Submitted by: Ted Allen, RiskMetrics Group - Risk & Governance blog:
The U.S. Supreme Court will hear arguments today in Stoneridge Investment Partners v. Scientific-Atlanta, a high-profile case that concerns the liability of bankers, vendors, and other third parties who help companies commit securities fraud.
The Stoneridge case stems from claims by shareholders of Charter Communications against Motorola and Scientific-Atlanta, which manufactured set-top boxes used by Charter’s cable television subscribers. The investors allege that the two vendors engaged in “wash” transactions in 2000 to help Charter meet its annual operating cash flow goals.
The closely watched case, which one industry group has called “the most important case in a generation,” has attracted 30 amicus briefs from investor advocates, state officials, and industry groups.
The Council of Institutional Investors, the North American Securities Administrators Association, the University of California, the New York State Teachers’ Retirement System, the Change to Win labor federation, and 30 state attorneys general have filed briefs in support of investors. The Bush administration disregarded the recommendation of the Securities and Exchange Commission and filed a brief in support of the Charter vendors.
While the Supreme Court previously barred suits against “aiders and abettors” in its 1994 Central Bank of Denver decision, the Charter investors argue that they should be able to bring “scheme liability” claims against vendors, bankers, and others who knowingly participate in transactions that help companies mislead shareholders, even if the third parties didn’t publicly mislead anyone. Billions of dollars may be at stake in the case, as the high court’s decision likely will have far-reaching implications and affect the ability of Enron investors to pursue a class lawsuit against the company’s former investment banks.
On Sept. 20, the Supreme Court announced that Chief Justice John Roberts would take part in the court’s deliberations in Stoneridge. Roberts, along with Justice Stephen Breyer, earlier recused himself from the high court’s decision on whether to hear the case. Both justices reported in their 2006 financial disclosure forms that they own shares in Cisco Systems, the parent of Scientific-Atlanta, Legal Times reported. The Supreme Court did not disclose the basis for the chief justice’s decision to rejoin the case.
Roberts’ participation in the case presumably will help the defendants. During the past year, the chief justice joined court majorities in several rulings that favored business interests.
Tuesday, October 09, 2007
Sallie Mae Sues to Force a Buyout
By ANDREW ROSS SORKIN and MICHAEL J. de la MERCED
Published: October 9, 2007, The New York Times
The SLM Corporation, parent of the student lender Sallie Mae, filed a lawsuit yesterday against a group of firms that had agreed to buy it for $25 billion but now are trying to renegotiate the deal.
The suit, filed last night in Delaware Chancery Court, comes one day ahead of a self-imposed deadline by the buyers to reach a new agreement. Failing that, the buyers — the private equity firms J. C. Flowers & Company and Friedman Fleischer & Lowe and the banks JPMorgan Chase and Bank of America — were prepared to walk away. Under the terms of the deal negotiated in April, the firms would pay a $900 million breakup fee.
The lawsuit is the harshest turn yet in one of the most bitter buyout fights this year. Buyers in other deals have clashed privately with their targets over price and terms of the acquisitions, but Sallie Mae and its suitors have been unafraid to slug it out in public.
Published: October 9, 2007, The New York Times
The SLM Corporation, parent of the student lender Sallie Mae, filed a lawsuit yesterday against a group of firms that had agreed to buy it for $25 billion but now are trying to renegotiate the deal.
The suit, filed last night in Delaware Chancery Court, comes one day ahead of a self-imposed deadline by the buyers to reach a new agreement. Failing that, the buyers — the private equity firms J. C. Flowers & Company and Friedman Fleischer & Lowe and the banks JPMorgan Chase and Bank of America — were prepared to walk away. Under the terms of the deal negotiated in April, the firms would pay a $900 million breakup fee.
The lawsuit is the harshest turn yet in one of the most bitter buyout fights this year. Buyers in other deals have clashed privately with their targets over price and terms of the acquisitions, but Sallie Mae and its suitors have been unafraid to slug it out in public.
Friday, October 05, 2007
Open Season on American Companies
WSJ.COM/DealJournal, October 4, 2007, 1:05 pm:
U.S. voters are getting increasingly nervous about free trade, reports this most recent edition of the WSJ-NBC News Poll. Here’s another reason for them to pay notice.
It turns out 2007 is shaping up as the most-active year for foreign acquisitions into the U.S. since 1990, according to recently released statistics from Thomson Financial. Seventeen years ago, there were jitters about Japanese buyers scooping up American icons from Rockefeller Center to Columbia Pictures.
Today, the list of buyers is incredibly diverse, with English, Russian, German, Chinese and Finnish companies getting into the mix.
In all, foreign buyers were responsible for more than 21% of U.S. acquisitions this year, a total of $275 billion of the record-setting $1.3 trillion in overall deals. Since 1990 — when the foreign buyers accounted for 28% of the M&A world — the percentage has fluctuated largely in the teens. See what effects this has had in New England, via this Boston Globe story.
There are a series of mixed political and economic messages in these numbers: The first is that the weakening U.S. dollar is creating a ripe opportunity for buyers around the world. The past week alone, for instance, has seen Canada’s TD Bank spend $8.5 billion on Commerce Bank and Finland’s Nokia Oyj buy digital map maker firm Navteq Corp. for roughly $8 billion.
Is this good or bad for the U.S. economy? There’s a thesis in this question. We’ll try to sum it up in two paragraphs.
It’s positive in that American companies continue to attract the best capital from around the world. This preumably keeps the American economy in its dynamic state, which is essential to overall growth and wealth creation. Want to see what happens when global capital dries up? Take a look at Asia after the currency crisis about 10 years ago.
Yet there’s understandably a worry underneath these investments. From a political standpoint, might a backlash against investments into the U.S. push the U.S. government to install its own trade roadblocks — thus blocking off U.S. capital from foreign markets? Even more important is the dilemma of our own economic habits: Are our trade imbalances so great that we’ve set up the seeds for our own cherry-picking?
U.S. voters are getting increasingly nervous about free trade, reports this most recent edition of the WSJ-NBC News Poll. Here’s another reason for them to pay notice.
It turns out 2007 is shaping up as the most-active year for foreign acquisitions into the U.S. since 1990, according to recently released statistics from Thomson Financial. Seventeen years ago, there were jitters about Japanese buyers scooping up American icons from Rockefeller Center to Columbia Pictures.
Today, the list of buyers is incredibly diverse, with English, Russian, German, Chinese and Finnish companies getting into the mix.
In all, foreign buyers were responsible for more than 21% of U.S. acquisitions this year, a total of $275 billion of the record-setting $1.3 trillion in overall deals. Since 1990 — when the foreign buyers accounted for 28% of the M&A world — the percentage has fluctuated largely in the teens. See what effects this has had in New England, via this Boston Globe story.
There are a series of mixed political and economic messages in these numbers: The first is that the weakening U.S. dollar is creating a ripe opportunity for buyers around the world. The past week alone, for instance, has seen Canada’s TD Bank spend $8.5 billion on Commerce Bank and Finland’s Nokia Oyj buy digital map maker firm Navteq Corp. for roughly $8 billion.
Is this good or bad for the U.S. economy? There’s a thesis in this question. We’ll try to sum it up in two paragraphs.
It’s positive in that American companies continue to attract the best capital from around the world. This preumably keeps the American economy in its dynamic state, which is essential to overall growth and wealth creation. Want to see what happens when global capital dries up? Take a look at Asia after the currency crisis about 10 years ago.
Yet there’s understandably a worry underneath these investments. From a political standpoint, might a backlash against investments into the U.S. push the U.S. government to install its own trade roadblocks — thus blocking off U.S. capital from foreign markets? Even more important is the dilemma of our own economic habits: Are our trade imbalances so great that we’ve set up the seeds for our own cherry-picking?
Venture Capital's Hidden Calamity
BusinessWeek.com, October 3, 2007, 12:01AM EST :
A closer look at otherwise strong investment growth shows many firms are getting all the drawbacks of a hot market, with few of the benefits. by Sarah Lacy
This is a bad time to be a venture capitalist. Anyone who says different is raising a new fund—or works at one of the few firms having a good year.
Sure, the numbers look great on the surface. The value of deals rose a solid, yet not bubbly, 8% in the second quarter, with investors pumping $7.4 billion into emerging companies, according to Dow Jones VentureOne. And the money is funding some legitimately exciting frontiers, including Web 2.0, which attracted $500 million in the first half. Companies specializing in clean tech got $1.1 billion in the same period.
Initial public offerings are up for the year, too. In the second quarter, venture-backed companies tapped the public markets for $2.73 billion, the most raised in a three-month period since the go-go days of 2000. And researchers expect the current period to be another banner quarter, with a whopping 46 companies looking to file.
IPOs and Acquisitions Tell a Different Story
But a closer look at the numbers reveals some disturbing trends. Consider IPOs. Most of the initial share sales getting done are mainly one-off companies that were founded years ago and have slogged away at building solid businesses for a half-decade or more. This year's biggest hits were MetroPCS (PCS) of Dallas and EMC's (EMC) spin-out of VMware (VMW)—hardly your classic Silicon Valley startups. There's simply no big overall tech movement getting Wall Street revved up, and among entrepreneurs, the feeling is mutual. Sarbanes Oxley and other regulations have made the prospect of going public far less appealing.
The picture looks worse among acquisitions. Sure, the usually sleepy third quarter saw $10 billion come in acquisition proceeds, but that was spread among 90 deals. Companies like TellMe, the voice recognition software company founded in the late 1990s that snagged $800 million from Microsoft (MSFT), are in the minority this year. Far more common is the tech company that plodded along for more than six years, chewing through some $30 million in venture cash to eventually get bought for $50 million or so. Indeed, the median length of time it took companies to get bought was the longest Dow Jones VentureOne has seen since it started measuring the industry 20 years ago. Meanwhile, valuations keep rising, as billions of dollars in VCs’ coffers fight to get in what few great companies are out there.
more...
A closer look at otherwise strong investment growth shows many firms are getting all the drawbacks of a hot market, with few of the benefits. by Sarah Lacy
This is a bad time to be a venture capitalist. Anyone who says different is raising a new fund—or works at one of the few firms having a good year.
Sure, the numbers look great on the surface. The value of deals rose a solid, yet not bubbly, 8% in the second quarter, with investors pumping $7.4 billion into emerging companies, according to Dow Jones VentureOne. And the money is funding some legitimately exciting frontiers, including Web 2.0, which attracted $500 million in the first half. Companies specializing in clean tech got $1.1 billion in the same period.
Initial public offerings are up for the year, too. In the second quarter, venture-backed companies tapped the public markets for $2.73 billion, the most raised in a three-month period since the go-go days of 2000. And researchers expect the current period to be another banner quarter, with a whopping 46 companies looking to file.
IPOs and Acquisitions Tell a Different Story
But a closer look at the numbers reveals some disturbing trends. Consider IPOs. Most of the initial share sales getting done are mainly one-off companies that were founded years ago and have slogged away at building solid businesses for a half-decade or more. This year's biggest hits were MetroPCS (PCS) of Dallas and EMC's (EMC) spin-out of VMware (VMW)—hardly your classic Silicon Valley startups. There's simply no big overall tech movement getting Wall Street revved up, and among entrepreneurs, the feeling is mutual. Sarbanes Oxley and other regulations have made the prospect of going public far less appealing.
The picture looks worse among acquisitions. Sure, the usually sleepy third quarter saw $10 billion come in acquisition proceeds, but that was spread among 90 deals. Companies like TellMe, the voice recognition software company founded in the late 1990s that snagged $800 million from Microsoft (MSFT), are in the minority this year. Far more common is the tech company that plodded along for more than six years, chewing through some $30 million in venture cash to eventually get bought for $50 million or so. Indeed, the median length of time it took companies to get bought was the longest Dow Jones VentureOne has seen since it started measuring the industry 20 years ago. Meanwhile, valuations keep rising, as billions of dollars in VCs’ coffers fight to get in what few great companies are out there.
more...
Thursday, October 04, 2007
Time for a New Corporate Buying Spree?
BusinessWeek.com, October 3, 2007, 3:57PM EST
As earnings take a nosedive, analysts expect to see more companies turn to M&A to pick up the slack. They certainly have the cash. by Steve Rosenbush
The slowdown in U.S. corporate profits has been swift and stunning. While earnings for companies in the Standard & Poor's 500-stock index grew a robust 14.7% in 2006, profit growth has screeched to a halt amid the troubled financial climate of 2007. With the income-reporting season kicking off the week of Oct. 8, average earnings for the S&P 500 companies are on track to grow just 1.9% during the third quarter, the slowest pace in more than five years, according to senior S&P index analyst Howard Silverblatt. That's down from 7.9% for the first quarter and 9.6% in the second. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)
The slowdown creates a dilemma for corporations, which face an imperative to "grow or die," Silverblatt says. How will they address their profit-growth problem? Many experts believe they will increasingly turn to mergers and acquisitions. "I don't think there's any question that growth will be harder to come by and that many companies will attempt to compensate for that by using M&A," says Hal Ritch, the former co-head of M&A at Citi (C); Donaldson, Lufkin & Jenrette; and Credit Suisse (CS), which acquired DLJ. He's now co-CEO of Sagent Advisors, an M&A advisory shop.
Ritch and other M&A advisers say they have detected a shift in their business during the last few months. The private equity firms that dominated M&A last year and during the first half of 2007 have been doing fewer deals of late. They are having a tougher time securing funding (BusinessWeek.com, 9/17/07).
continue http://www.businessweek.com/bwdaily/dnflash/content/oct2007/db2007103_812197.htm?dlbk
As earnings take a nosedive, analysts expect to see more companies turn to M&A to pick up the slack. They certainly have the cash. by Steve Rosenbush
The slowdown in U.S. corporate profits has been swift and stunning. While earnings for companies in the Standard & Poor's 500-stock index grew a robust 14.7% in 2006, profit growth has screeched to a halt amid the troubled financial climate of 2007. With the income-reporting season kicking off the week of Oct. 8, average earnings for the S&P 500 companies are on track to grow just 1.9% during the third quarter, the slowest pace in more than five years, according to senior S&P index analyst Howard Silverblatt. That's down from 7.9% for the first quarter and 9.6% in the second. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)
The slowdown creates a dilemma for corporations, which face an imperative to "grow or die," Silverblatt says. How will they address their profit-growth problem? Many experts believe they will increasingly turn to mergers and acquisitions. "I don't think there's any question that growth will be harder to come by and that many companies will attempt to compensate for that by using M&A," says Hal Ritch, the former co-head of M&A at Citi (C); Donaldson, Lufkin & Jenrette; and Credit Suisse (CS), which acquired DLJ. He's now co-CEO of Sagent Advisors, an M&A advisory shop.
Ritch and other M&A advisers say they have detected a shift in their business during the last few months. The private equity firms that dominated M&A last year and during the first half of 2007 have been doing fewer deals of late. They are having a tougher time securing funding (BusinessWeek.com, 9/17/07).
continue http://www.businessweek.com/bwdaily/dnflash/content/oct2007/db2007103_812197.htm?dlbk
Wednesday, October 03, 2007
Leveraged Buyout Bust By-Product: Lawsuits
DealLawyers.com Blog
Here is some good stuff from the D&O Diary Blog: As credit market disruption has reached the leveraged buyout world, a number of deals announced earlier this year to great fanfare have been unceremoniously snuffed, while others are on life support. Not too surprisingly, one direct result from this deal derailment has been a spate of lawsuits, as jilted partners and disappointed investors cast blame and seek to recoup their lost expectancy.
The most interesting of these litigation developments is the securities class action lawsuit that a Harman International Industries shareholder filed on October 1, 2007 against the company and three of its officers and directors. (Here is the complaint and the plaintiffs’ lawyers’ press release.) The Harman International lawsuit filing follows hard on the heels of the company’s September 21, 2007 announcement that its erstwhile acquirers, Kohlberg Kravis Roberts and a Goldman Sachs investment fund, had informed the company that they "no longer intend to complete the previously announced acquisition" of the company, and that they "believe a material adverse change in Harman’s business has occurred." Here is a Wall Street Journal’s article discussing the cancellation of the $8 billion deal.
The lawsuit, filed on behalf of shareholders who bought the company’s stock between the time of the company’s April 26, 2007 merger announcement and the September 24 cancellation announcement, alleges among other things that the company failed to disclose that it had breached the merger agreement; that it had R & D and other capital expenses, as well as inventory levels, above disclosed amounts; and that its relationship with a key customer had deteriorated. The complaint further alleges that Harman’s Chairman and controlling shareholder "had a strong personal motive" for the completion of the merger, from which he would received proceeds of $420 million. The implication is that the company withheld the true information to ensure that the merger would be completed, and that the merger fell apart only when the misrepresentations came to light.
In addition to the possibility of shareholder lawsuits, it may also be anticipated that other disappointed targets will sue their former suitors for breach of contract. The current dustup between Genesco and Finish Line provides an example of what this kind of dispute looks like. On June 18, 2007, Finish Line announced that it would be acquiring Genesco in a transaction valued at approximately $1.5 billion. But something happened on the way to the altar; on September 21, 2007, Genesco sued Finish Line in Tennessee state court seeking an order requiring Finish Line to complete the merger and forcing UBS to fulfill its agreement to finance the deal. Here is a CFO.com article describing the parties’ dispute and the Genesco lawsuit.
Finish Line, in turn, has filed a counterclaim asking the court, according to news reports, to compel Genesco to "provide information related to their proposed merger or else rule that a materially adverse event has occurred."
To my knowledge, no lawsuit has yet arisen in connection with the other very prominent deal in which the would-be acquirer invoked the "material adverse change" clause to cancel a deal – that would be the $25 billion deal to take over SLM Corp. (better known as Sallie Mae) that J.C. Flowers cancelled last week. Here is a Wall Street Journal article discussing the kibosh put on the Sallie Mae deal. But while there is no lawsuit yet, Sallie Mae did issue a September 26th press release saying that "the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to the fullest extent of the law." While there apparently remains some hope that the Sallie Mae deal might be salvaged, Sallie Mae yesterday rejected the would-be buyers latest reduced offer. If the deal dies altogether, keep an eye out for a lawsuit -- by somebody against somebody else.
It seems like only yesterday that the business pages were full of stories about increasing numbers of ever-larger buyout bids. Now the papers are covering the same deals as they fall apart. As the Journal noted, the termination of the Harman deal "represents a severe setback for the overall deal market as it tries to close upward of $350 billion of leveraged buyouts amid tightening credit conditions." If buyers’ remorse or tight credit undermines more deals, the disappointed targets can be expected to launch lawyers. Chances are that the lawsuits will live on long after the buyout bubble has become a distant memory. Posted by broc at October 3, 2007 08:06 AM
Here is some good stuff from the D&O Diary Blog: As credit market disruption has reached the leveraged buyout world, a number of deals announced earlier this year to great fanfare have been unceremoniously snuffed, while others are on life support. Not too surprisingly, one direct result from this deal derailment has been a spate of lawsuits, as jilted partners and disappointed investors cast blame and seek to recoup their lost expectancy.
The most interesting of these litigation developments is the securities class action lawsuit that a Harman International Industries shareholder filed on October 1, 2007 against the company and three of its officers and directors. (Here is the complaint and the plaintiffs’ lawyers’ press release.) The Harman International lawsuit filing follows hard on the heels of the company’s September 21, 2007 announcement that its erstwhile acquirers, Kohlberg Kravis Roberts and a Goldman Sachs investment fund, had informed the company that they "no longer intend to complete the previously announced acquisition" of the company, and that they "believe a material adverse change in Harman’s business has occurred." Here is a Wall Street Journal’s article discussing the cancellation of the $8 billion deal.
The lawsuit, filed on behalf of shareholders who bought the company’s stock between the time of the company’s April 26, 2007 merger announcement and the September 24 cancellation announcement, alleges among other things that the company failed to disclose that it had breached the merger agreement; that it had R & D and other capital expenses, as well as inventory levels, above disclosed amounts; and that its relationship with a key customer had deteriorated. The complaint further alleges that Harman’s Chairman and controlling shareholder "had a strong personal motive" for the completion of the merger, from which he would received proceeds of $420 million. The implication is that the company withheld the true information to ensure that the merger would be completed, and that the merger fell apart only when the misrepresentations came to light.
In addition to the possibility of shareholder lawsuits, it may also be anticipated that other disappointed targets will sue their former suitors for breach of contract. The current dustup between Genesco and Finish Line provides an example of what this kind of dispute looks like. On June 18, 2007, Finish Line announced that it would be acquiring Genesco in a transaction valued at approximately $1.5 billion. But something happened on the way to the altar; on September 21, 2007, Genesco sued Finish Line in Tennessee state court seeking an order requiring Finish Line to complete the merger and forcing UBS to fulfill its agreement to finance the deal. Here is a CFO.com article describing the parties’ dispute and the Genesco lawsuit.
Finish Line, in turn, has filed a counterclaim asking the court, according to news reports, to compel Genesco to "provide information related to their proposed merger or else rule that a materially adverse event has occurred."
To my knowledge, no lawsuit has yet arisen in connection with the other very prominent deal in which the would-be acquirer invoked the "material adverse change" clause to cancel a deal – that would be the $25 billion deal to take over SLM Corp. (better known as Sallie Mae) that J.C. Flowers cancelled last week. Here is a Wall Street Journal article discussing the kibosh put on the Sallie Mae deal. But while there is no lawsuit yet, Sallie Mae did issue a September 26th press release saying that "the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to the fullest extent of the law." While there apparently remains some hope that the Sallie Mae deal might be salvaged, Sallie Mae yesterday rejected the would-be buyers latest reduced offer. If the deal dies altogether, keep an eye out for a lawsuit -- by somebody against somebody else.
It seems like only yesterday that the business pages were full of stories about increasing numbers of ever-larger buyout bids. Now the papers are covering the same deals as they fall apart. As the Journal noted, the termination of the Harman deal "represents a severe setback for the overall deal market as it tries to close upward of $350 billion of leveraged buyouts amid tightening credit conditions." If buyers’ remorse or tight credit undermines more deals, the disappointed targets can be expected to launch lawyers. Chances are that the lawsuits will live on long after the buyout bubble has become a distant memory. Posted by broc at October 3, 2007 08:06 AM
Monday, October 01, 2007
A Parched Month Ends on Hopeful Note
WSJ DealBook, September 28, 2007, 1:13 pm
A few months ago, at the peak of the buyout boom, a $2 billion transaction could have easily slipped under the radar. These days, it is, literally, a big deal.
Case in point is 3Com, which said Friday that it will be taken private by Bain Capital for $2.2 billion. That single announcement accounted for about 11 percent of the world’s buyout volume during the entire month of September, according to data from Dealogic. It was about 16 percent of buyouts in the United States. That gives you an idea how slow this month has been.
Private equity firms rely on borrowed money to fund their acquisitions. After a long period of easy access to credit, buyout firms hit a wall this summer when the debt markets pulled back. The result was a dramatic decline in private equity deals, especially those with big price tags.
It remains to be seen whether 3Com is an isolated event or a sign that the drought of private equity deals is breaking. On Thursday, the banks financing the buyout of First Data — a deal that came before the credit crunch — were able to sell a larger-than-expected amount of loans related to the transaction, which is also a potentially positive sign.
Before the 3Com buyout was announced, Dealogic calculated that global buyout volume in September was about $17.6 billion. In September 2006, a single buyout — that of Freescale Semiconductor — was worth just as much. For all of September 2006, the figure was $57.5 billion, more than three times this September’s total.
The dropoff was similar for private equity activity in the United States, where buyout activity came to $11.4 billion in September (excluding 3Com), compared with $31.7 billion a year ago.
Dealogic also published preliminary third-quarter data, which indicated that overall merger activity — as opposed to just buyouts — actually rose from a year ago. It reported Friday that global announced mergers came to $992 billion in the latest quarter, 24 percent more than the same period a year ago (but down 43 percent from a very busy second quarter).
Go to Article from The Financial Times »
Go to Related Item from DealBook »
A few months ago, at the peak of the buyout boom, a $2 billion transaction could have easily slipped under the radar. These days, it is, literally, a big deal.
Case in point is 3Com, which said Friday that it will be taken private by Bain Capital for $2.2 billion. That single announcement accounted for about 11 percent of the world’s buyout volume during the entire month of September, according to data from Dealogic. It was about 16 percent of buyouts in the United States. That gives you an idea how slow this month has been.
Private equity firms rely on borrowed money to fund their acquisitions. After a long period of easy access to credit, buyout firms hit a wall this summer when the debt markets pulled back. The result was a dramatic decline in private equity deals, especially those with big price tags.
It remains to be seen whether 3Com is an isolated event or a sign that the drought of private equity deals is breaking. On Thursday, the banks financing the buyout of First Data — a deal that came before the credit crunch — were able to sell a larger-than-expected amount of loans related to the transaction, which is also a potentially positive sign.
Before the 3Com buyout was announced, Dealogic calculated that global buyout volume in September was about $17.6 billion. In September 2006, a single buyout — that of Freescale Semiconductor — was worth just as much. For all of September 2006, the figure was $57.5 billion, more than three times this September’s total.
The dropoff was similar for private equity activity in the United States, where buyout activity came to $11.4 billion in September (excluding 3Com), compared with $31.7 billion a year ago.
Dealogic also published preliminary third-quarter data, which indicated that overall merger activity — as opposed to just buyouts — actually rose from a year ago. It reported Friday that global announced mergers came to $992 billion in the latest quarter, 24 percent more than the same period a year ago (but down 43 percent from a very busy second quarter).
Go to Article from The Financial Times »
Go to Related Item from DealBook »
Thursday, September 27, 2007
Private-Equity Firms: Job Creation Machines?
Deal Journal - WSJ.com
September 27, 2007, 10:48 am
Posted by Stephen Grocer
Do private-equity firms create jobs? It’s an essential point as the buyout kings get deeper into the economy and the U.S. Congress gets more eager to tax their pay.
The answer — at least for the most succesful private-equity owned firms — is yes. Accountancy Ernst & Young conducted the new study, examining 100 biggest sales of private-equity portfolio companies in the U.S. and Western Europe in 2006.
Ernst & Young found that the average enterprise value of the companies studied in both Europe and U.S. jumped more than 80% from the time they were acquired. The growth in enterprise value was driven in part by the fact that private-equity-owned companies achieved faster profit growth, two-thirds of which came from business expansion — while a third in Europe — and 23% came from cost reductions.
What does that mean for jobs? The study found that employment was at the same or higher level at the time of exit in 80% of U.S. buyouts and 60% of European buyouts. In the United Kingdom, France and Germany, where fears that the industry will slash jobs has spurred strong opposition and scathing criticism, employment at businesses owned by private-equity firms rose 5% annually. That compares to 3% for equivalent publicly traded companies.
And the performance of the company remains strong after private-equity exits the business.
The study could be used to challenge arguments by private-equity opponents: namely that buyout firms slice up companies and slash jobs all to fatten the wallets of their limited partners. Of course, the study is highly self-selecting, as it identifies what are essentially the most successful deals, not the ones that fail.
Still, the conclusions do get to an interesting point: Whether private-equity firms are better managers than others.
“I think it has been proven that IPOs of private-equity-backed companies perform better post-IPO than comparable companies not backed by private equity,” says John O’Neill, America’s director of private equity with Ernst & Young. “That’s because of their laser-like focus on improving the business and working very closely with management and the board that allows them to jump on things very quickly and make the business better.”
September 27, 2007, 10:48 am
Posted by Stephen Grocer
Do private-equity firms create jobs? It’s an essential point as the buyout kings get deeper into the economy and the U.S. Congress gets more eager to tax their pay.
The answer — at least for the most succesful private-equity owned firms — is yes. Accountancy Ernst & Young conducted the new study, examining 100 biggest sales of private-equity portfolio companies in the U.S. and Western Europe in 2006.
Ernst & Young found that the average enterprise value of the companies studied in both Europe and U.S. jumped more than 80% from the time they were acquired. The growth in enterprise value was driven in part by the fact that private-equity-owned companies achieved faster profit growth, two-thirds of which came from business expansion — while a third in Europe — and 23% came from cost reductions.
What does that mean for jobs? The study found that employment was at the same or higher level at the time of exit in 80% of U.S. buyouts and 60% of European buyouts. In the United Kingdom, France and Germany, where fears that the industry will slash jobs has spurred strong opposition and scathing criticism, employment at businesses owned by private-equity firms rose 5% annually. That compares to 3% for equivalent publicly traded companies.
And the performance of the company remains strong after private-equity exits the business.
The study could be used to challenge arguments by private-equity opponents: namely that buyout firms slice up companies and slash jobs all to fatten the wallets of their limited partners. Of course, the study is highly self-selecting, as it identifies what are essentially the most successful deals, not the ones that fail.
Still, the conclusions do get to an interesting point: Whether private-equity firms are better managers than others.
“I think it has been proven that IPOs of private-equity-backed companies perform better post-IPO than comparable companies not backed by private equity,” says John O’Neill, America’s director of private equity with Ernst & Young. “That’s because of their laser-like focus on improving the business and working very closely with management and the board that allows them to jump on things very quickly and make the business better.”
Wednesday, September 26, 2007
Sallie Mae CEO’s Counterattack Against Waffling LBO Buyers
WSJ DealJournal, September 26, 2007:
Sallie Mae is the odds-on favorite to be the next deal after Harman and Genesco where the buyers try to slip away scot-free by arguing that a so-called Material Adverse Change has occurred to the business. The Sallie Mae buyers — private-equity firm J.C. Flowers & Co. as well as Bank of America and J.P. Morgan Chase — already have said education-finance legislation expected to be signed by President Bush may trigger the MAC clause in their merger agreement with SLM, the student lender’s parent.
With SLM saying last week, effectively, that a deal is a deal, if Flowers & Co. call a MAC — as many in the deal community expect they will — the parties could be headed to court (likely the Delaware Chancery Court, according to this post from Steven Davidoff from M&A Law Prof. Blog). That would be the biggest such deal ever to land there.
Here’s the key part: We spoke to someone who is familiar with the thinking of SLM Chairman Albert Lord, who is said by people who know him to be combative and competitive. He is expected to argue the following points: 1) Disclosures in the company’s 10-K annual filing with the SEC about possible legislation prevent the buyers from calling a MAC; and 2) Flowers sung the deal’s praises to potential equity partners after agreeing to the deal, and after it became clear that the legislation would be worse for the company than previously expected. How could he do that and at the same time argue that a material adverse change has occurred, the argument goes.
The Flowers camp won’t comment publicly. Privately they argue that the MAC clause in the deal does allow for an out if legislation for the industry is worse than what’s contemplated in the 10-K.
Of course, the two sides ultimately could settle their differences quietly and agree to a lower price for the deal. BofA chief Ken Lewis signaled that is what his bank wants in this interview published today in the Charlotte Observer.
At stake is the $900 million reverse break-up fee the buyers are on the hook for if they want to walk and can’t prove a MAC — and that will buy a lot of fireworks.
Sallie Mae is the odds-on favorite to be the next deal after Harman and Genesco where the buyers try to slip away scot-free by arguing that a so-called Material Adverse Change has occurred to the business. The Sallie Mae buyers — private-equity firm J.C. Flowers & Co. as well as Bank of America and J.P. Morgan Chase — already have said education-finance legislation expected to be signed by President Bush may trigger the MAC clause in their merger agreement with SLM, the student lender’s parent.
With SLM saying last week, effectively, that a deal is a deal, if Flowers & Co. call a MAC — as many in the deal community expect they will — the parties could be headed to court (likely the Delaware Chancery Court, according to this post from Steven Davidoff from M&A Law Prof. Blog). That would be the biggest such deal ever to land there.
Here’s the key part: We spoke to someone who is familiar with the thinking of SLM Chairman Albert Lord, who is said by people who know him to be combative and competitive. He is expected to argue the following points: 1) Disclosures in the company’s 10-K annual filing with the SEC about possible legislation prevent the buyers from calling a MAC; and 2) Flowers sung the deal’s praises to potential equity partners after agreeing to the deal, and after it became clear that the legislation would be worse for the company than previously expected. How could he do that and at the same time argue that a material adverse change has occurred, the argument goes.
The Flowers camp won’t comment publicly. Privately they argue that the MAC clause in the deal does allow for an out if legislation for the industry is worse than what’s contemplated in the 10-K.
Of course, the two sides ultimately could settle their differences quietly and agree to a lower price for the deal. BofA chief Ken Lewis signaled that is what his bank wants in this interview published today in the Charlotte Observer.
At stake is the $900 million reverse break-up fee the buyers are on the hook for if they want to walk and can’t prove a MAC — and that will buy a lot of fireworks.
Strategics Return to M&A Market
from Corporate Dealmaker Forum by Basdeo Hiralal
Strategic buyers are returning to the market in force after being outbid and crowded out by private equity buyers since 2004. However, strategic buyers will be more selective than private equity buyers and won’t pay the premiums and multiples that sellers have come to expect. Moreover, strategic transactions will be considerably smaller than the megadeals announced during the boom years.
Low interest rates, great liquidity and rising asset values fueled the greatest mergers and acquisition boom in history, with approximately $11.4 trillion in announced transactions on a worldwide basis since the beginning of 2004 (see table). Private equity accounted for a large percentage of these transactions. The credit crisis that developed in the summer of 2007 sharply reduced the number of private equity deals and the volume of M&A activity (see table).
Historically, sellers faced a trade-off between private equity and strategic buyers. Private equity buyers traditionally offered sellers a lower bid, but no antitrust risk of a delay or challenge by a competition agency in the U.S. or abroad. Strategic buyers, in contrast, traditionally offered a higher bid than private equity by sharing some of the synergies of a proposed transaction with the seller. That premium, however, was sometimes accompanied by antitrust risk. Over the last couple of years, private equity buyers were able to offer sellers both higher prices and no antitrust risk, effectively trumping strategic buyers and largely crowding them out of the market.
This dynamic has now changed. Most significantly, the credit crisis has restricted the availability of capital and raised uncertainty in the credit markets. Second, some private equity buyers also now present antitrust risk due to prior acquisitions.
We expect to see consolidation in the energy, steel, chemicals, pharmaceutical and healthcare industries. A number of strategic transactions have been recently announced, including Transocean Inc.-GlobalSantaFe Corp. (offshore drilling rigs); US Steel Corp.-Stelco Inc. (Canadian steelmaker) and Medco Health Solutions Inc.-PolyMedica Corp. (diabetes-care services and products). Bloomberg LP has reported speculation that Arcelor Mittal may bid for Tenaris SA (steel pipe). We see more strategic acquisitions in the pipeline and expect the weak dollar to attract foreign buyers. — Tom Fina
Tom Fina is a partner in the antitrust practice in the Washington office of international law firm Howrey LLP.
Strategic buyers are returning to the market in force after being outbid and crowded out by private equity buyers since 2004. However, strategic buyers will be more selective than private equity buyers and won’t pay the premiums and multiples that sellers have come to expect. Moreover, strategic transactions will be considerably smaller than the megadeals announced during the boom years.
Low interest rates, great liquidity and rising asset values fueled the greatest mergers and acquisition boom in history, with approximately $11.4 trillion in announced transactions on a worldwide basis since the beginning of 2004 (see table). Private equity accounted for a large percentage of these transactions. The credit crisis that developed in the summer of 2007 sharply reduced the number of private equity deals and the volume of M&A activity (see table).
Historically, sellers faced a trade-off between private equity and strategic buyers. Private equity buyers traditionally offered sellers a lower bid, but no antitrust risk of a delay or challenge by a competition agency in the U.S. or abroad. Strategic buyers, in contrast, traditionally offered a higher bid than private equity by sharing some of the synergies of a proposed transaction with the seller. That premium, however, was sometimes accompanied by antitrust risk. Over the last couple of years, private equity buyers were able to offer sellers both higher prices and no antitrust risk, effectively trumping strategic buyers and largely crowding them out of the market.
This dynamic has now changed. Most significantly, the credit crisis has restricted the availability of capital and raised uncertainty in the credit markets. Second, some private equity buyers also now present antitrust risk due to prior acquisitions.
We expect to see consolidation in the energy, steel, chemicals, pharmaceutical and healthcare industries. A number of strategic transactions have been recently announced, including Transocean Inc.-GlobalSantaFe Corp. (offshore drilling rigs); US Steel Corp.-Stelco Inc. (Canadian steelmaker) and Medco Health Solutions Inc.-PolyMedica Corp. (diabetes-care services and products). Bloomberg LP has reported speculation that Arcelor Mittal may bid for Tenaris SA (steel pipe). We see more strategic acquisitions in the pipeline and expect the weak dollar to attract foreign buyers. — Tom Fina
Tom Fina is a partner in the antitrust practice in the Washington office of international law firm Howrey LLP.
Monday, September 24, 2007
M&A Deal Credit Crunches
TheCorporateCounsel.net Blog
The Practical Corporate & Securities Law Blog, Broc Romanek and Dave Lynn are Editors of TheCorporateCounsel.net
September 24, 2007
Despite the Fed's reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: "The 'Downturn' Roadmap: Parsing the Shift in Deal Terms").
Here are some of the notable developments and disclosures:
1. Harman International's Form 8-K (expected soon) - According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce "stub equity."
2. Genesco's Form 8-K (filed 9/20/07) - As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).
3. Reddy Ice Holding's Proxy Statement (filed 9/12/07) - As noted in this article, Morgan Stanley, the deal's solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was "reserving its rights." According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout's equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley's consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.
4. Accredited Home Lenders Holding Co.'s Form 8-K (filed 9/20/07) - As noted in this article, Accredited Home Lenders compromised on its price tag in order to save its sale to the Lone Star Fund.
5. SLM Corp.'s Additional Soliciting Material (filed 8/7/07) - As noted in this article, Sallie Mae's purchase by a consortium led by JC Flowers & Co. might tank as the buyers are having second thoughts.
Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing
Join DealLawyers.com tomorrow for a webcast – “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing” – to hear Tim O'Connor of Imperial Capital, and Mark Palmer and Jonathan Gill of Bracewell Giuliani discuss the latest trends and developments regarding the opportunities and strategies available in distressed situations. Given what’s happening in the credit markets – this program is particularly timely!
Coming Soon: On November 1st, join us for the webcast: “Compensation Arrangements for Private Equity Deals.”
Act Now: To catch these programs, try a 2008 no-risk trial to DealLawyers.com today – and get the "Rest of 2007" at no charge.
Delaware Supreme Court: Rejects Deepening Insolvency Cause of Action
A few weeks ago, the Delaware Supreme Court decided - in Trenwick America Litigation Trust v. Billet, No. 495, 2006 (Del. Aug. 14, 2007) - that no cause of action asserting deepening insolvency exists under Delaware law. Sitting en banc, the court didn't issue its own decision - rather, it relied on the lengthy opinion of Vice Chancellor Strine issued in August of last year, where he looked carefully at the underlying theory (and other available causes of action) and concluded that the deepening insolvency theory was incoherent. We have posted memos regarding this decision in our "Bankruptcy & Reorganization" Practice Area.
- Broc RomanekPosted by broc at 06:42 AMPermalink: Some Notable Credit Crunch Disclosures and Developments...
The Practical Corporate & Securities Law Blog, Broc Romanek and Dave Lynn are Editors of TheCorporateCounsel.net
September 24, 2007
Despite the Fed's reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: "The 'Downturn' Roadmap: Parsing the Shift in Deal Terms").
Here are some of the notable developments and disclosures:
1. Harman International's Form 8-K (expected soon) - According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce "stub equity."
2. Genesco's Form 8-K (filed 9/20/07) - As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).
3. Reddy Ice Holding's Proxy Statement (filed 9/12/07) - As noted in this article, Morgan Stanley, the deal's solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was "reserving its rights." According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout's equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley's consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.
4. Accredited Home Lenders Holding Co.'s Form 8-K (filed 9/20/07) - As noted in this article, Accredited Home Lenders compromised on its price tag in order to save its sale to the Lone Star Fund.
5. SLM Corp.'s Additional Soliciting Material (filed 8/7/07) - As noted in this article, Sallie Mae's purchase by a consortium led by JC Flowers & Co. might tank as the buyers are having second thoughts.
Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing
Join DealLawyers.com tomorrow for a webcast – “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing” – to hear Tim O'Connor of Imperial Capital, and Mark Palmer and Jonathan Gill of Bracewell Giuliani discuss the latest trends and developments regarding the opportunities and strategies available in distressed situations. Given what’s happening in the credit markets – this program is particularly timely!
Coming Soon: On November 1st, join us for the webcast: “Compensation Arrangements for Private Equity Deals.”
Act Now: To catch these programs, try a 2008 no-risk trial to DealLawyers.com today – and get the "Rest of 2007" at no charge.
Delaware Supreme Court: Rejects Deepening Insolvency Cause of Action
A few weeks ago, the Delaware Supreme Court decided - in Trenwick America Litigation Trust v. Billet, No. 495, 2006 (Del. Aug. 14, 2007) - that no cause of action asserting deepening insolvency exists under Delaware law. Sitting en banc, the court didn't issue its own decision - rather, it relied on the lengthy opinion of Vice Chancellor Strine issued in August of last year, where he looked carefully at the underlying theory (and other available causes of action) and concluded that the deepening insolvency theory was incoherent. We have posted memos regarding this decision in our "Bankruptcy & Reorganization" Practice Area.
- Broc RomanekPosted by broc at 06:42 AMPermalink: Some Notable Credit Crunch Disclosures and Developments...
Tuesday, September 18, 2007
Trouble in the Private Equity Market
DealLawyers.com, September 18, 2007:
That there is much trouble in the private equity market is clear and well-documented. No credit available for signed deals. Private equity partners suing each other. Shareholders suing funds. The troubles will likely continue for some time.
On Sunday, the NY Times ran this column with some interesting remarks from Michael Jensen, professor emeritus at the Harvard Business School, leading scholar in finance and management, and the man whom many consider to be the intellectual father of private equity. Here is an excerpt:
“We are going to see bad deals that have been done that are not publicly known as bad deals yet, we will have scandals, reputations will decline and people are going to be left with a bad taste in their mouths,” Mr. Jensen said in an interview last week. “The whole sector will decline.”
Mr. Jensen was elaborating on the trenchant comments he made last month in a forum on private equity convened by the Academy of Management. There, he excoriated private equity titans who sell stock in their companies to the public — a non sequitur in both language and economics, he said — and warned that industry “innovations,” like deal fees that encourage private equity managers to overpay for companies, will destroy value at these firms, not create it.
He also said that private equity managers who sell overvalued company shares to the public, whether in their own entities or in businesses they have bought and are repeddling, are breaching their duties to those buying the stocks.
“The owners who are selling the equity are in effect giving their word to the market that the equity is really worth what it is being priced at,” he said. “But the attitude on Wall Street is that there is no responsibility to the buyers of the equity on the part of the managers who are doing the selling. And that’s a recipe for nonworkability and value destruction.”
That there is much trouble in the private equity market is clear and well-documented. No credit available for signed deals. Private equity partners suing each other. Shareholders suing funds. The troubles will likely continue for some time.
On Sunday, the NY Times ran this column with some interesting remarks from Michael Jensen, professor emeritus at the Harvard Business School, leading scholar in finance and management, and the man whom many consider to be the intellectual father of private equity. Here is an excerpt:
“We are going to see bad deals that have been done that are not publicly known as bad deals yet, we will have scandals, reputations will decline and people are going to be left with a bad taste in their mouths,” Mr. Jensen said in an interview last week. “The whole sector will decline.”
Mr. Jensen was elaborating on the trenchant comments he made last month in a forum on private equity convened by the Academy of Management. There, he excoriated private equity titans who sell stock in their companies to the public — a non sequitur in both language and economics, he said — and warned that industry “innovations,” like deal fees that encourage private equity managers to overpay for companies, will destroy value at these firms, not create it.
He also said that private equity managers who sell overvalued company shares to the public, whether in their own entities or in businesses they have bought and are repeddling, are breaching their duties to those buying the stocks.
“The owners who are selling the equity are in effect giving their word to the market that the equity is really worth what it is being priced at,” he said. “But the attitude on Wall Street is that there is no responsibility to the buyers of the equity on the part of the managers who are doing the selling. And that’s a recipe for nonworkability and value destruction.”
Wednesday, September 12, 2007
Smaller M&A Deals
WSJ DealJournal, September 11, 2007:
Need more proof of the impact the credit markets are having on global deal making? Look no further than the average size of deals announced last month.
With investment banks now balking at financing megadeals, the theory went that buyers would turn to the middle market to make deals. (See this post.) Data from August on the average deal size seems to bear that out.
Not only were the number of deals and deal volume down in August, but the average deal size tumbled world-wide to $121 million. That was the lowest average since November 2004, a 65% drop from July and a 32% slide from August 2006. Last month also had just one deal larger than $5 billion, the first time that had happened since September 2004, according to Thomson Financial.
Not surprisingly, the tumble in average deal size was most pronounced among private-equity-led buyouts, which fell to $197.8 million – a far cry from $881.8 million in July or even the $476 million in August 2006. It also represented the lowest average LBO size since February 2005, according to the data.
This was even more pronounced in the U.S., where the size of the average LBO deal tumbled to $239.6 million. By way of comparison, in only one other month this year (January) did the average buyout size fall below $1 billion and, at $748.5 million, January’s average still was more than three times as much as August.
Corporate buyers also announced smaller deals last month. The average size of strategic transactions globally fell 28% from a year ago to $114.4 million. That was the lowest since March 2005 and suggests – along with the fact that corporate deal volume fell to the lowest monthly total since January 2006 – that corporate buyers didn’t fill the void left by the now less-active private-equity firms.
In the U.S., the average size of strategic transactions did rise 6% from a year earlier, though it was down 26% from July.
Need more proof of the impact the credit markets are having on global deal making? Look no further than the average size of deals announced last month.
With investment banks now balking at financing megadeals, the theory went that buyers would turn to the middle market to make deals. (See this post.) Data from August on the average deal size seems to bear that out.
Not only were the number of deals and deal volume down in August, but the average deal size tumbled world-wide to $121 million. That was the lowest average since November 2004, a 65% drop from July and a 32% slide from August 2006. Last month also had just one deal larger than $5 billion, the first time that had happened since September 2004, according to Thomson Financial.
Not surprisingly, the tumble in average deal size was most pronounced among private-equity-led buyouts, which fell to $197.8 million – a far cry from $881.8 million in July or even the $476 million in August 2006. It also represented the lowest average LBO size since February 2005, according to the data.
This was even more pronounced in the U.S., where the size of the average LBO deal tumbled to $239.6 million. By way of comparison, in only one other month this year (January) did the average buyout size fall below $1 billion and, at $748.5 million, January’s average still was more than three times as much as August.
Corporate buyers also announced smaller deals last month. The average size of strategic transactions globally fell 28% from a year ago to $114.4 million. That was the lowest since March 2005 and suggests – along with the fact that corporate deal volume fell to the lowest monthly total since January 2006 – that corporate buyers didn’t fill the void left by the now less-active private-equity firms.
In the U.S., the average size of strategic transactions did rise 6% from a year earlier, though it was down 26% from July.
Monday, September 10, 2007
The Ranks of the Comfortable Are Still Thinning
By ANDREW ROSS SORKIN, New York Times, Sunday, September 9, 2007:
BY now, all of Wall Street understands that the private-equity gravy train has jumped the tracks. But few seem to realize how ugly the pile-up could become.
With the buyout market in free fall, lots of attention has focused on a few obvious pressure points, like which investment banks will rack up big losses on the $330 billion in debt that they committed to pay for leveraged buyouts over the last year.
For the most part, though, Wall Street seems to be taking it all in stride. James Dimon, the chief executive of JPMorgan Chase, said last month that he was “comfortable.”
Comfortable? Let me offer a more dour view: wide swaths of Wall Street, and many of the industries that serve it, are in for some serious collateral damage. Not only has private equity been out of business for the last two months, but that activity is not likely to resume with any significance soon. And when it does, it will be at a fraction of its recent peak.
So what does that mean? For much of Wall Street, a severe case of withdrawal. Forget about cutting the size of bonuses: let’s start really thinking about the possibility of slashing jobs.
See the article at: http://www.nytimes.com/2007/09/09/business/09deal.html?_r=1&dlbk&oref=slogin
BY now, all of Wall Street understands that the private-equity gravy train has jumped the tracks. But few seem to realize how ugly the pile-up could become.
With the buyout market in free fall, lots of attention has focused on a few obvious pressure points, like which investment banks will rack up big losses on the $330 billion in debt that they committed to pay for leveraged buyouts over the last year.
For the most part, though, Wall Street seems to be taking it all in stride. James Dimon, the chief executive of JPMorgan Chase, said last month that he was “comfortable.”
Comfortable? Let me offer a more dour view: wide swaths of Wall Street, and many of the industries that serve it, are in for some serious collateral damage. Not only has private equity been out of business for the last two months, but that activity is not likely to resume with any significance soon. And when it does, it will be at a fraction of its recent peak.
So what does that mean? For much of Wall Street, a severe case of withdrawal. Forget about cutting the size of bonuses: let’s start really thinking about the possibility of slashing jobs.
See the article at: http://www.nytimes.com/2007/09/09/business/09deal.html?_r=1&dlbk&oref=slogin
Friday, August 31, 2007
A Cold Winter for M&A in August
WSJ DealJournal, August 31, 2007, 8:41 am
Posted by Stephen Grocer
Since June when concerns about the credit market began mounting, industry watchers have been wondering when the buyout boom would go bust.
The data is in and August may well come to mark the end of the “golden era” for M&A.
Through Aug. 30, companies and private-equity firms struck 2,496 deals world-wide valued at $193 billion, according to Dealogic. That’s a far cry from the $544 billion of deals announced in July.
The drop off can’t be blamed on a summer slowdown. Deal volume this month fell 25% from August 2006 (22% in the U.S.). It marked the lowest monthly total since July 2005 and the lowest for the month of August since 2004.
The fall off in M&A activity during the month was due in no small part to the retreat of the private-equity industry. With investors refusing to buy much LBO-backed debt, private-equity deal making slowed to a trickle. Gone were the megadeals of the first half of the year.
Buyout firms scooped up just 152 companies world-wide, valued at $15.6 billion, through Aug. 29. That’s a 35% and 70% drop, respectively, from the same period last year. In the U.S., buyout volume fell 70% to $5.3 billion. Buyout volume as a percentage of total deal volume was just 10% after accounting for more than 20% through the first seven months of the year, according to the data.
And those numbers just begin to tell the story. August saw just three leverage buyouts valued at more than $1 billion announced. The month of May saw 26, according to Dealogic.
Yet 2007 is still on pace to shatter last year’s record total – a sign of just how robust the first seven months of the year were. Volume through Aug. 30 reached $3.65 trillion, up 51% compared to the same period last year. It’s just $264 billion behind 2006’s $3.9 trillion total.
Posted by Stephen Grocer
Since June when concerns about the credit market began mounting, industry watchers have been wondering when the buyout boom would go bust.
The data is in and August may well come to mark the end of the “golden era” for M&A.
Through Aug. 30, companies and private-equity firms struck 2,496 deals world-wide valued at $193 billion, according to Dealogic. That’s a far cry from the $544 billion of deals announced in July.
The drop off can’t be blamed on a summer slowdown. Deal volume this month fell 25% from August 2006 (22% in the U.S.). It marked the lowest monthly total since July 2005 and the lowest for the month of August since 2004.
The fall off in M&A activity during the month was due in no small part to the retreat of the private-equity industry. With investors refusing to buy much LBO-backed debt, private-equity deal making slowed to a trickle. Gone were the megadeals of the first half of the year.
Buyout firms scooped up just 152 companies world-wide, valued at $15.6 billion, through Aug. 29. That’s a 35% and 70% drop, respectively, from the same period last year. In the U.S., buyout volume fell 70% to $5.3 billion. Buyout volume as a percentage of total deal volume was just 10% after accounting for more than 20% through the first seven months of the year, according to the data.
And those numbers just begin to tell the story. August saw just three leverage buyouts valued at more than $1 billion announced. The month of May saw 26, according to Dealogic.
Yet 2007 is still on pace to shatter last year’s record total – a sign of just how robust the first seven months of the year were. Volume through Aug. 30 reached $3.65 trillion, up 51% compared to the same period last year. It’s just $264 billion behind 2006’s $3.9 trillion total.
President of Standard & Poor’s Steps Down
By BLOOMBERG NEWS
Published: August 31, 2007
Kathleen Corbet, president of the credit rating company Standard & Poor’s, resigned after lawmakers and investors criticized the company for failing to judge the risks of securities backed by subprime mortgages.
The McGraw-Hill Companies, the parent of Standard & Poor’s, said in a statement yesterday that Ms. Corbet will be succeeded by Deven Sharma, executive vice president for investment services and global sales.
Ms. Corbet is leaving to spend more time with her family and her exit is not related to the current credit-market turmoil, a McGraw-Hill spokesman, Steven Weiss, said.
S.& P. and Moody’s Investors Service failed to downgrade bonds backed by loans to borrowers with poor credit until July, when some had already lost more than 50 cents on the dollar.
Christopher J. Dodd, the Senate Banking Committee chairman and a Connecticut Democrat who is seeking the presidential nomination, said yesterday that credit rating companies must explain why they assigned “AAA ratings to securities that never deserved them.”
Published: August 31, 2007
Kathleen Corbet, president of the credit rating company Standard & Poor’s, resigned after lawmakers and investors criticized the company for failing to judge the risks of securities backed by subprime mortgages.
The McGraw-Hill Companies, the parent of Standard & Poor’s, said in a statement yesterday that Ms. Corbet will be succeeded by Deven Sharma, executive vice president for investment services and global sales.
Ms. Corbet is leaving to spend more time with her family and her exit is not related to the current credit-market turmoil, a McGraw-Hill spokesman, Steven Weiss, said.
S.& P. and Moody’s Investors Service failed to downgrade bonds backed by loans to borrowers with poor credit until July, when some had already lost more than 50 cents on the dollar.
Christopher J. Dodd, the Senate Banking Committee chairman and a Connecticut Democrat who is seeking the presidential nomination, said yesterday that credit rating companies must explain why they assigned “AAA ratings to securities that never deserved them.”
Wednesday, August 15, 2007
Redemption Day: Will Hedge-Fund Investors Bolt?
NYT DealBook, August 15, 2007:
For hedge fund bosses, today could be a nail-biter. August 15 marks the last day for most investors to notify fund managers that they want to withdraw money at the end of the third quarter. Coming so soon after last week's market turbulence, which led to huge losses at some well-known funds, the deadline raises the prospect of a wave of redemptions from rattled investors seeking to pull out their money. Of course, investors may also decide to stay the course, rather than selling out at what might end up being the lowest point.
Go to Article from Reuters via The New York Times»
Go to Article from The Financial Times»
Go to Related Article from MarketWatch»
For hedge fund bosses, today could be a nail-biter. August 15 marks the last day for most investors to notify fund managers that they want to withdraw money at the end of the third quarter. Coming so soon after last week's market turbulence, which led to huge losses at some well-known funds, the deadline raises the prospect of a wave of redemptions from rattled investors seeking to pull out their money. Of course, investors may also decide to stay the course, rather than selling out at what might end up being the lowest point.
Go to Article from Reuters via The New York Times»
Go to Article from The Financial Times»
Go to Related Article from MarketWatch»
Dog Days: Looking Further Into the LBO Slowdown
WSJ OnLine Deal Journal, August 14, 2007:
Just how much has the buyout boom slowed? For an idea, try taking a stab at this question: When was the last major buyout?
The answer: Blackstone Group’s $20 billion deal to buy Hilton Hotels on July 3. (Though depending on your definition of megabuyout, Cerberus Capital Management’s $3.7 billion deal for United Rentals on July 23 might take the prize, but then the first half of the year did spoil us.)
That is in stark contrast to just a few months back, when hardly a day — let alone a week — went by without a private-equity firm taking a company private. It just begins to show how slow deal making has gotten for the private-equity industry in recent weeks.
As Deal Journal pointed out in this post earlier today, buyout firms participated in just 13.5% of the $81 billion of deals struck in the U.S. from July 23 to Aug. 8. That is down from 36.1% for the rest of year, according to Thomson Financial. Moreover, through the first 10 days of August, global buyout volume fell to $4.86 billion, while U.S. buyout volume failed to surpass $2 billion, according to Dealogic.
Let us put those numbers in perspective: Buyout volume through the first seven months of this year has averaged $95.6 billion a month. Meanwhile, August buyout volume — almost half way through — is on pace to barely surpass $15 billion world-wide and $6 billion in the U.S. That falls well short of the previous monthly lows of $22.8 billion world-wide (February 2006) and almost $12 billion in the U.S (April 2006) since the beginning of 2006, according to Dealogic. Also, the two-week period ending Aug. 11 was the slowest two week period of this year.
This stall in private-equity deals can’t be pinned on a summer slowdown. In 2006, buyout volume averaged about $60 billion a month, and August buyout volume last year came in just below that average at $59 billion, according to Dealogic.
Yet in a sign of how busy private-equity firms were earlier in the year, private equity’s buying frenzy still is well ahead of last year’s pace. LBO deal volume through Aug. 10 was $705.6 billion world-wide and $435 billion in the U.S. That is up almost 87% and 100%, respectively, from the same period last year.
Just how much has the buyout boom slowed? For an idea, try taking a stab at this question: When was the last major buyout?
The answer: Blackstone Group’s $20 billion deal to buy Hilton Hotels on July 3. (Though depending on your definition of megabuyout, Cerberus Capital Management’s $3.7 billion deal for United Rentals on July 23 might take the prize, but then the first half of the year did spoil us.)
That is in stark contrast to just a few months back, when hardly a day — let alone a week — went by without a private-equity firm taking a company private. It just begins to show how slow deal making has gotten for the private-equity industry in recent weeks.
As Deal Journal pointed out in this post earlier today, buyout firms participated in just 13.5% of the $81 billion of deals struck in the U.S. from July 23 to Aug. 8. That is down from 36.1% for the rest of year, according to Thomson Financial. Moreover, through the first 10 days of August, global buyout volume fell to $4.86 billion, while U.S. buyout volume failed to surpass $2 billion, according to Dealogic.
Let us put those numbers in perspective: Buyout volume through the first seven months of this year has averaged $95.6 billion a month. Meanwhile, August buyout volume — almost half way through — is on pace to barely surpass $15 billion world-wide and $6 billion in the U.S. That falls well short of the previous monthly lows of $22.8 billion world-wide (February 2006) and almost $12 billion in the U.S (April 2006) since the beginning of 2006, according to Dealogic. Also, the two-week period ending Aug. 11 was the slowest two week period of this year.
This stall in private-equity deals can’t be pinned on a summer slowdown. In 2006, buyout volume averaged about $60 billion a month, and August buyout volume last year came in just below that average at $59 billion, according to Dealogic.
Yet in a sign of how busy private-equity firms were earlier in the year, private equity’s buying frenzy still is well ahead of last year’s pace. LBO deal volume through Aug. 10 was $705.6 billion world-wide and $435 billion in the U.S. That is up almost 87% and 100%, respectively, from the same period last year.
Tuesday, August 14, 2007
Corporate M&A Ascendance by the Numbers
WSJ.com, Deal Journal, August 14, 2007:
For anyone doubting that corporations are taking center stage in M&A, Thomson Financial has a news flash.
Thomson researchers gave a presentation in New York today titled “M&A: At the Crossroads?” According to one slide from the presentation, the contribution of private-equity buyers to U.S. M&A volume has fallen almost two thirds since the pace of declines in the credit and equity markets quickened late last month.
Private-equity firms were the buyers in just 13.5% of the $81 billion of deals struck in the U.S. from July 23 to Aug. 8, down from 36.1% for the year to date before then, according to Thomson. (Using more up-to-date figures, the private-equity share has fallen to less than a tenth, Thomson says.) Corporate acquirers have ratcheted up their participation to 70.4% of the total from 44.5% over the same time frame, according to the data. (Foreign acquirers account for the balance.)
So-called strategic buyers are taking center stage mainly because the high-yield debt markets private-equity firms use to fund their deals are, for all intents, no longer functioning. Corporations, meanwhile, have stock to use as currency, not to mention plenty of cash on their balance sheets. (General Electric, for example, has $62 billion saved up and Microsoft $34 billion, Thomson points out, though GE has made it clear it won’t be spending all that on deals any time soon.) Many of them also have investment-grade ratings, meaning their access to borrowers still is intact. Read more about the resurgence of corporate acquirers in this recent Wall Street Journal article.
In fact, the $57.1 billion of deals that U.S. corporate acquirers have struck since July 23 puts them on a faster pace than they were on this year, with $499.5 billion of deals notched before then.
For anyone doubting that corporations are taking center stage in M&A, Thomson Financial has a news flash.
Thomson researchers gave a presentation in New York today titled “M&A: At the Crossroads?” According to one slide from the presentation, the contribution of private-equity buyers to U.S. M&A volume has fallen almost two thirds since the pace of declines in the credit and equity markets quickened late last month.
Private-equity firms were the buyers in just 13.5% of the $81 billion of deals struck in the U.S. from July 23 to Aug. 8, down from 36.1% for the year to date before then, according to Thomson. (Using more up-to-date figures, the private-equity share has fallen to less than a tenth, Thomson says.) Corporate acquirers have ratcheted up their participation to 70.4% of the total from 44.5% over the same time frame, according to the data. (Foreign acquirers account for the balance.)
So-called strategic buyers are taking center stage mainly because the high-yield debt markets private-equity firms use to fund their deals are, for all intents, no longer functioning. Corporations, meanwhile, have stock to use as currency, not to mention plenty of cash on their balance sheets. (General Electric, for example, has $62 billion saved up and Microsoft $34 billion, Thomson points out, though GE has made it clear it won’t be spending all that on deals any time soon.) Many of them also have investment-grade ratings, meaning their access to borrowers still is intact. Read more about the resurgence of corporate acquirers in this recent Wall Street Journal article.
In fact, the $57.1 billion of deals that U.S. corporate acquirers have struck since July 23 puts them on a faster pace than they were on this year, with $499.5 billion of deals notched before then.
Monday, August 13, 2007
Mid-Market Deals Feel The Credit Crunch, Too
Monday, August 13, 2007 — LBO Wire
Paul Ziobro
Middle-market buyout deals are experiencing the same problems raising debt as their multi-billion-dollar counterparts, with a number of smaller deals having trouble securing debt at the desired prices and some deals being pulled altogether.
At least 10 outright buyouts, dividend recapitalizations or debt refinancings are having a difficult time finding buyers for their paper, according to several middle-market lenders.
Among the deals having trouble are MidOcean Partners' buyout of Bushnell Outdoor Products Inc., a maker of binoculars, telescopes and other optical equipment; as well as Graham Partners' planned purchase of Schneller Inc., a maker of decorative laminates, these people said.
Dividend recapitalizations of companies like Escort Inc., a maker of radar detectors backed by Falconhead Capital LLC, and Stolle Machinery Co., a maker of parts for canning equipment backed by Littlejohn & Co., have been pulled altogether, several people said.
The buyout firms mentioned either declined to comment or couldn't be reached.
The credit crunch is similar to the problems that some mega-buyout shops are having raising debt to fund multi-billion dollar deals, such as the buyouts of First Data Corp. and Chrysler Corp., as problems in the subprime mortgage markets have essentially frozen the debt markets. "The middle market is not immune to the problems in the large-cap market," said Walter Owens, president of CIT Group Inc.'s corporate finance group.
Traditional mid-market lenders, like collateralized loan obligation funds, or CLOs, are reducing their commitments, while banks and other lenders are demanding more conservative capital structures and better prices. "Leverage is moving down a bit, while cost is moving up," Daniel Duffy, co-president of the corporate finance group at CapitalSource Finance LLC, said.
Lenders say the upper limit for digestable debt ratios is now around 4.75 times earnings before interest, taxes, depreciation and amortization, down from some 6.2 times Ebitda in the second quarter, according to Standard & Poor's Leveraged Commentary & Data. The new level is more in line with multiples seen in 2005 and 2006.
There are also tales of lenders getting cold feet as deals near closure, either pulling out at the last minute or demanding changes to pricing as the overall credit markets remain in flux.
"The markets aren't shutting down, although you are seeing lenders looking for a little more yield and less willing to take on too much leverage," Todd Kumble, a managing partner at investment bank SPP Capital, said. "They have really become much more particular about which companies they'll lend to because their liquidity is more restrained right now."
Buyouts like Bushnell and Schneller are likely to go through eventually, people familiar with the matter say, but at more favorable pricing for the buyers of the debt. That equilibrium will take some time to establish, as will other distinguishing features of the changed credit markets."
It's all too new," said David Yewer, a managing director at lender FirstLight Financial Corp. "So we don't know exactly how things are going to shake out here."
© 2007 Dow Jones & Company, Inc. All rights
Paul Ziobro
Middle-market buyout deals are experiencing the same problems raising debt as their multi-billion-dollar counterparts, with a number of smaller deals having trouble securing debt at the desired prices and some deals being pulled altogether.
At least 10 outright buyouts, dividend recapitalizations or debt refinancings are having a difficult time finding buyers for their paper, according to several middle-market lenders.
Among the deals having trouble are MidOcean Partners' buyout of Bushnell Outdoor Products Inc., a maker of binoculars, telescopes and other optical equipment; as well as Graham Partners' planned purchase of Schneller Inc., a maker of decorative laminates, these people said.
Dividend recapitalizations of companies like Escort Inc., a maker of radar detectors backed by Falconhead Capital LLC, and Stolle Machinery Co., a maker of parts for canning equipment backed by Littlejohn & Co., have been pulled altogether, several people said.
The buyout firms mentioned either declined to comment or couldn't be reached.
The credit crunch is similar to the problems that some mega-buyout shops are having raising debt to fund multi-billion dollar deals, such as the buyouts of First Data Corp. and Chrysler Corp., as problems in the subprime mortgage markets have essentially frozen the debt markets. "The middle market is not immune to the problems in the large-cap market," said Walter Owens, president of CIT Group Inc.'s corporate finance group.
Traditional mid-market lenders, like collateralized loan obligation funds, or CLOs, are reducing their commitments, while banks and other lenders are demanding more conservative capital structures and better prices. "Leverage is moving down a bit, while cost is moving up," Daniel Duffy, co-president of the corporate finance group at CapitalSource Finance LLC, said.
Lenders say the upper limit for digestable debt ratios is now around 4.75 times earnings before interest, taxes, depreciation and amortization, down from some 6.2 times Ebitda in the second quarter, according to Standard & Poor's Leveraged Commentary & Data. The new level is more in line with multiples seen in 2005 and 2006.
There are also tales of lenders getting cold feet as deals near closure, either pulling out at the last minute or demanding changes to pricing as the overall credit markets remain in flux.
"The markets aren't shutting down, although you are seeing lenders looking for a little more yield and less willing to take on too much leverage," Todd Kumble, a managing partner at investment bank SPP Capital, said. "They have really become much more particular about which companies they'll lend to because their liquidity is more restrained right now."
Buyouts like Bushnell and Schneller are likely to go through eventually, people familiar with the matter say, but at more favorable pricing for the buyers of the debt. That equilibrium will take some time to establish, as will other distinguishing features of the changed credit markets."
It's all too new," said David Yewer, a managing director at lender FirstLight Financial Corp. "So we don't know exactly how things are going to shake out here."
© 2007 Dow Jones & Company, Inc. All rights
Pack Mentality Among Hedge Funds Fuels Market Volatility
By LANDON THOMAS Jr., New York Times, August 13, 2007:
On Wall Street, there is a rage against the machine.
Hedge funds with computer-driven or quantitative investment strategies have been recording significant losses this month.
The managers of these funds are the products of the trading desks of the big investment banks, like Goldman Sachs and Morgan Stanley, both of which have investment operations that use computer models.
The cross-fertilization has raised fears among some analysts that it is not only the hedge funds that are being hit, but the trading desks at the banks as well.
“These guys all know each other, and they all have the same strategies,” said Ernest P. Chan, a quantitative trading consultant who has done computer-driven research at Morgan Stanley and Credit Suisse. “They came from the same schools, and they get together for drinks after work.”
As the quantitative system has come to underpin the investment approaches of some of the largest hedge funds, its use has grown sharply.
Moreover, bankers and investors say, the strategies employed tend to be not only duplicable but broadly followed — the result being a packlike tendency that has helped increase market volatility and, for some hedge funds, has led to losses in the last month.
Wild swings in stock prices have become the norm as fears about the mortgage securities market have expanded into the broader markets. Last week, the Dow Jones industrial average was sharply higher on Monday and Wednesday, only to drop 387 points on Thursday, eventually ending the week about where it began.
A common thread has often been a rise or fall in prices late in the day, a pattern that many analysts attribute to computer models, which are driving a much larger volume of the trading.
Mr. Chan said this predilection for lemming-style buying or selling from investors using similar computer models could turn what would normally be a market setback into a wider contagion.
“If all the models say buy, who is going to say sell? There is just not enough money on the other side,” he said.
The problems of these quantitative funds mirror those of the hedge fund industry as a whole — many funds have seen sharp declines in the last couple of months as the credit markets have dried up. Some quantitative funds could potentially have their worst year on record.
Despite the large sums of money involved, ranging from $250 billion to $500 billion, according to industry estimates, the club of quantitative investors is a small, exclusive one that bridges the trading desks of investment banks and some of the country’s largest hedge funds.
One might call it six degrees of quantitative investing.
Clifford S. Asness, who has a Ph.D. in finance from the University of Chicago, is the founder of AQR Capital Management, a quantitative hedge fund that, according to investors, has had a 13 percent loss so far this month.
Mr. Asness is also a founder of Goldman Sachs’s troubled Global Alpha fund, which controls about $9 billion. The Alpha fund has suffered an 11 percent reversal this month, giving it a decline for the year that is approaching 30 percent, sparking speculation that Goldman would liquidate the fund. Goldman calls the speculation “categorically untrue.”
On a smaller scale, Tykhe Capital, another hedge fund that uses quantitative techniques, was down 19 percent in August. The founders of Tykhe are from D.E. Shaw & Company, the giant hedge fund that manages $35 billion via a broad reliance on quantitative, as well as other, strategies and whose founder, David E. Shaw, who has a Ph.D. from Stanford, originally came from Morgan Stanley.
Hedge funds as a whole have grown exponentially and now manage about $1.7 trillion, more than double the amount five years ago.
In one respect the swoon of these computer-reliant funds is the result of managers, who are faced with a deluge of investor money seeking accelerated returns, using their models to make higher risk market bets by following day-to-day trends. It is an approach that seems to run contrary to the original philosophy underlying a quantitative approach, called statistical arbitrage.
Narrowly defined, statistical arbitrage involves a fairly straightforward investment strategy, like the rapid-fire buying of one stock and the selling short of another so as to use the computer’s speed to identify and make money from even the most minute price discrepancies. Such a strategy will generally provide liquidity to the market by buying stocks on the way down and selling them short on the way up. In so doing, it provides a dose of calming, computerized sang-froid to markets in the grip of panic or euphoria.
But such strategies rarely promise high returns, so quantitative investors have broadened their computer models to include strategies for investing in more risky areas like mortgage-backed securities, derivatives and commodities.
“You can build a computer model for anything that is tradable,” Mr. Chan said. To some extent, that explains the outbreak of losses in these funds.
With many of these new assets being highly illiquid and with the funds themselves having used considerable amounts of borrowed money to enhance their returns, losses have been magnified as worried investors have demanded to pull their money out.
In a letter to investors this week, James H. Simons, the founder of Renaissance Technologies, the most highly regarded of the quantitative funds, gave voice to what he described as “unusual” market conditions. Mr. Simons, who received a Ph.D. in mathematics from the University of California, Berkeley, acknowledged what a difficult month August had been, with his RIEF down close to 9 percent for the month.
For an investor who reportedly earned $1.6 billion last year and whose flagship Medallion fund had an average annual return of over 30 percent since 1988, it was a surprising reversal.
“We cannot predict the duration of the current environment,” Mr. Simons wrote. “But usually such behavior causes first pain and then opportunity. Our basic plan is to stay the course.”
On Wall Street, there is a rage against the machine.
Hedge funds with computer-driven or quantitative investment strategies have been recording significant losses this month.
The managers of these funds are the products of the trading desks of the big investment banks, like Goldman Sachs and Morgan Stanley, both of which have investment operations that use computer models.
The cross-fertilization has raised fears among some analysts that it is not only the hedge funds that are being hit, but the trading desks at the banks as well.
“These guys all know each other, and they all have the same strategies,” said Ernest P. Chan, a quantitative trading consultant who has done computer-driven research at Morgan Stanley and Credit Suisse. “They came from the same schools, and they get together for drinks after work.”
As the quantitative system has come to underpin the investment approaches of some of the largest hedge funds, its use has grown sharply.
Moreover, bankers and investors say, the strategies employed tend to be not only duplicable but broadly followed — the result being a packlike tendency that has helped increase market volatility and, for some hedge funds, has led to losses in the last month.
Wild swings in stock prices have become the norm as fears about the mortgage securities market have expanded into the broader markets. Last week, the Dow Jones industrial average was sharply higher on Monday and Wednesday, only to drop 387 points on Thursday, eventually ending the week about where it began.
A common thread has often been a rise or fall in prices late in the day, a pattern that many analysts attribute to computer models, which are driving a much larger volume of the trading.
Mr. Chan said this predilection for lemming-style buying or selling from investors using similar computer models could turn what would normally be a market setback into a wider contagion.
“If all the models say buy, who is going to say sell? There is just not enough money on the other side,” he said.
The problems of these quantitative funds mirror those of the hedge fund industry as a whole — many funds have seen sharp declines in the last couple of months as the credit markets have dried up. Some quantitative funds could potentially have their worst year on record.
Despite the large sums of money involved, ranging from $250 billion to $500 billion, according to industry estimates, the club of quantitative investors is a small, exclusive one that bridges the trading desks of investment banks and some of the country’s largest hedge funds.
One might call it six degrees of quantitative investing.
Clifford S. Asness, who has a Ph.D. in finance from the University of Chicago, is the founder of AQR Capital Management, a quantitative hedge fund that, according to investors, has had a 13 percent loss so far this month.
Mr. Asness is also a founder of Goldman Sachs’s troubled Global Alpha fund, which controls about $9 billion. The Alpha fund has suffered an 11 percent reversal this month, giving it a decline for the year that is approaching 30 percent, sparking speculation that Goldman would liquidate the fund. Goldman calls the speculation “categorically untrue.”
On a smaller scale, Tykhe Capital, another hedge fund that uses quantitative techniques, was down 19 percent in August. The founders of Tykhe are from D.E. Shaw & Company, the giant hedge fund that manages $35 billion via a broad reliance on quantitative, as well as other, strategies and whose founder, David E. Shaw, who has a Ph.D. from Stanford, originally came from Morgan Stanley.
Hedge funds as a whole have grown exponentially and now manage about $1.7 trillion, more than double the amount five years ago.
In one respect the swoon of these computer-reliant funds is the result of managers, who are faced with a deluge of investor money seeking accelerated returns, using their models to make higher risk market bets by following day-to-day trends. It is an approach that seems to run contrary to the original philosophy underlying a quantitative approach, called statistical arbitrage.
Narrowly defined, statistical arbitrage involves a fairly straightforward investment strategy, like the rapid-fire buying of one stock and the selling short of another so as to use the computer’s speed to identify and make money from even the most minute price discrepancies. Such a strategy will generally provide liquidity to the market by buying stocks on the way down and selling them short on the way up. In so doing, it provides a dose of calming, computerized sang-froid to markets in the grip of panic or euphoria.
But such strategies rarely promise high returns, so quantitative investors have broadened their computer models to include strategies for investing in more risky areas like mortgage-backed securities, derivatives and commodities.
“You can build a computer model for anything that is tradable,” Mr. Chan said. To some extent, that explains the outbreak of losses in these funds.
With many of these new assets being highly illiquid and with the funds themselves having used considerable amounts of borrowed money to enhance their returns, losses have been magnified as worried investors have demanded to pull their money out.
In a letter to investors this week, James H. Simons, the founder of Renaissance Technologies, the most highly regarded of the quantitative funds, gave voice to what he described as “unusual” market conditions. Mr. Simons, who received a Ph.D. in mathematics from the University of California, Berkeley, acknowledged what a difficult month August had been, with his RIEF down close to 9 percent for the month.
For an investor who reportedly earned $1.6 billion last year and whose flagship Medallion fund had an average annual return of over 30 percent since 1988, it was a surprising reversal.
“We cannot predict the duration of the current environment,” Mr. Simons wrote. “But usually such behavior causes first pain and then opportunity. Our basic plan is to stay the course.”
Sorting Through the Buyout Freezeout
By ANDREW ROSS SORKIN, New York Times, Sunday, August 12, 2007:
WELL, so much for the “slow leak” theory.
Now that the buyout boom has officially gone bust and the credit markets are in meltdown, it’s time to assess what went wrong — and what went really wrong. And, of course, to shower a bit of praise on those who got it right.
It is going to be a long August. Here are some talking points to get you through brunch in East Hampton, or if you just happen to run into Jimmy Cayne, the chairman of Bear Stearns, working off some subprime-related stress at the Hollywood Golf Club in New Jersey.
•
Again, Kohlberg Kravis Roberts has shown a remarkable knack for accelerating into the crash. The buyout giant has more “hung deals” — transactions that have been announced but not yet closed — than any other private equity firm out there, thanks in large part to its frenzied deal-making in the last few months. First Data and TXU are the biggies, and they are likely to cost the banks that lent Kohlberg Kravis the money dearly. (Banks agreed to lend Kohlberg Kravis $24 billion to acquire First Data and $37 billion for TXU). Kohlberg Kravis’s investors will likely be hit, too, as it increasingly looks as if the firm overpaid in these deals.
Just three months ago, at a conference in Halifax, Nova Scotia, Henry R. Kravis said we were in a “golden era” of buyouts. It is the kind of thing that people were saying in 1987 at the Predators’ Ball — Michael Milken’s annual junk-bond sales conference — just before Kohlberg Kravis bought RJR Nabisco, an investment that turned into a decade-long headache.
This time around, Kohlberg Kravis has again leaped headlong into a closing window, taking advantage of its ability to generate enormous fees on supersize deals, even if the returns are not going to be stellar.
Warren E. Buffett said last year at the annual meeting of Berkshire Hathaway that private equity’s long-term success, to the extent it has any, would not come from outsize returns. “They’ll make it on fees, fees, fees,” he said.
Speaking of closing windows, given the current state of the market, don’t hold your breath for Kohlberg Kravis’s planned initial public offering.
•
Handshake deals are causing some mighty sweaty palms. An idea has been floating around Wall Street, suggesting that private equity firms may try to walk away from deals and that some banks, on the hook for huge, underpriced loans, may try to push them to do it. (The banks would offer to pay the breakup fee, which would be cheaper than financing the deal.) The idea was initially pooh-poohed by private equity professionals because of the damage it would cause to their reputation.
“The next time David Bonderman or Henry Kravis wants to buy a company, the board could say, ‘Aren’t you the same guys who backed out of that other deal?’ ” a private equity executive said.
But look what’s happening now: A group of firms that bought Home Depot’s wholesale supply business for $10.3 billion is trying to renegotiate the price lower, and J. C. Flowers, a private equity firm that agreed to buy Sallie Mae, is threatening to back out of the deal. And those are just two deals where the negotiations are public. There are probably dozens more conversations going on privately. But what about that issue of reputational damage? Come on. Wall Street has a short memory.
•
How is this for irony? While the credit squeeze has crushed the life out of the buyout boom, guess who has quietly begun talking about buying up deal debt on the cheap? Yes, the buyout firms themselves. While the likes of Kohlberg Kravis are forcing big banks to uphold their commitment to lend money on deals like First Data at rates that will surely cause them losses, Kohlberg Kravis and others are exploring the prospect of buying some of that debt from the banks at discounted rates. The Apollo Group has already played the role of debt vulture, picking up some of the debt on the recent buyout of Thomson Learning that the Royal Bank of Scotland had been unable to offload at the initial rates, people involved in the deal said.
•
Who’s the biggest bully on Wall Street? For the last year or two, Cerberus Capital Management hasn’t made too many friends by often pushing banks to the brink on loan terms. Two weeks ago, however, Cerberus eased up, permitting JPMorgan Chase and the other banks backing its purchase of Chrysler to renegotiate the deal. The next time Cerberus needs a favor from Wall Street, it is likely to get it. Kohlberg Kravis, which hasn’t let up on its lenders so far, may want to take note.
•
The board of Alltel, which sold the company for about $27.5 billion in May to TPG Capital and Goldman Sachs, should take a bow. The board and its adviser, Merrill Lynch, were criticized for accepting a pre-emptive bid before hearing offers from other suitors, which were due in June as part of a full-fledged auction. Phew! Had they waited, there is a good possibility there would have been no deal at all.
•
While we’re handing out kudos, the independent directors of Cablevision look as if they deserve some. The company’s founding family, the Dolans, tried to buy out the company for a song twice, and the directors stopped them until the family ponied up a major premium. Even then, some investors felt shortchanged. Now, with markets in turmoil and Cablevision lowering its 2007 revenue projections, the deal may have been a boon for shareholders.
•
Speaking of timing, good or otherwise: Shouldn’t the private-equity-controlled Warner Music Group have entertained an offer this year to sell itself to EMI for $31 a share? Warner’s share price briefly dropped below $10 last week. Just asking.
•
Finally, the big question on Wall Street is this: Which heads will roll when the dust settles? There are a few candidates to consider. John J. Mack, the chief executive of Morgan Stanley, jumped into the buyout game with both feet at the worst possible moment. While some people have been calling for months for the ouster of Chuck Prince, the chairman of Citigroup, they could get their way if he is not able to offload some of the jumbo loans on his books.
And then there is a dark horse: the Goldman Sachs “it” boy, Lloyd C. Blankfein. He bet more on private equity than any of the other banks. The Citigroup analyst Prashant Bhatia says the firm has $20 billion of loan exposure, more than any other firm on the street. On top of that, Goldman’s private equity and hedge fund business has been in a world of hurt. Even its flagship Global Alpha fund is down significantly.
To be sure, each of these guys has experience riding out storms. A lot will depend on whether this is a summer squall or something more serious.
WELL, so much for the “slow leak” theory.
Now that the buyout boom has officially gone bust and the credit markets are in meltdown, it’s time to assess what went wrong — and what went really wrong. And, of course, to shower a bit of praise on those who got it right.
It is going to be a long August. Here are some talking points to get you through brunch in East Hampton, or if you just happen to run into Jimmy Cayne, the chairman of Bear Stearns, working off some subprime-related stress at the Hollywood Golf Club in New Jersey.
•
Again, Kohlberg Kravis Roberts has shown a remarkable knack for accelerating into the crash. The buyout giant has more “hung deals” — transactions that have been announced but not yet closed — than any other private equity firm out there, thanks in large part to its frenzied deal-making in the last few months. First Data and TXU are the biggies, and they are likely to cost the banks that lent Kohlberg Kravis the money dearly. (Banks agreed to lend Kohlberg Kravis $24 billion to acquire First Data and $37 billion for TXU). Kohlberg Kravis’s investors will likely be hit, too, as it increasingly looks as if the firm overpaid in these deals.
Just three months ago, at a conference in Halifax, Nova Scotia, Henry R. Kravis said we were in a “golden era” of buyouts. It is the kind of thing that people were saying in 1987 at the Predators’ Ball — Michael Milken’s annual junk-bond sales conference — just before Kohlberg Kravis bought RJR Nabisco, an investment that turned into a decade-long headache.
This time around, Kohlberg Kravis has again leaped headlong into a closing window, taking advantage of its ability to generate enormous fees on supersize deals, even if the returns are not going to be stellar.
Warren E. Buffett said last year at the annual meeting of Berkshire Hathaway that private equity’s long-term success, to the extent it has any, would not come from outsize returns. “They’ll make it on fees, fees, fees,” he said.
Speaking of closing windows, given the current state of the market, don’t hold your breath for Kohlberg Kravis’s planned initial public offering.
•
Handshake deals are causing some mighty sweaty palms. An idea has been floating around Wall Street, suggesting that private equity firms may try to walk away from deals and that some banks, on the hook for huge, underpriced loans, may try to push them to do it. (The banks would offer to pay the breakup fee, which would be cheaper than financing the deal.) The idea was initially pooh-poohed by private equity professionals because of the damage it would cause to their reputation.
“The next time David Bonderman or Henry Kravis wants to buy a company, the board could say, ‘Aren’t you the same guys who backed out of that other deal?’ ” a private equity executive said.
But look what’s happening now: A group of firms that bought Home Depot’s wholesale supply business for $10.3 billion is trying to renegotiate the price lower, and J. C. Flowers, a private equity firm that agreed to buy Sallie Mae, is threatening to back out of the deal. And those are just two deals where the negotiations are public. There are probably dozens more conversations going on privately. But what about that issue of reputational damage? Come on. Wall Street has a short memory.
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How is this for irony? While the credit squeeze has crushed the life out of the buyout boom, guess who has quietly begun talking about buying up deal debt on the cheap? Yes, the buyout firms themselves. While the likes of Kohlberg Kravis are forcing big banks to uphold their commitment to lend money on deals like First Data at rates that will surely cause them losses, Kohlberg Kravis and others are exploring the prospect of buying some of that debt from the banks at discounted rates. The Apollo Group has already played the role of debt vulture, picking up some of the debt on the recent buyout of Thomson Learning that the Royal Bank of Scotland had been unable to offload at the initial rates, people involved in the deal said.
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Who’s the biggest bully on Wall Street? For the last year or two, Cerberus Capital Management hasn’t made too many friends by often pushing banks to the brink on loan terms. Two weeks ago, however, Cerberus eased up, permitting JPMorgan Chase and the other banks backing its purchase of Chrysler to renegotiate the deal. The next time Cerberus needs a favor from Wall Street, it is likely to get it. Kohlberg Kravis, which hasn’t let up on its lenders so far, may want to take note.
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The board of Alltel, which sold the company for about $27.5 billion in May to TPG Capital and Goldman Sachs, should take a bow. The board and its adviser, Merrill Lynch, were criticized for accepting a pre-emptive bid before hearing offers from other suitors, which were due in June as part of a full-fledged auction. Phew! Had they waited, there is a good possibility there would have been no deal at all.
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While we’re handing out kudos, the independent directors of Cablevision look as if they deserve some. The company’s founding family, the Dolans, tried to buy out the company for a song twice, and the directors stopped them until the family ponied up a major premium. Even then, some investors felt shortchanged. Now, with markets in turmoil and Cablevision lowering its 2007 revenue projections, the deal may have been a boon for shareholders.
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Speaking of timing, good or otherwise: Shouldn’t the private-equity-controlled Warner Music Group have entertained an offer this year to sell itself to EMI for $31 a share? Warner’s share price briefly dropped below $10 last week. Just asking.
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Finally, the big question on Wall Street is this: Which heads will roll when the dust settles? There are a few candidates to consider. John J. Mack, the chief executive of Morgan Stanley, jumped into the buyout game with both feet at the worst possible moment. While some people have been calling for months for the ouster of Chuck Prince, the chairman of Citigroup, they could get their way if he is not able to offload some of the jumbo loans on his books.
And then there is a dark horse: the Goldman Sachs “it” boy, Lloyd C. Blankfein. He bet more on private equity than any of the other banks. The Citigroup analyst Prashant Bhatia says the firm has $20 billion of loan exposure, more than any other firm on the street. On top of that, Goldman’s private equity and hedge fund business has been in a world of hurt. Even its flagship Global Alpha fund is down significantly.
To be sure, each of these guys has experience riding out storms. A lot will depend on whether this is a summer squall or something more serious.
Wednesday, August 08, 2007
August Bust: First Signs of M&A Slowdown
WSJ Deal Journal, August 7, 2007, 5:08 pm:
August may turn out to be the cruelest month for the M&A business.
According to Thomson Financial, this has been the slowest August so far for deals in four years. There have been 170 announced, with a total value of $13.2 billion. That compares with 236 deals with a total value of $19.6 billion a year earlier. The last time deal activity was so slow in this period was 2003, when deal makers struck 146 deals valued at $8.3 billion. (It may not be a coincidence that most bankers date the start of the mergers-and-acquisitions boom that now may be in its death throes to some time in 2003.)
As we pointed out in this post last week, the tremors rippling through the credit and stock markets hadn’t shaken the deal market as of July, when companies and private-equity firms world-wide struck $544 billion of deals. That was more than double the year-earlier total.
Of course, one week does not an M&A slowdown make. Still, few deal watchers think an LBO with an 11-digit headline (at least $10 billion) is a possibility with the financing markets in their current state. So it is hard to imagine the early August returns aren’t a signal of more of the same to come. If nothing else, it is almost certain that deal activity won’t maintain the scorching pace of earlier in the year. With deals like Virgin Media and the $15 billion sale of Cadbury Schweppes’ U.S. drinks business getting sidelined, how could it not?
August may turn out to be the cruelest month for the M&A business.
According to Thomson Financial, this has been the slowest August so far for deals in four years. There have been 170 announced, with a total value of $13.2 billion. That compares with 236 deals with a total value of $19.6 billion a year earlier. The last time deal activity was so slow in this period was 2003, when deal makers struck 146 deals valued at $8.3 billion. (It may not be a coincidence that most bankers date the start of the mergers-and-acquisitions boom that now may be in its death throes to some time in 2003.)
As we pointed out in this post last week, the tremors rippling through the credit and stock markets hadn’t shaken the deal market as of July, when companies and private-equity firms world-wide struck $544 billion of deals. That was more than double the year-earlier total.
Of course, one week does not an M&A slowdown make. Still, few deal watchers think an LBO with an 11-digit headline (at least $10 billion) is a possibility with the financing markets in their current state. So it is hard to imagine the early August returns aren’t a signal of more of the same to come. If nothing else, it is almost certain that deal activity won’t maintain the scorching pace of earlier in the year. With deals like Virgin Media and the $15 billion sale of Cadbury Schweppes’ U.S. drinks business getting sidelined, how could it not?
Tuesday, August 07, 2007
VENTURE CAPITAL INVESTMENT VOLUME IN Q2 2007
WASHINGTON, D.C., August 7, 2007 – Venture capitalists invested $7.1 billion in 977 deals in the second quarter of 2007 -- the highest level of deals reported in a quarter since Q3 2001 -- according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data by Thomson Financial. The quarterly strength in the number of deals was driven by companies in the Seed and Early stages of development, which increased by 31 percent from the prior quarter.
“The data implies good news all around for the venture capital industry which has been extremely active in doing what we do best -- building companies from the ground up,” said Mark Heesen, president of the National Venture Capital Association. “Not only does the increase in Seed and Early stage deals demonstrate the number of young, promising opportunities available, but the diversity of investment strongly suggests that the prospects for innovation are all around us. The industry is not relying on one particular sector for deals. Even better, dollars invested are holding steady or even declining, suggesting that venture capitalists are being very measured about how much money they invest per company.”
You can get the press release and detailed data here.
“The data implies good news all around for the venture capital industry which has been extremely active in doing what we do best -- building companies from the ground up,” said Mark Heesen, president of the National Venture Capital Association. “Not only does the increase in Seed and Early stage deals demonstrate the number of young, promising opportunities available, but the diversity of investment strongly suggests that the prospects for innovation are all around us. The industry is not relying on one particular sector for deals. Even better, dollars invested are holding steady or even declining, suggesting that venture capitalists are being very measured about how much money they invest per company.”
You can get the press release and detailed data here.
Monday, August 06, 2007
High-Yield Goes on Holiday
WSJ Deal Journal, August 6, 2007, 11:34 am
Posted by Dana Cimilluca
For a little perspective on the impact market turmoil is having on borrowers’ ability to raise cash in the high-yield loan and bond markets, consider the following from Thomson Financial.
No U.S. company has raised funds in the high-yield market since July 26th, either to finance a takeover or to trade in existing debt for new paper. That is six trading sessions and counting. The last time there was a drought that long was the holiday period of Dec. 20 of last year to Jan. 8.
New high-yield issuance since the end of June totals just $2.43 billion. That compares with a first-half total of $97 billion. At the current pace, second-half issuance would be roughly one-tenth what it was in the first six months of 2007.
The last U.S. acquisition to exceed $20 billion was Blackstone Group’s $27 billion bid for Hilton Hotels (including debt) on July 3rd.
A little more than a month may not seem like a long time, but given the rapid-fire deal making private-equity firms had gotten us used to, it starts to seem like a long time. No one expects that clock to stop ticking any time soon. The narrow slit of an opening in the funding window raises again the question of how in the world all the pending buyouts (First Data, TXU, Alltel, Harrah’s, SLM to name a few) are going to get funding in the market. Also, how much longer can the default rate stay down with shaky companies forced to stand on their own two feet?
Posted by Dana Cimilluca
For a little perspective on the impact market turmoil is having on borrowers’ ability to raise cash in the high-yield loan and bond markets, consider the following from Thomson Financial.
No U.S. company has raised funds in the high-yield market since July 26th, either to finance a takeover or to trade in existing debt for new paper. That is six trading sessions and counting. The last time there was a drought that long was the holiday period of Dec. 20 of last year to Jan. 8.
New high-yield issuance since the end of June totals just $2.43 billion. That compares with a first-half total of $97 billion. At the current pace, second-half issuance would be roughly one-tenth what it was in the first six months of 2007.
The last U.S. acquisition to exceed $20 billion was Blackstone Group’s $27 billion bid for Hilton Hotels (including debt) on July 3rd.
A little more than a month may not seem like a long time, but given the rapid-fire deal making private-equity firms had gotten us used to, it starts to seem like a long time. No one expects that clock to stop ticking any time soon. The narrow slit of an opening in the funding window raises again the question of how in the world all the pending buyouts (First Data, TXU, Alltel, Harrah’s, SLM to name a few) are going to get funding in the market. Also, how much longer can the default rate stay down with shaky companies forced to stand on their own two feet?
Thursday, August 02, 2007
Venture fundraising down at halftime
A new report from Dow Jones VentureOne reveals that U.S. venture firms have raised less capital during the first half of 2007 than in any other six-month period in almost four years.
Venture funds in the U.S. totaling $6.36 billion were closed between Jan. 1 and June 30, 2007, almost exactly half the dollar amount raised during the same period the previous year. Although fundraising tends to fluctuate from quarter to quarter, the numbers were fairly consistent in early 2007, with funds raising $3.13 billion in the first quarter and $3.22 billion in the second.
The half-year total puts fundraising on a pace well behind last year's, when a total of $24.73 billion was raised over 12 months.
The 32 funds closed thus far in 2007 also represent diminished activity compared to last year. In 2006, a total of 98 funds were raised, including 46 in the first half of the year.
Venture funds in the U.S. totaling $6.36 billion were closed between Jan. 1 and June 30, 2007, almost exactly half the dollar amount raised during the same period the previous year. Although fundraising tends to fluctuate from quarter to quarter, the numbers were fairly consistent in early 2007, with funds raising $3.13 billion in the first quarter and $3.22 billion in the second.
The half-year total puts fundraising on a pace well behind last year's, when a total of $24.73 billion was raised over 12 months.
The 32 funds closed thus far in 2007 also represent diminished activity compared to last year. In 2006, a total of 98 funds were raised, including 46 in the first half of the year.
Wednesday, August 01, 2007
SEC looking at sovereign wealth funds
Chairman questions funds' motives during Senate hearing
By Robert Schroeder, MarketWatch
Last Update: 11:49 AM ET Jul 31, 2007
WASHINGTON (MarketWatch) -- Securities regulators are "grappling with" the rising prominence of sovereign wealth funds, the chairman of the Securities and Exchange Commission told a Senate panel Tuesday as he questioned the motives of funds' investment decisions.
SEC Chairman Christopher Cox told a Senate Banking Committee hearing that these funds, which are government investment vehicles funded by foreign-exchange assets, pose challenges to the U.S. regulatory system.
Sovereign wealth funds are "significantly less transparent" than hedge funds, Cox noted.
The SEC chief said the growing governmental and potentially political influence over capital market flows that the sovereign wealth funds portend "presents challenges to a regulatory system premised on free markets, the free flow of information and investor incentives based on profit and loss."
During a question-and-answer session with senators, Cox said motives for investment decisions may "go beyond profit and loss."
The value of the funds could reach $12 trillion by 2015, up from $2.5 trillion now and dwarfing hedge funds' value.
The foreign-exchange assets in such funds are managed separately from the official reserves of a country's monetary authorities, Cox said.
Robert Schroeder is a reporter for MarketWatch in Washington.
By Robert Schroeder, MarketWatch
Last Update: 11:49 AM ET Jul 31, 2007
WASHINGTON (MarketWatch) -- Securities regulators are "grappling with" the rising prominence of sovereign wealth funds, the chairman of the Securities and Exchange Commission told a Senate panel Tuesday as he questioned the motives of funds' investment decisions.
SEC Chairman Christopher Cox told a Senate Banking Committee hearing that these funds, which are government investment vehicles funded by foreign-exchange assets, pose challenges to the U.S. regulatory system.
Sovereign wealth funds are "significantly less transparent" than hedge funds, Cox noted.
The SEC chief said the growing governmental and potentially political influence over capital market flows that the sovereign wealth funds portend "presents challenges to a regulatory system premised on free markets, the free flow of information and investor incentives based on profit and loss."
During a question-and-answer session with senators, Cox said motives for investment decisions may "go beyond profit and loss."
The value of the funds could reach $12 trillion by 2015, up from $2.5 trillion now and dwarfing hedge funds' value.
The foreign-exchange assets in such funds are managed separately from the official reserves of a country's monetary authorities, Cox said.
Robert Schroeder is a reporter for MarketWatch in Washington.
Monday, July 30, 2007
Cedar Fair in Takeover Talks
New York Post Exclusive, by Peter Lauria, July 30, 2007:
Cedar Fair Entertainment Co., the nation's third-largest theme-park operator, has entered into quick-moving talks with investment firm Destiny Capital Solutions about a $4.1 billion takeover, The Post has learned.
The Post broke the news three weeks ago that Cedar Fair was reaching out to private-equity firms to gauge their interest in a buyout on the condition that the company's management team remained in place.
That's a caveat Destiny Capital is willing to accept, with a spokesman for the firm saying that it has agreed to keep Cedar Fair CEO Richard Kinzel, 66, and other managers in place for a period of time, should a deal be reached.
While the talks with Destiny Capital are at an early stage and could break down, and while other bidders could emerge, the spokesman said the two sides have had constructive negotiations since first making contact two weeks ago.
The deal Destiny Capital proposed calls for paying $4.1 billion, or a 20 percent premium over Cedar Fair's current market value, to acquire all of the theme-park operator's shares.
The firm also said it plans to commit at least $500 million, and as much as $800 million, to upgrade Cedar Fair's 12 amusement parks, six water parks and six hotels, which include Knott's Berry Farm in California and Star Trek: The Experience in Las Vegas. Only Disney and Six Flags are bigger players in the theme-park world.
Cedar Fair Entertainment Co., the nation's third-largest theme-park operator, has entered into quick-moving talks with investment firm Destiny Capital Solutions about a $4.1 billion takeover, The Post has learned.
The Post broke the news three weeks ago that Cedar Fair was reaching out to private-equity firms to gauge their interest in a buyout on the condition that the company's management team remained in place.
That's a caveat Destiny Capital is willing to accept, with a spokesman for the firm saying that it has agreed to keep Cedar Fair CEO Richard Kinzel, 66, and other managers in place for a period of time, should a deal be reached.
While the talks with Destiny Capital are at an early stage and could break down, and while other bidders could emerge, the spokesman said the two sides have had constructive negotiations since first making contact two weeks ago.
The deal Destiny Capital proposed calls for paying $4.1 billion, or a 20 percent premium over Cedar Fair's current market value, to acquire all of the theme-park operator's shares.
The firm also said it plans to commit at least $500 million, and as much as $800 million, to upgrade Cedar Fair's 12 amusement parks, six water parks and six hotels, which include Knott's Berry Farm in California and Star Trek: The Experience in Las Vegas. Only Disney and Six Flags are bigger players in the theme-park world.
Friday, July 27, 2007
Pop Goes the Buyout Bubble
Hear that sound? That was the private-equity bubble finally getting pricked on Thursday, as the market for debt -- the jet fuel that had propelled it to dizzying heights -- slammed shut.The stock market plummeted 311 points as investors erased the takeover premiums that had increasingly propped up share prices for dozens of companies that had been considered buyout targets. The buyout frenzy also helped fuel the large profits made by investment banks and gave companies access to easy money, which was often used to buy back stock.Among the hardest hit stocks was one of the buyout management firms that had managed to go public. Shares of the Fortress Investment Group dropped more than 6 percent, to $19.31. The Blackstone Group fell as much as 8 percent during the day but finished up 19 cents, at $25.70. It went public last month at $31.Some analysts yesterday openly speculated that Kohlberg Kravis Roberts should pull its initial public offering.
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Wednesday, July 25, 2007
Chrysler Throws Salt in Citigroup’s Wounds
Citigroup is one of the banks that will, at least temporarily, be left holding the bag after investors took a pass on the sale of $10 billion of loans at Chrysler’s auto unit for the company’s leveraged buyout. (The others include J.P. Morgan Chase, Goldman Sachs Group, Bear Stearns and Morgan Stanley.)
It’s the biggest chunk of paper forced on investment banks since debt- buyers decided last month to stop financing buyouts with easy terms. It isn’t good news for either the banks or the buyout firms. There will come a point, if we aren’t there already, when banks refuse to make new loan commitments. That’s because they’re too occupied getting rapidly- accumulating paper off their books. (The giant Alliance Boots deal in Europe also is now headed down the same path — though Citigroup doesn’t appear to have a primary role there.)
Chatter among investment bankers lately has focused on Citigroup, which is said to be clamping down especially hard on making new loans. Indeed, according too this story in the Financial Times today, Citigroup could pull the plug on financing for the buyout of EMI, which would be “suicidal” for its relationships with clients, the paper quotes one source.
Citi has the misfortune of having been involved in a lot of the buyout loans that have soured lately, including Allison Transmission, U.S. Foodservice, Dollar General and ServiceMaster. It also has a role in three of the coming megadeals that still need to be financed: First Data, TXU and Clear Channel Communications. Investors are taking notice. Citi’s stock is down 12% this year, even after it reported better-than-expected second-quarter earnings last week, compared with a 7% decline for J.P. Morgan’s stock.
It’s the biggest chunk of paper forced on investment banks since debt- buyers decided last month to stop financing buyouts with easy terms. It isn’t good news for either the banks or the buyout firms. There will come a point, if we aren’t there already, when banks refuse to make new loan commitments. That’s because they’re too occupied getting rapidly- accumulating paper off their books. (The giant Alliance Boots deal in Europe also is now headed down the same path — though Citigroup doesn’t appear to have a primary role there.)
Chatter among investment bankers lately has focused on Citigroup, which is said to be clamping down especially hard on making new loans. Indeed, according too this story in the Financial Times today, Citigroup could pull the plug on financing for the buyout of EMI, which would be “suicidal” for its relationships with clients, the paper quotes one source.
Citi has the misfortune of having been involved in a lot of the buyout loans that have soured lately, including Allison Transmission, U.S. Foodservice, Dollar General and ServiceMaster. It also has a role in three of the coming megadeals that still need to be financed: First Data, TXU and Clear Channel Communications. Investors are taking notice. Citi’s stock is down 12% this year, even after it reported better-than-expected second-quarter earnings last week, compared with a 7% decline for J.P. Morgan’s stock.
Postponements worsen loan glut
From the Deal.com, July 25, 2007:
By avoiding the pain of the debt financing markets now, are issuers who are delaying their deals only making matters worse for themselves when they finally do come to market?
That is the fear of some market participants as more and more companies, faced with a precarious loan market, postpone debt financings until after Labor Day. The postponements are adding to an already-large and growing pipeline of debt at a time when demand — in the form of collateralized loan obligation funds — has fallen off dramatically.
By avoiding the pain of the debt financing markets now, are issuers who are delaying their deals only making matters worse for themselves when they finally do come to market?
That is the fear of some market participants as more and more companies, faced with a precarious loan market, postpone debt financings until after Labor Day. The postponements are adding to an already-large and growing pipeline of debt at a time when demand — in the form of collateralized loan obligation funds — has fallen off dramatically.
Merger season heats up
From The Deal.com, July 25, 2007:
If the past two years are any guide, August should be one of this year's busiest months for mergers.
According to the Federal Trade Commission's latest report to Congress, filed Tuesday, July 24, 186 mergers were reported to the government last August, more than any other month in the last fiscal year. In the prior year, August missed the top spot by only one, with 170 companies telling the government they were getting ready to make an acquisition.
One reason for August's popularity: That's the latest companies can request government approval for a deal and expect to get a decision in time to close the merger by the end of the calendar year.
If the past two years are any guide, August should be one of this year's busiest months for mergers.
According to the Federal Trade Commission's latest report to Congress, filed Tuesday, July 24, 186 mergers were reported to the government last August, more than any other month in the last fiscal year. In the prior year, August missed the top spot by only one, with 170 companies telling the government they were getting ready to make an acquisition.
One reason for August's popularity: That's the latest companies can request government approval for a deal and expect to get a decision in time to close the merger by the end of the calendar year.
Monday, July 23, 2007
New state law aims to make Ohio more business friendly
Cincinnati Business Courier - July 19, 2007
Gov. Ted Strickland signed a law Thursday designed to make Ohio a more competitive place for public companies and encourage all businesses to reside in the state.
The law, known as House Bill 134, will become effective Jan. 1, 2008, and give corporations the opportunity to use majority voting instead of plurality voting for its board of directors.
Under majority voting, directors can be elected by affirmative votes from a majority of shares eligible to be voted at a meeting.
Plurality gives voters two voting choices, "for" or "withheld" and only "for" votes are counted. This outcome allows someone to be elected on only one "for" vote.
"This bill builds on the successes of our prior corporate modernization legislation from last year, and helps Ohio-incorporated entities remain here by giving shareholders the voting rights they are increasingly demanding," said Ohio House Majority Whip Bill Seitz, R-Cincinnati, in a press release.
Other states that already allow majority voting include California, Delaware, Florida, Illinois and Michigan.
State Sen. David Goodman, R-Columbus, chair of the Senate Judiciary and Civil Justice Committee and one of the bill's cosponsors, said many Ohio-based companies had received shareholder proposals demanding re-location outside of the state for lack of majority voting.
Gov. Ted Strickland signed a law Thursday designed to make Ohio a more competitive place for public companies and encourage all businesses to reside in the state.
The law, known as House Bill 134, will become effective Jan. 1, 2008, and give corporations the opportunity to use majority voting instead of plurality voting for its board of directors.
Under majority voting, directors can be elected by affirmative votes from a majority of shares eligible to be voted at a meeting.
Plurality gives voters two voting choices, "for" or "withheld" and only "for" votes are counted. This outcome allows someone to be elected on only one "for" vote.
"This bill builds on the successes of our prior corporate modernization legislation from last year, and helps Ohio-incorporated entities remain here by giving shareholders the voting rights they are increasingly demanding," said Ohio House Majority Whip Bill Seitz, R-Cincinnati, in a press release.
Other states that already allow majority voting include California, Delaware, Florida, Illinois and Michigan.
State Sen. David Goodman, R-Columbus, chair of the Senate Judiciary and Civil Justice Committee and one of the bill's cosponsors, said many Ohio-based companies had received shareholder proposals demanding re-location outside of the state for lack of majority voting.
Thursday, July 19, 2007
Why the M&A Boom May Continue
WSJ Deal Journal, July 19, 2007, 11:31 am
Posted by Dana Cimilluca
M&A partiers may get their curfews extended.
Deal Journal popped over to the downtown Manhattan offices of Thomson Financial this morning to hear presentations from a couple of its analysts, Matthew Toole and Robert Keiser, on the state of the red hot mergers-and-acquisitions and private-equity markets. We heard some strong evidence for why all may not be doom and gloom for deal makers.
Exhibit A is the relationship between M&A activity and GDP growth. According to Keiser, a vice president in Thomson’s Proprietary Research group, there is a 67% correlation between the two going back to 1990. Though the economy may be slowing a bit, it’s still growing at a healthy clip of roughly 3%. Additionally, M&A accounts for just 4% of GDP now, down from 7% in 1999, at the height of the Internet bubble, Thomson says. That suggests there might be further room for growth.
Exhibit B is cash. Fourteen straight quarters of earnings increases “has put a tremendous amount of cash on the balance sheets of S&P 500 companies,” says Keiser. Companies have nearly $3 trillion of cash, even after all the increased spending on share buybacks and the like, up from just $500 billion in 1994. Even if tighter credit markets slow down private-equity takeovers, corporations, which still account for most M&A activity, could pick up the slack using all that coin.
Exhibit C is stock prices. Although stocks have been on a tear the past few years, the average expected earnings multiple on the S&P 500 is still just about 15 times, in line with the 20-year average. Since M&A tends to move in lockstep with stock prices, the idea that stocks aren’t overvalued may mean that M&A volume isn’t on the verge of falling off a cliff either.
Posted by Dana Cimilluca
M&A partiers may get their curfews extended.
Deal Journal popped over to the downtown Manhattan offices of Thomson Financial this morning to hear presentations from a couple of its analysts, Matthew Toole and Robert Keiser, on the state of the red hot mergers-and-acquisitions and private-equity markets. We heard some strong evidence for why all may not be doom and gloom for deal makers.
Exhibit A is the relationship between M&A activity and GDP growth. According to Keiser, a vice president in Thomson’s Proprietary Research group, there is a 67% correlation between the two going back to 1990. Though the economy may be slowing a bit, it’s still growing at a healthy clip of roughly 3%. Additionally, M&A accounts for just 4% of GDP now, down from 7% in 1999, at the height of the Internet bubble, Thomson says. That suggests there might be further room for growth.
Exhibit B is cash. Fourteen straight quarters of earnings increases “has put a tremendous amount of cash on the balance sheets of S&P 500 companies,” says Keiser. Companies have nearly $3 trillion of cash, even after all the increased spending on share buybacks and the like, up from just $500 billion in 1994. Even if tighter credit markets slow down private-equity takeovers, corporations, which still account for most M&A activity, could pick up the slack using all that coin.
Exhibit C is stock prices. Although stocks have been on a tear the past few years, the average expected earnings multiple on the S&P 500 is still just about 15 times, in line with the 20-year average. Since M&A tends to move in lockstep with stock prices, the idea that stocks aren’t overvalued may mean that M&A volume isn’t on the verge of falling off a cliff either.
Wednesday, July 18, 2007
Credit Woes Dampen Deal Makers’ Spirits
Investment bankers, a notoriously overconfident lot, are starting to get a little insecure.
Of the more than 1,000 bankers, lawyers, private-equity executives and corporate deal making types surveyed by the Association for Corporate Growth and Thomson Financial, a full 68% believe the credit markets that have fueled the M&A boom will be worse a year from now. On a separate but related question, the biggest group (37%) listed higher interest rates as the biggest challenge to continued growth in merger activity.
Of the more than 1,000 bankers, lawyers, private-equity executives and corporate deal making types surveyed by the Association for Corporate Growth and Thomson Financial, a full 68% believe the credit markets that have fueled the M&A boom will be worse a year from now. On a separate but related question, the biggest group (37%) listed higher interest rates as the biggest challenge to continued growth in merger activity.
Friday, July 13, 2007
House: Tighten Rules for Private Equity I.P.O.'s
House hearings on regulating private equity investments moved forward this week with Rep. Dennis Kucinich blaming the Securities and Exchange Commission Wednesday for failing to classify the Blackstone Group as an investment company prior to Blackstone’s initial public offering. As a growing number of private equity firms contemplate going public, Mr. Kucinich seeks to tighten regulations so private equity stocks are treated more like mutual funds, required to disclose more information about their holdings, empower independent boards of directors and to cap debt loads. Blackstone’s public offering last month raised $4 billion while critics, including organized labor, argued that the company failed to allow sufficient transparency. Several other private equity firms, including Kohlberg Kravis Roberts & Co. and Och-Ziff Capital Management LLP are preparing to go public later this year.
Preliminary Postseason Report
By L. Reed Walton, Staff Writer, ISS Governance Weekly:
Looking back at the 2007 U.S. proxy season, two themes come to mind: accountability and engagement.
Shareholders gave strong support for proposals that seek greater board accountability, such as those seeking annual investor votes on executive pay and majority voting in director elections.
At the same time, investors withdrew more than half of their proposals on majority voting and stock option reforms after negotiations with companies. These withdrawals suggest that companies are becoming willing to engage with shareholders on certain issues.
Pay-related proposals received the most attention this season; more than 40 proposals that request an annual advisory vote on compensation--or “say on pay”--were voted on. Investors withdrew six resolutions; most of those withdrawals were at firms that agreed to join a new investor-issuer working group on pay votes.
Looking back at the 2007 U.S. proxy season, two themes come to mind: accountability and engagement.
Shareholders gave strong support for proposals that seek greater board accountability, such as those seeking annual investor votes on executive pay and majority voting in director elections.
At the same time, investors withdrew more than half of their proposals on majority voting and stock option reforms after negotiations with companies. These withdrawals suggest that companies are becoming willing to engage with shareholders on certain issues.
Pay-related proposals received the most attention this season; more than 40 proposals that request an annual advisory vote on compensation--or “say on pay”--were voted on. Investors withdrew six resolutions; most of those withdrawals were at firms that agreed to join a new investor-issuer working group on pay votes.
Congress Tightens Exon-Florio 'National Security' Reviews of Foreign Investment in the United States,"
On Wednesday, Congress passed the "Foreign Investment and National Security Act of 2007" to formalize and tighten the process for reviews of foreign acquisitions of businesses in the US that raise potential national security concerns. The new Act amends the "Exon-Florio Amendment to the Defense Production Act" and codifies - as well as extends - recent trends toward more stringent review of foreign acquisitions by the Committee on Foreign Investment (CFIUS), which is an interagency committee chaired by the Treasury Secretary and composed of various representatives of the executive branch. There are also enhanced Congressional reporting requirements.
The new Act cleans up many of the provisions of earlier proposals considered problematic by the business community.
The new Act cleans up many of the provisions of earlier proposals considered problematic by the business community.
Thursday, July 12, 2007
Delaware Chancery Court Playing Tough With Companies Going Private
In recent back-to-back opinions, the Court has criticized two publicly listed companies that have agreed to sell themselves to private investors. The rulings expressed concern that Topps Co. and Lear Corp. hadn’t disclosed enough information to shareholders about possible incentives the companies’ managements may have to agree to the deals. According to the story, the decisions, both authored by the colorful Vice Chancellor Leo E. Strine, Jr., could slow the pace of some transactions given the five-judge Court’s influence in corporate-governance issues and takeover disputes.
In the case of Lear, an auto-parts maker that billionaire financier Carl Icahn is seeking to buy for $2.9 billion, Strine faulted the company’s board for letting its Chief Executive, Robert Rossiter, negotiate the deal with Icahn on his own. In the case of Topps, Strine ruled that the company should have been more forthcoming about an agreement with its suitor to retain Topps’s management.
In the case of Lear, an auto-parts maker that billionaire financier Carl Icahn is seeking to buy for $2.9 billion, Strine faulted the company’s board for letting its Chief Executive, Robert Rossiter, negotiate the deal with Icahn on his own. In the case of Topps, Strine ruled that the company should have been more forthcoming about an agreement with its suitor to retain Topps’s management.
Wednesday, July 11, 2007
Plaintiffs Take a Break: Securities Class Action Litigation Remains Low
The Corporate Counsel Net blog, July 11, 2007:
The latest study from Stanford’s Securities Class Action Clearinghouse and Cornerstone Research finds that securities class action filings remain at historically low levels in the first six months of 2007, with only 59 filings made in courts nationwide. We have posted a copy of this study, along with other securities litigation studies, in our "Securities Litigation" Practice Area.
While the study notes that filing activity was up slightly compared to 53 filings in the same period last year, the overall trend for the past two years has been surprisingly low filing rates when compared to historical averages. The types of allegations made in the filings for the first half of 2007 remained relatively steady, with 92% of cases alleging misrepresentations in financial documents (unchanged from 2006), and a slight drop-off in the number of cases alleging false forward looking statements at 64% of all cases (down from 72% in 2006). Among the new developments noted in the study is that there have been at least 3 filings so far this year with allegations relating to the meltdown in the subprime mortgage market.
The obvious question is: are we living in a brave new world where directors and executive officers of public companies have less to fear from securities class action lawsuits? The Securities Class Action Clearinghouse/Cornerstone Research study examines two possible hypotheses for explaining the recent trends, citing the stepped-up SEC and Justice Department as deterring fraud and the overall strength and low volatility of the stock market as providing little reason to sue. Professor Joseph Grundfest of Stanford states his opinion that “increased enforcement activity and a heightened awareness among corporate insiders may have led to a permanent shift in the incidence of securities fraud litigation.” On the other hand, John Gould of Cornerstone Research notes in the study that he “would not be surprised to see filings move back to the 200 per year level if the stock market were to weaken.” I suspect that the market hypothesis may be the stronger of the two for explaining the most recent trends – any observer of the federal securities laws could attest to the fact that the regulatory zeal of the government and the litigiousness of investors each swing with the overall strength or weakness of the markets and the broader economy.
Further, class actions only tell part of the story. As noted in this recent PricewaterhouseCoopers 2006 Securities Litigation Study, the recent options backdating scandal demonstrates that even when federal securities class actions may not be attractive because there is little in the way of potential damages to recover, shareholders still opt to express their disapproval in court by filing state derivative actions. Further, while the number of securities class action cases remains relatively low, the PwC study notes that settlement costs remained high at a whopping $6.17 billion in 2006, which was down 20% from $7.67 billion in 2005.
Is There a Milberg Weiss Effect?
In the Securities Class Action Clearinghouse/Cornerstone Research study, Professor Grundfest rejects the notion that the recent downtick in securities class action filings is attributable to a chilling effect from the indictment of legendary plaintiffs’ firm Milberg Weiss & Bershad. I guess that remains to be seen, as the controversy around the practices of Milberg Weiss and its principals continues to play out. Earlier this week, the US Attorney for the Central District of California announced that name partner David Bershad agreed to plead guilty to a federal conspiracy charge. Under the plea deal, Bershad will forfeit $7.75 million, pay a fine of $250,000 and cooperate with the government’s efforts to prosecute the other participants in the alleged conspiracy. Along with Bershad, one of the former Milberg Weiss named plaintiffs Steven Cooperman also agreed to plead guilty to a conspiracy charge.
The latest study from Stanford’s Securities Class Action Clearinghouse and Cornerstone Research finds that securities class action filings remain at historically low levels in the first six months of 2007, with only 59 filings made in courts nationwide. We have posted a copy of this study, along with other securities litigation studies, in our "Securities Litigation" Practice Area.
While the study notes that filing activity was up slightly compared to 53 filings in the same period last year, the overall trend for the past two years has been surprisingly low filing rates when compared to historical averages. The types of allegations made in the filings for the first half of 2007 remained relatively steady, with 92% of cases alleging misrepresentations in financial documents (unchanged from 2006), and a slight drop-off in the number of cases alleging false forward looking statements at 64% of all cases (down from 72% in 2006). Among the new developments noted in the study is that there have been at least 3 filings so far this year with allegations relating to the meltdown in the subprime mortgage market.
The obvious question is: are we living in a brave new world where directors and executive officers of public companies have less to fear from securities class action lawsuits? The Securities Class Action Clearinghouse/Cornerstone Research study examines two possible hypotheses for explaining the recent trends, citing the stepped-up SEC and Justice Department as deterring fraud and the overall strength and low volatility of the stock market as providing little reason to sue. Professor Joseph Grundfest of Stanford states his opinion that “increased enforcement activity and a heightened awareness among corporate insiders may have led to a permanent shift in the incidence of securities fraud litigation.” On the other hand, John Gould of Cornerstone Research notes in the study that he “would not be surprised to see filings move back to the 200 per year level if the stock market were to weaken.” I suspect that the market hypothesis may be the stronger of the two for explaining the most recent trends – any observer of the federal securities laws could attest to the fact that the regulatory zeal of the government and the litigiousness of investors each swing with the overall strength or weakness of the markets and the broader economy.
Further, class actions only tell part of the story. As noted in this recent PricewaterhouseCoopers 2006 Securities Litigation Study, the recent options backdating scandal demonstrates that even when federal securities class actions may not be attractive because there is little in the way of potential damages to recover, shareholders still opt to express their disapproval in court by filing state derivative actions. Further, while the number of securities class action cases remains relatively low, the PwC study notes that settlement costs remained high at a whopping $6.17 billion in 2006, which was down 20% from $7.67 billion in 2005.
Is There a Milberg Weiss Effect?
In the Securities Class Action Clearinghouse/Cornerstone Research study, Professor Grundfest rejects the notion that the recent downtick in securities class action filings is attributable to a chilling effect from the indictment of legendary plaintiffs’ firm Milberg Weiss & Bershad. I guess that remains to be seen, as the controversy around the practices of Milberg Weiss and its principals continues to play out. Earlier this week, the US Attorney for the Central District of California announced that name partner David Bershad agreed to plead guilty to a federal conspiracy charge. Under the plea deal, Bershad will forfeit $7.75 million, pay a fine of $250,000 and cooperate with the government’s efforts to prosecute the other participants in the alleged conspiracy. Along with Bershad, one of the former Milberg Weiss named plaintiffs Steven Cooperman also agreed to plead guilty to a conspiracy charge.
Investors pull back leveraged loans
The Deal.com, Jul-10-2007 :
The financing environment for leveraged buyouts got a lot tougher Tuesday, July 10, as a key index suffered what traders termed a "meltdown" and investors pulled back from leveraged loans as an asset class.
Standard & Poor's Leveraged Commentary & Data unit's composite index of the largest loans trading in the secondary market fell to 99.14 Tuesday morning, its lowest level in four years. Investors punished loans by such large issuers as Univision Communications Inc., whose loan was trading at 96, a 4% discount to par value, and broadly traded off recent loans used to fund high-profile leveraged buyouts of Michaels Stores Inc. and Celanese Corp.
"Traders are using words like 'meltdown' to describe the state of the market today," LCD wrote in a market report. "Hedge funds, they say, continue to sell loans to cover losses in other areas and because they think the loan market remains rich."
LCD added that, while things are "ugly out there," a looming glut of supply is causing the pullback, which indicates a technical, market issue as opposed to a more severe pullback driven by fundamental fears about the economy or the strength of the companies being funded.
Still, market participants say that the negative tone of recent weeks is increasing, which doesn't augur well for the $200 billion-plus of deals that are waiting to come to market over the next few weeks and months. A worst-case scenario, some say, could cause a freezing of buyout activity in general as investment banks pull back from funding deals.
Deals such as the $20 billion financing tied to the buyout of Chrysler Automotive by Cerberus Capital Management LP and the $24 billion financing to fund Kohlberg Kravis Roberts & Co.'s purchase of First Data Corp. will likely have trouble getting sold under current terms, several market participants say. That could cause the private equity firms to force their lending banks to fund bridge loans to finance the deals — as has happened to five deals in the past month — which could ultimately lead to a freezing up of the financing markets as banks with too much risk on their books are forced by their risk officers to step back.
Investment banks often back their private equity clients with committed financing packages on the assumption that the banks will be able to sell those commitments to hedge funds and collateralized loan obligation funds after the deal closes. If they can't do so, the banks are still contractually bound to provide the financings and swallow the losses associated with selling that debt in secondary markets at steep discounts. Failing that, the banks can also hold the loans on their books, which limits their ability to offer financing on future deals.
The financing environment for leveraged buyouts got a lot tougher Tuesday, July 10, as a key index suffered what traders termed a "meltdown" and investors pulled back from leveraged loans as an asset class.
Standard & Poor's Leveraged Commentary & Data unit's composite index of the largest loans trading in the secondary market fell to 99.14 Tuesday morning, its lowest level in four years. Investors punished loans by such large issuers as Univision Communications Inc., whose loan was trading at 96, a 4% discount to par value, and broadly traded off recent loans used to fund high-profile leveraged buyouts of Michaels Stores Inc. and Celanese Corp.
"Traders are using words like 'meltdown' to describe the state of the market today," LCD wrote in a market report. "Hedge funds, they say, continue to sell loans to cover losses in other areas and because they think the loan market remains rich."
LCD added that, while things are "ugly out there," a looming glut of supply is causing the pullback, which indicates a technical, market issue as opposed to a more severe pullback driven by fundamental fears about the economy or the strength of the companies being funded.
Still, market participants say that the negative tone of recent weeks is increasing, which doesn't augur well for the $200 billion-plus of deals that are waiting to come to market over the next few weeks and months. A worst-case scenario, some say, could cause a freezing of buyout activity in general as investment banks pull back from funding deals.
Deals such as the $20 billion financing tied to the buyout of Chrysler Automotive by Cerberus Capital Management LP and the $24 billion financing to fund Kohlberg Kravis Roberts & Co.'s purchase of First Data Corp. will likely have trouble getting sold under current terms, several market participants say. That could cause the private equity firms to force their lending banks to fund bridge loans to finance the deals — as has happened to five deals in the past month — which could ultimately lead to a freezing up of the financing markets as banks with too much risk on their books are forced by their risk officers to step back.
Investment banks often back their private equity clients with committed financing packages on the assumption that the banks will be able to sell those commitments to hedge funds and collateralized loan obligation funds after the deal closes. If they can't do so, the banks are still contractually bound to provide the financings and swallow the losses associated with selling that debt in secondary markets at steep discounts. Failing that, the banks can also hold the loans on their books, which limits their ability to offer financing on future deals.
Tuesday, July 10, 2007
Re: Moody’s report titled "Rating Private Equity Transactions."
From PE Week Wire, July 10, 2007:
I know firsthand that many general partners refuse to take stock in what ratings agencies have to say about their marketplace, at least when they’re speaking on the record. After all, it seems that every time a company is levered up, the ratings agencies pounce on it with a press release that notes how risky the deal is and how much strain the additional debt puts on the company, even though debt is the very life-blood of the LBO industry.
But one is left to wonder how long the current economy, which has easily shouldered the weight of some heavily levered deals, can last. For Q2 2007, Standard & Poor’s Leveraged Commentary & Data, says the average debt-to-EBITDA ratio for buyouts of companies with more than $50 million of EBITDA was about 7x, while companies with up to $50 million of EBITDA command an average leverage ratio of just more than 6x EBITDA. It’s hard to see how LBO firms can go much higher.
Today’s blog is by Ari Nathanson, Senior Editor of Buyouts Magazine.
I know firsthand that many general partners refuse to take stock in what ratings agencies have to say about their marketplace, at least when they’re speaking on the record. After all, it seems that every time a company is levered up, the ratings agencies pounce on it with a press release that notes how risky the deal is and how much strain the additional debt puts on the company, even though debt is the very life-blood of the LBO industry.
But one is left to wonder how long the current economy, which has easily shouldered the weight of some heavily levered deals, can last. For Q2 2007, Standard & Poor’s Leveraged Commentary & Data, says the average debt-to-EBITDA ratio for buyouts of companies with more than $50 million of EBITDA was about 7x, while companies with up to $50 million of EBITDA command an average leverage ratio of just more than 6x EBITDA. It’s hard to see how LBO firms can go much higher.
Today’s blog is by Ari Nathanson, Senior Editor of Buyouts Magazine.
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