innovative concepts if the Obama plan is implemented — and the results will run counter to the administration’s other major goals, namely energy efficiency and cost-effective health care. Many are also concerned that VCs will be less inclined to invest as much time working alongside portfolio companies to help refine their business models and foster growth. As Heesen puts it, “We are involved in long-term job creation, and if that’s not worthy of capital gains taxes, I don’t know what is.”
In the administration’s view, taxing carried interest at a higher level could bring in up to $2.7 billion in 2011 and $4.3 billion in 2012. And those supporting the measure believe the current policy allows some wealthy firms to dodge paying their fare share, reports the Washington Post.
When asked what he would advise Obama to do — considering the loss of public faith in Wall Street and country’s dire financial situation — Heesen said the administration should motivate investors to hold onto portfolio companies for longer periods of time. “There are ways to raise revenues in this area,” he says. “If you increased a long-term capital gains period so that VCs would hold onto assets for two to three years, that would set policy in the right direction.”
Copyright 2009 VentureBeat. All Rights Reserved.

Survey: VC, Startups Feel the Pain

2009-02-26T08:16:00.001-05:00

A new survey that detailed trends in venture capital investments in the fourth quarter of 2008 has found that, like the rest of the economy, venture capital and startups are feeling more pain from the deepening global crisis.
BusinessWeek reported that the survey, conducted by California law firm Fenwick & West, analyzed the terms of venture deals for 128 companies headquartered in the San Francisco Bay Area and found that valuations are falling for startups while venture capitalists are driving harder bargains.
Of the 128 companies that received financing, 33 percent of them experienced “down rounds,” or an investment that placed a lower valuation on the company than it received in the previous round.
In addition, the percentage of down rounds rose every month at year’s end, hitting 45 percent in December.
Go to Article from Business Week »

The American Recovery and Reinvestment Act

2009-02-17T08:53:00.001-05:00

From the CorporateCounsel.Net Blog, February 17, 2009:
Late Friday, Congress finished its conferencing and passed the "American Recovery and Reinvestment Act" - and law firms went to work drafting their memos analyzing this stimulus package (we'll be posting all these memos in our "American Recovery Act" Practice Area). The final text of the legislation is posted on the White House's site in five parts, along with the ability for anybody to post comments!
The most relevant part of the legislation for our members is the tax provisions in Division B, which includes the controversial executive compensation restrictions among others (eg. see this Hodak Value commentary) - even President Obama is not happy with what Senator Dodd inserted as the final exec comp language. Oddly, the stimulus legislation went from no new executive compensation restrictions on Friday morning to more restrictive than previously contemplated by the end of the day. More coverage to come...

Congress strengthens executives’ pay limits

2009-02-16T12:43:00.001-05:00

CHICAGO — President Barack Obama’s economic team tried to keep Democratic allies negotiating the stimulus bill from limiting paychecks for executives at banks in need of a bailout. Treasury Secretary Timothy Geithner and economic aide Lawrence Summers failed.
Sen. Christopher Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee, inserted strict rules into the $787 billion economic stimulus package over the White House’s objections. Dodd’s limits on bankers’ bonuses are significantly more aggressive than those sought by Obama or Geithner in recent days, with much fanfare.
Dodd, D-Conn., said the restrictions — an executive making $1 million a year in salary could receive only $500,000 in bonus money, for example — are necessary if Obama plans to ask Congress for more money to save the financial sector.
“It will never happen as long as the public perceives that there are people getting rich,” Dodd said in an interview. “Save their pay or save capitalism.”
That tone among Democrats flavored much of the discussion about how to write the stimulus bill, which the president planned to sign on Tuesday in Denver. Despite direct appeals from Geithner, Summers and White House officials, Democrats didn’t budge, according to administration officials.
The Obama administration’s proposed restrictions applied only to banks that receive “exceptional assistance” from the government. It set a $500,000 cap on pay for top executives and limited bonuses or additional compensation to restricted stock that could only be claimed after the firm had paid the government back.
The stimulus bill, however, sets executive bonus limits on all banks that receive infusions from the government’s $700 billion financial rescue fund. The number of executives affected depends on the amount of government assistance they receive. But as a rule, top executives will be prohibited from getting bonuses or incentives except as restricted stock that vests only after bailout funds are repaid and that is no greater than one-third of the executive’s annual compensation.
The prohibition would not apply to bonuses that are spelled out in an executive’s contract signed before Feb. 11, 2009.
At banks that received $25 million or less, the bonus restriction would apply only to the highest paid executives. At banks that receive $500 million or more, all senior executives and at least 20 of the next most highly compensated employees would fall under the bonus limits.
The White House claimed partial victory in this area. Officials also said that it would be up to Geithner to implement the bill and cautioned that the administration might be able to work out a deal with leaders on the Hill to modify some of the rules later.
The original bill said all banks receiving bailout money could give no bonuses to their top 25 employees. The White House worried that would dissuade smaller banks from taking — or keeping for long — the bailout money, which would slow their lending rates.
Administration officials also said they were worried Dodd’s plan would still allow multimillion dollar paychecks, just not structured as bonuses. The Obama plan would cap the entire compensation at $500,000 — with anything above that coming from restricted stock. Dodd’s plan provides no limit to base salary pay, which typically is relatively small but supplemented with gigantic bonuses.
Even so, the final bill was far stricter than the White House wanted.
“As he has already expressed, the president shares a deep concern about excessive executive compensation at financial firms that are receiving extraordinary assistance from American taxpayers,” spokeswoman Jen Psaki said Saturday.
White House officials took credit for influencing other parts of Congress’ plan, including shareholder say on pay and a requirement for companies to disclose luxury expenditures, administration officials said.
Negotiators had removed a $400,000 pay cap included in an earlier draft. The Congressional Budget Office said it would cost some $11 billion in lost tax revenues by 2019.
Associated Press writers Jim Kuhnhenn in Washington and Martin Crutsinger in Rome contributed to this report.

Pssst Wall Street: Change the Name from Bonuses to “Making Work Pay” Credits

2009-02-04T10:16:00.003-05:00

From Truth on the Market, by Thom Lambert, February 2, 2009

President Obama, widely admired for his willingness and ability to engage in nuanced analysis, painted with pretty broad strokes when he attacked the bonuses recently paid by Wall Street banks:

"One point I want to make is that all of us are going to have responsibilities to get this economy moving again. And when I saw an article today indicating that Wall Street bankers had given themselves $20 billion worth of bonuses — the same amount of bonuses as they gave themselves in 2004 — at a time when most of these institutions were teetering on collapse and they are asking for taxpayers to help sustain them, and when taxpayers find themselves in the difficult position that if they don’t provide help that the entire system could come down on top of our heads — that is the height of irresponsibility. It is shameful."

Obama’s message has resonated with millions of Americans and no doubt scored him lots of “forthrightness” points. Indeed, two of my colleagues, both of whom I respect greatly, told me how refreshing it was to hear their leader speak in such black and white terms, calling this sort of behavior “shameful.”
With all due respect, I’m afraid I must dissent.
Putting aside that it’s generally unfair (un-nuanced?) to lump groups of disparate individuals together to make a political point, it’s important to note:
* that many of the institutions in this bonus pool didn’t receive TARP money;
* that a number of the banks (the biggies in particular) didn’t “ask[] for taxpayers to help sustain them,” as this article explains (and note Secretary Geithner’s presence at the meeting described);
* that the bonuses were generally for the rank and file salespeople, not for senior executives, and were based on their individual performances;
* that the bonus pool was down 44% from last year; and
* that “Wall Street” (a group of disparate stock brokers, commodities traders, investment bankers, and administrative professionals who don’t work in concert) really had no more to do with this crisis than did the real estate agents who sold (and earned commissions on) homes they knew to be overvalued and who are now benefiting from Treasury’s purchase of mortgage-related assets.
Most importantly, though, it’s important to recognize that these “shameful” bonuses are effectively the wages of the working folks who did a good job this past year. Imagine you’re a salesperson at a company. In order to create an incentive for you to bust your tail, the company negotiates with you a leveraged compensation plan under which you receive a relatively small base salary plus fairly generous commissions on the sales you close. Suppose you do a bang up job one year, but the company as a whole suffers a loss because of some poor decisions beyond your control (or because of developments in the macroeconomy, such as the bursting of an asset bubble facilitated by government-sponsored entities). Now imagine that the government perceives your company to be strategically important and therefore decides to subsidize it by, say, buying its preferred stock or extending it a loan. Would it be “the height of irresponsibility” for your employer to honor your legitimate compensation expectations and pay you the wages that you effectively earned under your implicit deal with the firm? And what would happen if your employer didn’t pay you what you legitimately expected? Wouldn’t you and the other successful salespeople at your company immediately bolt, leaving the company with a much less effective sales force?
Look, I agree that private firms that get in bed with the government open themselves up to all sorts of meddling in their affairs and that it’s appropriate for the government to exercise some measure of control over the firms it subsidizes. But our leaders need to be fair in recognizing that the bonuses in this industry are really legitimate wages; that the rank-and-file workers to whom they’re being paid are not responsible for the mess we’re in; that the bonus recipients are the ones who did a good job last year and who deserve to have their legitimate wage expectations honored; and that we U.S. citizens — as preferred stockholders in these financial institutions — have an interest in retaining the firms’ best workers and in maintaining the sort of leveraged, “eat what you kill” compensation scheme that has proven to best incentivize performance.
In the end, these so-called shameful bonuses are really just a matter of “making work pay” in these struggling financial firms. Who could rail against that?

Another View: Lessons From the Budweiser Battle

2009-02-04T10:00:00.000-05:00

Sabine Chalmers, the chief legal officer of Anheuser-Busch InBev, and Frank Aquila, a partner in the mergers and acquisitions group of Sullivan & Crowmell, were InBev’s lead internal and external lawyers, respectively, on the company’s successful bid to acquire Anheuser-Busch last year. Below, Mr. Aquila and Ms. Chalmers offer their views on what other unsolicited buyers can learn from this takeover battle.
Hostile to Whom? Unsolicited Offers Become MainstreamLessons From InBev’s Acquisition of Anheuser-Busch
The tactics and objectives of unsolicited offers in the 1970s and 1980s justifiably evoked images of raiders and pirates. Yet while these terms continue to be used — hostile bidder, bear hugs, poison pills and white knights — today’s strategic buyers have little in common with the greenmailers and corporate bust-up artists of that era. Today, such buyers view unsolicited bids as just another tool in their chest to achieve strategic objectives.
InBev was not alone among multinational strategic buyers in making unsolicited bids in 2008. Microsoft, United Technologies, Samsung, BHP Billiton and Electronic Arts, a veritable “who’s who” of multinational companies, were just a few that did so in the last year. Other blue-chip companies, including G.E. and I.B.M., have also pursued unsolicited offers as part of their M.&A. repertoire.
In the months and years to come, there will likely be a steady stream of such proposals. The continuing trend towards global consolidation, the current level of economic uncertainty and the recent precipitous drop in share prices come at a time when seller price expectations remain high and unsolicited bids are becoming increasingly respectable.
When undertaking any significant acquisition, solicited or unsolicited, planning is essential, because once an announcement is made, the deal team is at full stretch. No detail is too small, and every contingency must be given a thorough, 360-degree review well before the news is made public. While each situation will have its own dynamics, the lessons from InBev’s successful bid for Anheuser-Busch can be broadly applied by others considering a similar approach.
Lesson One: Define Success. An unsolicited acquisition that prevails at any cost may earn advisers a fee, but is unlikely to achieve all of the buyer’s key objectives. While the ultimate purpose of any acquisition is for the bidder to acquire the target company, the bidder will always have more nuanced objectives. From the outset, the InBev team was clear that it wanted its bid executed in such a way that the acquisition of Anheuser-Busch would proceed as quickly as possible, with a minimum of hostility and with financial discipline. This meant that while we had to move quickly, we would not vilify the other side or simply prevail by paying more than fair value. With these considerations in mind, the deal team developed an in depth plan that would set out to achieve all of InBev’s objectives.
Lesson Two: Turn Weaknesses to Advantage. Given the then developing credit crisis, we recognized that A-B’s board would focus on our financing and would likely reject our offer if there was the slightest weakness in the financing package. The deal team therefore explored the best and firmest financing arrangements that could be made available for the bid. As a consequence, InBev put in place an exceptionally strong, United Kingdom-style “certain funds” package. This not only removed financing as an issue in our negotiations with A-B, it ultimately allowed InBev to close a $55 billion financing in the midst of the severest credit crunch in more than a century.
Lesson Three: Anticipate Challenges and Be Proactive. From the outset, we had a carefully developed communications strategy ready for most possible scenarios. For example, we were ready with messages geared to the key constituencies. An outreach strategy was in place to address, early in the process, critical concerns of the employees, the wholesalers and the communities in which A-B operated. Beyond this initial program, we attempted to anticipate potential challenges to the bid and developed complete responses — press releases with detailed Q&As — that were ready to go when needed. This allowed InBev to respond to any rumor or charge within hours. Issues that might have played out over several days and become major distractions, instead became nonevents within less than a single news cycle.
Lesson Four: Don’t Expect to Win Round One. Developing a plan is important, executing that plan is essential. When the A-B board rejected InBev’s initial proposal, our hope of a quick, friendly deal began to evaporate. Rather than spending days contemplating our next move, the next phase of the plan went into high gear within hours of the A-B board’s decision. That same day, InBev filed a motion for declaratory judgment in Delaware Chancery Court making clear the company’s intention to remove and replace the A-B board by written consent. Without a moment’s hesitation, we began assembling our slate of nominees and our preparations for the consent solicitation.
Lesson Five: Dare to Think Big. In putting together our proposed slate of nominees for the A-B board, we sought well-known names that would give the consent solicitation process instant credibility. Hank McKinnell, the retired chairman and chief executive officer of Pfizer, led our director slate of former chief executives and business luminaries. Mr. McKinnell is the chairman emeritus of the Business Roundtable, the “trade group” of America’s top C.E.O.’s, and a highly regarded business leader. A slate that also included Adolphus A. Busch IV, a leading member of the Busch family, and well-known former C.E.O.’s such as Mr. McKinnell, Ernie Mario, John Lilly, Bill Yost and Allen Loren clearly made a strong statement to the business world. It was unveiled on July 7; within hours, the A-B board met and discussions between InBev and Anheuser-Busch began the next day. The deal was approved by the two boards a few days later.
* * * *
A takeover battle that many predicted would never succeed, and most believed would play out over many months at a very minimum, was resolved with an agreed deal just 32 days after the initial proposal. Not only did InBev achieve its main objective of acquiring Anheuser-Busch, it did so in a quick and friendly way, and at a fair price.
While no two deals are ever the same, planning will always be crucial. Once the plan has been developed, it must be implemented with skill and discipline. InBev and its advisers anticipated a long and hard-fought battle, but by developing tactics that reflected InBev’s true objectives, we were able to achieve a quick resolution on a basis that was ultimately beneficial to all parties.
The views and opinions expressed in this article are the authors’ own and do not necessarily represent those of either Anheuser-Busch InBev NV/SA or Sullivan & Cromwell L.L.P.

Don't eulogize private equity, Kravis says

2009-01-30T09:30:00.000-05:00

By William L. Watts, MarketWatch
Last update: 5:51 a.m. EST Jan. 30, 2009

DAVOS, Switzerland (MarketWatch) -- Times are tough in the private equity business, but the industry will survive, Kohlberg Kravis Roberts founding partner Henry Kravis insisted Friday at the World Economic Forum's annual meeting.
"Private equity is not dead," Kravis said in a panel discussion on the global financial system at this year's gathering of corporate executives, politicians, regulators and others in the Swiss Alps.
Credit constraints have made deals more difficult, but not for the first time, he said, recalling a prime rate of 21% in 1979 accompanied by then-Federal Reserve Chairman Paul Volcker's subsequent decision to slap on credit controls that barred non-purpose lending.
"That was tough," Kravis said. Things weren't much better during the savings-and-loan crisis of 1990-91 when credit essentially dried up.
It's a similar situation today in the wake of the banking crisis, but money is available from a range of sources, he said, and there are opportunities for private equity.
The next three years will see about $1.7 trillion in debt in the United States come due, with about $1.5 trillion of that investment grade. Over five years, the figure is $3 trillion, he said.
Unless credit markets thaw, "there's going to be a real need for private equity," Kravis said.
Commitments by sovereign wealth funds and other sources mean around $400 billion is available for private equity firms, he said.
And private equity firms can still raise long-term debt, albeit on a smaller scale and from different sources, Kravis said. Sovereign wealth funds and pension funds, for example, are willing to invest in debt.
Finally, the amount of leverage needed buy stakes in companies has "obviously come down substantially" due to much lower purchase prices.

William L. Watts is a reporter for MarketWatch in London.

Venture capital fund-raising down sharply

2009-01-20T09:51:00.000-05:00

Venture capital fund-raising dropped sharply last year, with U.S. venture firms collecting a total of $27.9 billion from limited partners, a 21.4 percent decline from the $35.5 billion raised in 2007, according to figures from the National Venture Capital Association.
Go to Article from The Boston Globe»
Go to Press Release from the National Venture Capital Association (PDF)»

Credit Markets’ Spring Awakening May Help Mergers

2009-01-08T15:49:00.001-05:00

Posted by Heidi N. Moore at Deal Journal, WSJ.com:
While much of the country languishes in a post-New Year’s, dead-of-winter coma, it feels like spring in the corporate debt market–spring 2008, that is.
The collapse of Bear Stearns in March 2008 froze the credit markets. It is only now, after several more companies went under, a $700 billion bailout was put in place and the auto industry was saved, that companies have been able to find buyers for their debt in the public markets in any appreciable number.
This week already is the best week for corporate debt sales since May 18, 2008, with proceeds totaling $19.9 billion, according to Thomson Reuters, though it still doesn’t match the $33.1 billion of that week in May. The second quarter of 2008 was a record for the debt markets as companies paid banks $5.5 billion in fees in just three months, according to Dealogic data.
The biggest debt issuance this week comes courtesy of a big takeover: InBev’s acquisition of Anheuser-Busch. Anheuser-Busch Inbev, rated BBB+, raised nearly $5 billion Wednesday, according to Thomson Reuters.
In addition, junk-rated Cablevision Systems Corp.’s CSC Holdings Inc. launched the first junk bond offering of the year Thursday and is expected to sell $500 million of bonds in the afternoon at a discounted price to yield 11% or more.
For banks, this is good news on two fronts. Most obviously, they can start making money by selling debt on the markets. Banks took a big hit as that business evaporated last year. Debt capital markets generated revenue of $13.6 billion in 2008, down 38% from 2007. Investment grade issuance earned banks $5.9 billion in fees–for the whole year–down 21% from 2007, while high yield issuance earned banks $1.0 billion in fees, down 69%, Dealogic reported.
InBev’s creditworthiness surely helped, as highly rated companies come back to the markets. Credit-worthy issuers with AAA ratings accounted for $6.7 billion of this week’s issuance, the highest level since the week of April 13, 2008. The good news there is that it means that nearly two-thirds of this week’s issuance, or $13.2 billion, comes from companies that aren’t necessarily the highest-rated. That signals that the gates on the credit markets may finally be starting to open.
One sector that stands to benefit from an ability to sell debt is the pharmaceutical industry, which appears poised for a wave of mergers. Pfizer and Merck have both indicated they are searching for companies to buy. Generics giant Actavis appears headed for the auction block according to our brother Health Blog, and its potential buyers include Big Pharma players Pfizer, Sanofi-Aventis, Novartis and GlaxoSmithKline.