Floyd Norris, NYT, Notions on High and Low Finance, April 8, 2009:
The S.E.C. is putting out for comment a bunch of possible short-selling restrictions today. There are several variations on two ideas. First is an uptick rule, like one we used to have, that bars short-selling at a price lower than the last different price. Second is some type of circuit breaker, like barring further short sales of a particular stock on a day that stock has fallen 10 percent.
I assume the commission will eventually adopt something. The pressure from Congress, and the public, is great.
And I suspect that the eventual impact of what they adopt will be modest, at best.
Listening to the five commissioners speak was refreshing, in contrast to the unlamented S.E.C. during the chairmanship of Christopher Cox. Last fall, the S.E.C. introduced panic measure after panic measure to halt or reduce short-selling. There was little effort to carefully consider whether there was any evidence to support the measures, which seemed to change every hour or two. Then they had to be tweaked as unanticipated consequences piled up.
This time, all five commissioners, led by Chairwoman Mary Schapiro, seemed to understand that there is no empirical evidence to support the belief that short-sellers are to blame for much of anything, even if there is public outrage. Whatever rule is adopted will be chosen after everyone has a chance to comment and point out unintended consequences.
It sounds as if panic is receding at the commission.
Thursday, April 09, 2009
Wednesday, April 01, 2009
Will the stimulus package stimulate M&A?
Posted on April 1, 2009 at 1:26 PM, TheDeal.com:
M&A advisers don't see such a rosy future for their business, at least not in the near term, according to an annual survey by communications firm Brunswick Group LLC. Only 29% of the 59 respondents -- including bankers, lawyers and other market players -- maintain there will be signs of recovery in "a year to eighteen months" -- down from 52% who shared that view in April 2008. Indeed, 69% believe it will take up to five years to return to the level of M&A activity seen in 2007, up 28% from last year's survey. Respondents cited the lack of credit (39%), slowing economy (26%), lack of CEO confidence (26%) and equity market decline (9%) as the most significant factors stifling M&A. Asked about the likely impact of the stimulus package on dealmaking, 44% believe the package will have a positive affect on M&A if it is able to "restore confidence" and "ease credit" while 46% believe the package will have a neutral effect. "While advisers caution that recovery will take time, the survey indicates some areas where we can expect activity in 2009," Brunswick senior partner Steven Lipin said in a statement. "Lower company valuations as well as the potential impact of the stimulus package on both credit and confidence could drive domestic deals, especially in the healthcare and financial sectors, and prompt unsolicited transactions."Topping the list of sectors considered ripe for consolidation are healthcare (25%), financial services (24%), energy (15%) and consumer goods/retail (14%). - Claire Poole
M&A advisers don't see such a rosy future for their business, at least not in the near term, according to an annual survey by communications firm Brunswick Group LLC. Only 29% of the 59 respondents -- including bankers, lawyers and other market players -- maintain there will be signs of recovery in "a year to eighteen months" -- down from 52% who shared that view in April 2008. Indeed, 69% believe it will take up to five years to return to the level of M&A activity seen in 2007, up 28% from last year's survey. Respondents cited the lack of credit (39%), slowing economy (26%), lack of CEO confidence (26%) and equity market decline (9%) as the most significant factors stifling M&A. Asked about the likely impact of the stimulus package on dealmaking, 44% believe the package will have a positive affect on M&A if it is able to "restore confidence" and "ease credit" while 46% believe the package will have a neutral effect. "While advisers caution that recovery will take time, the survey indicates some areas where we can expect activity in 2009," Brunswick senior partner Steven Lipin said in a statement. "Lower company valuations as well as the potential impact of the stimulus package on both credit and confidence could drive domestic deals, especially in the healthcare and financial sectors, and prompt unsolicited transactions."Topping the list of sectors considered ripe for consolidation are healthcare (25%), financial services (24%), energy (15%) and consumer goods/retail (14%). - Claire Poole
Angel Investors’ Wings Are Being Clipped
From Claire Cain Miller at Bits:
Entrepreneurs had a harder time getting angel funding to get their start-up idea off the ground last year, according to a new report from the Center for Venture Research at the University of New Hampshire. In 2008, angel investors funded young companies at the same pace as they did the year before, but they invested significantly less in each start-up.
Angels invested $19.2 billion in start-ups in 2008, a decrease of 26 percent from $26 billion in 2007. Still, they financed 55,480 ideas, only a slight decrease of 3 percent from 57,120 the year before. As a result, the average deal size for 2008 fell 24 percent from 2007. MORE »
Entrepreneurs had a harder time getting angel funding to get their start-up idea off the ground last year, according to a new report from the Center for Venture Research at the University of New Hampshire. In 2008, angel investors funded young companies at the same pace as they did the year before, but they invested significantly less in each start-up.
Angels invested $19.2 billion in start-ups in 2008, a decrease of 26 percent from $26 billion in 2007. Still, they financed 55,480 ideas, only a slight decrease of 3 percent from 57,120 the year before. As a result, the average deal size for 2008 fell 24 percent from 2007. MORE »
Monday, March 16, 2009
Naked Short Selling
A Few (Negative) Words about Naked Short Selling
TheCorporateCounsel.Net blog, March 16, 2009, by Broc Romanek:
When the market surged 6% last Tuesday, it was allegedly due to the rumor that the SEC would bring back the "uptick" rule (on Friday, the SEC announced it will hold an April 8th Commission meeting to propose a new uptick rule). The use of short selling by hedgies to move markets for their own gain was discussed during the conversation between Jon Stewart and Jim Cramer on Thursday. Add us to the chorus that something has to be done about short-selling. And something different than the SEC's emergency short-selling restrictions implemented last Fall, which some argue had no impact.
We've always believed that naked short selling is a form of manipulation, particularly when it occurs near the market's opening and close (even if it's part of a hedging strategy, it's often still manipulative). There now have been a number of stories revealing what short sellers have been doing over the past few years and it's clear that this is destructive behavior.
It's time that the SEC and other regulators step up. Otherwise, this is one more aspect of "deregulation" that will continue to allow some to artificially manipulate stock prices - and feed the widespread belief that the markets aren't safe.
TheCorporateCounsel.Net blog, March 16, 2009, by Broc Romanek:
When the market surged 6% last Tuesday, it was allegedly due to the rumor that the SEC would bring back the "uptick" rule (on Friday, the SEC announced it will hold an April 8th Commission meeting to propose a new uptick rule). The use of short selling by hedgies to move markets for their own gain was discussed during the conversation between Jon Stewart and Jim Cramer on Thursday. Add us to the chorus that something has to be done about short-selling. And something different than the SEC's emergency short-selling restrictions implemented last Fall, which some argue had no impact.
We've always believed that naked short selling is a form of manipulation, particularly when it occurs near the market's opening and close (even if it's part of a hedging strategy, it's often still manipulative). There now have been a number of stories revealing what short sellers have been doing over the past few years and it's clear that this is destructive behavior.
It's time that the SEC and other regulators step up. Otherwise, this is one more aspect of "deregulation" that will continue to allow some to artificially manipulate stock prices - and feed the widespread belief that the markets aren't safe.
Friday, March 13, 2009
Mark-to-Market Accounting Now on the Regulatory Fast Track
From TheCorporateCounsel.net Blog, March 13, 2009:
Yesterday’s House hearing on mark-to-market issues seemed to light a fire under the SEC and FASB, prompting commitments from FASB Chairman Robert Herz and the SEC’s Acting Chief Accountant Jim Kroeker to provide guidance on fair value accounting within three weeks.
As Edith Orenstein notes in the FEI Financial Reporting Blog, the members of the Committee pressed for immediate action:
“Rep. Paul Kanjorski (D-PA), chair of the Capital Markets Subcommittee of the House Financial Services Committee, noted in his opening remarks, “Mark-to-market accounting did not create our economic crisis, and altering it will not end the crisis. But improving the application of a fundamentally sound principle that is having profound adverse implications in a time of global financial distress is imperative. Therefore, our hearing today is about getting Financial Accounting Standards Board and the Securities and Exchange Commission to do the jobs they are required to do.” He added, “Emergency situations require expeditious action, not academic treatises. They must act quickly.”
“There are three pieces of legislation presently pending in Congress,” noted Kanjorski, with respect to mark-to-market accounting or accounting standard-setting generally (e.g. HR 1349 co-sponsored by Rep. Ed Perlmutter (D-CO) and Rep. Frank Lucas (R-OK) which would create a Federal Accounting Oversight Board). Kanjorski added, “I guarantee you one of those pieces of legislation is going to become law before early April.
Rep. Gary Ackerman (D-NY) responded to FASB’s current timetable, ‘If you are going to act, you’ve got to do it real quick.’”
The FASB Chairman ultimately responded, “We could have the guidance in three weeks; whether it will fix things, I don’t know.”
Also on the fast track are efforts to reinstate the “uptick rule” applicable to short selling. As noted in this Business Week article, SEC Chairman Mary Schapiro indicated in her testimony before the House appropriations committee earlier this week that the SEC hopes to propose reinstatement of the uptick rule some time in April.
Yesterday’s House hearing on mark-to-market issues seemed to light a fire under the SEC and FASB, prompting commitments from FASB Chairman Robert Herz and the SEC’s Acting Chief Accountant Jim Kroeker to provide guidance on fair value accounting within three weeks.
As Edith Orenstein notes in the FEI Financial Reporting Blog, the members of the Committee pressed for immediate action:
“Rep. Paul Kanjorski (D-PA), chair of the Capital Markets Subcommittee of the House Financial Services Committee, noted in his opening remarks, “Mark-to-market accounting did not create our economic crisis, and altering it will not end the crisis. But improving the application of a fundamentally sound principle that is having profound adverse implications in a time of global financial distress is imperative. Therefore, our hearing today is about getting Financial Accounting Standards Board and the Securities and Exchange Commission to do the jobs they are required to do.” He added, “Emergency situations require expeditious action, not academic treatises. They must act quickly.”
“There are three pieces of legislation presently pending in Congress,” noted Kanjorski, with respect to mark-to-market accounting or accounting standard-setting generally (e.g. HR 1349 co-sponsored by Rep. Ed Perlmutter (D-CO) and Rep. Frank Lucas (R-OK) which would create a Federal Accounting Oversight Board). Kanjorski added, “I guarantee you one of those pieces of legislation is going to become law before early April.
Rep. Gary Ackerman (D-NY) responded to FASB’s current timetable, ‘If you are going to act, you’ve got to do it real quick.’”
The FASB Chairman ultimately responded, “We could have the guidance in three weeks; whether it will fix things, I don’t know.”
Also on the fast track are efforts to reinstate the “uptick rule” applicable to short selling. As noted in this Business Week article, SEC Chairman Mary Schapiro indicated in her testimony before the House appropriations committee earlier this week that the SEC hopes to propose reinstatement of the uptick rule some time in April.
Monday, March 02, 2009
Buffett on Private Equity
Excerpt From Berkshire Hathaway’s 2008 Annual Report
Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker).
Our record matches our rhetoric.
Most buyers competing against us, however, follow a different path. For them, acquisitions are “merchandise.” Before the ink dries on their purchase contracts, these operators arecontemplating “exit strategies.” We have a decided advantage, therefore, when we encounter sellers who truly care about the future of their businesses.
Some years back our competitors were known as “leveraged-buyout operators.” But LBO became abad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.
Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private equityfirms, it should be noted, are not rushing in to inject the equity their wards now desperately need.Instead, they’re keeping their remaining funds very private.
In the regulated utility field there are no large family-owned businesses. Here, Berkshire hopes to be the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of purchasers when transactions are proposed.
There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business, including a willingness to commit adequate equity capital.
When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in the six new states wewould be serving immediately checked our record in Iowa. They also carefully evaluated our financing plans and capabilities. We passed this examination, just as we expect to pass future ones.
There are two reasons for our confidence. First, Dave Sokol and Greg Abel are going to run anybusinesses with which they are associated in a first-class manner. They don’t know of any other way to operate.
Beyond that is the fact that we hope to buy more regulated utilities in the future – and we know that our business behavior in jurisdictions where we are operating today will determine how we are welcomed by new jurisdictions tomorrow.
Our long-avowed goal is to be the “buyer of choice” for businesses – particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker).
Our record matches our rhetoric.
Most buyers competing against us, however, follow a different path. For them, acquisitions are “merchandise.” Before the ink dries on their purchase contracts, these operators arecontemplating “exit strategies.” We have a decided advantage, therefore, when we encounter sellers who truly care about the future of their businesses.
Some years back our competitors were known as “leveraged-buyout operators.” But LBO became abad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.
Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating. The private equityfirms, it should be noted, are not rushing in to inject the equity their wards now desperately need.Instead, they’re keeping their remaining funds very private.
In the regulated utility field there are no large family-owned businesses. Here, Berkshire hopes to be the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of purchasers when transactions are proposed.
There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business, including a willingness to commit adequate equity capital.
When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in the six new states wewould be serving immediately checked our record in Iowa. They also carefully evaluated our financing plans and capabilities. We passed this examination, just as we expect to pass future ones.
There are two reasons for our confidence. First, Dave Sokol and Greg Abel are going to run anybusinesses with which they are associated in a first-class manner. They don’t know of any other way to operate.
Beyond that is the fact that we hope to buy more regulated utilities in the future – and we know that our business behavior in jurisdictions where we are operating today will determine how we are welcomed by new jurisdictions tomorrow.
VCs challenge Obama plan to up carried interest tax
By CAMILLE RICKETTS, VentureBeat
Earlier this week, president Obama announced his intention to raise taxes on carried interest for hedge funds and private equity firms as part of his bold new budget plan. Not surprisingly, members of the venture capital community have been quick to speak out against the change, arguing that it will discourage investors from taking risks on potentially important startups, and ultimately weaken the economy.
Obama’s proposal would hike the tax on carried interest (the percentage earned on investment profits used to pay general partners at firms) — from the current 15 percent capital gains rate to 39 percent, more than the regular income tax rate, starting in 2011. Mark Heesen, president of the National Venture Capital Association, estimates that about 500 venture capitalists received carried interest checks in the last year. This might not seem like a lot, but further substracting from this number could dissuade bright young business minds from choosing private equity as a career, he says.
Beyond brain drain, he suggests the shift in policy could fundamentally change the types of companies investors choose to back. “When you look at venture capital, we are investing for the very long term in technologies that may or may not play out — ironically, the very technology that the administration is saying we need more of than ever, lifescience and cleantech,” Heesen says. “But as a VC, if you are going to get ordinary income tax on your carry, there is much less incentive to wait around for seven, eight, nine years.” The capital gains rate essentially gave firms a buffer to weather failures while waiting for something like Google or Genentech to hit the bigtime.
This has been the general consensus among investors, who say the industry will probably place its bets on safer, less innovative concepts if the Obama plan is implemented — and the results will run counter to the administration’s other major goals, namely energy efficiency and cost-effective health care. Many are also concerned that VCs will be less inclined to invest as much time working alongside portfolio companies to help refine their business models and foster growth. As Heesen puts it, “We are involved in long-term job creation, and if that’s not worthy of capital gains taxes, I don’t know what is.”
In the administration’s view, taxing carried interest at a higher level could bring in up to $2.7 billion in 2011 and $4.3 billion in 2012. And those supporting the measure believe the current policy allows some wealthy firms to dodge paying their fare share, reports the Washington Post.
When asked what he would advise Obama to do — considering the loss of public faith in Wall Street and country’s dire financial situation — Heesen said the administration should motivate investors to hold onto portfolio companies for longer periods of time. “There are ways to raise revenues in this area,” he says. “If you increased a long-term capital gains period so that VCs would hold onto assets for two to three years, that would set policy in the right direction.”
Copyright 2009 VentureBeat. All Rights Reserved.
Earlier this week, president Obama announced his intention to raise taxes on carried interest for hedge funds and private equity firms as part of his bold new budget plan. Not surprisingly, members of the venture capital community have been quick to speak out against the change, arguing that it will discourage investors from taking risks on potentially important startups, and ultimately weaken the economy.
Obama’s proposal would hike the tax on carried interest (the percentage earned on investment profits used to pay general partners at firms) — from the current 15 percent capital gains rate to 39 percent, more than the regular income tax rate, starting in 2011. Mark Heesen, president of the National Venture Capital Association, estimates that about 500 venture capitalists received carried interest checks in the last year. This might not seem like a lot, but further substracting from this number could dissuade bright young business minds from choosing private equity as a career, he says.
Beyond brain drain, he suggests the shift in policy could fundamentally change the types of companies investors choose to back. “When you look at venture capital, we are investing for the very long term in technologies that may or may not play out — ironically, the very technology that the administration is saying we need more of than ever, lifescience and cleantech,” Heesen says. “But as a VC, if you are going to get ordinary income tax on your carry, there is much less incentive to wait around for seven, eight, nine years.” The capital gains rate essentially gave firms a buffer to weather failures while waiting for something like Google or Genentech to hit the bigtime.
This has been the general consensus among investors, who say the industry will probably place its bets on safer, less innovative concepts if the Obama plan is implemented — and the results will run counter to the administration’s other major goals, namely energy efficiency and cost-effective health care. Many are also concerned that VCs will be less inclined to invest as much time working alongside portfolio companies to help refine their business models and foster growth. As Heesen puts it, “We are involved in long-term job creation, and if that’s not worthy of capital gains taxes, I don’t know what is.”
In the administration’s view, taxing carried interest at a higher level could bring in up to $2.7 billion in 2011 and $4.3 billion in 2012. And those supporting the measure believe the current policy allows some wealthy firms to dodge paying their fare share, reports the Washington Post.
When asked what he would advise Obama to do — considering the loss of public faith in Wall Street and country’s dire financial situation — Heesen said the administration should motivate investors to hold onto portfolio companies for longer periods of time. “There are ways to raise revenues in this area,” he says. “If you increased a long-term capital gains period so that VCs would hold onto assets for two to three years, that would set policy in the right direction.”
Copyright 2009 VentureBeat. All Rights Reserved.
Thursday, February 26, 2009
Survey: VC, Startups Feel the Pain
A new survey that detailed trends in venture capital investments in the fourth quarter of 2008 has found that, like the rest of the economy, venture capital and startups are feeling more pain from the deepening global crisis.
BusinessWeek reported that the survey, conducted by California law firm Fenwick & West, analyzed the terms of venture deals for 128 companies headquartered in the San Francisco Bay Area and found that valuations are falling for startups while venture capitalists are driving harder bargains.
Of the 128 companies that received financing, 33 percent of them experienced “down rounds,” or an investment that placed a lower valuation on the company than it received in the previous round.
In addition, the percentage of down rounds rose every month at year’s end, hitting 45 percent in December.
Go to Article from Business Week »
BusinessWeek reported that the survey, conducted by California law firm Fenwick & West, analyzed the terms of venture deals for 128 companies headquartered in the San Francisco Bay Area and found that valuations are falling for startups while venture capitalists are driving harder bargains.
Of the 128 companies that received financing, 33 percent of them experienced “down rounds,” or an investment that placed a lower valuation on the company than it received in the previous round.
In addition, the percentage of down rounds rose every month at year’s end, hitting 45 percent in December.
Go to Article from Business Week »
Tuesday, February 17, 2009
The American Recovery and Reinvestment Act
From the CorporateCounsel.Net Blog, February 17, 2009:
Late Friday, Congress finished its conferencing and passed the "American Recovery and Reinvestment Act" - and law firms went to work drafting their memos analyzing this stimulus package (we'll be posting all these memos in our "American Recovery Act" Practice Area). The final text of the legislation is posted on the White House's site in five parts, along with the ability for anybody to post comments!
The most relevant part of the legislation for our members is the tax provisions in Division B, which includes the controversial executive compensation restrictions among others (eg. see this Hodak Value commentary) - even President Obama is not happy with what Senator Dodd inserted as the final exec comp language. Oddly, the stimulus legislation went from no new executive compensation restrictions on Friday morning to more restrictive than previously contemplated by the end of the day. More coverage to come...
Late Friday, Congress finished its conferencing and passed the "American Recovery and Reinvestment Act" - and law firms went to work drafting their memos analyzing this stimulus package (we'll be posting all these memos in our "American Recovery Act" Practice Area). The final text of the legislation is posted on the White House's site in five parts, along with the ability for anybody to post comments!
The most relevant part of the legislation for our members is the tax provisions in Division B, which includes the controversial executive compensation restrictions among others (eg. see this Hodak Value commentary) - even President Obama is not happy with what Senator Dodd inserted as the final exec comp language. Oddly, the stimulus legislation went from no new executive compensation restrictions on Friday morning to more restrictive than previously contemplated by the end of the day. More coverage to come...
Monday, February 16, 2009
Congress strengthens executives’ pay limits
CHICAGO — President Barack Obama’s economic team tried to keep Democratic allies negotiating the stimulus bill from limiting paychecks for executives at banks in need of a bailout. Treasury Secretary Timothy Geithner and economic aide Lawrence Summers failed.
Sen. Christopher Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee, inserted strict rules into the $787 billion economic stimulus package over the White House’s objections. Dodd’s limits on bankers’ bonuses are significantly more aggressive than those sought by Obama or Geithner in recent days, with much fanfare.
Dodd, D-Conn., said the restrictions — an executive making $1 million a year in salary could receive only $500,000 in bonus money, for example — are necessary if Obama plans to ask Congress for more money to save the financial sector.
“It will never happen as long as the public perceives that there are people getting rich,” Dodd said in an interview. “Save their pay or save capitalism.”
That tone among Democrats flavored much of the discussion about how to write the stimulus bill, which the president planned to sign on Tuesday in Denver. Despite direct appeals from Geithner, Summers and White House officials, Democrats didn’t budge, according to administration officials.
The Obama administration’s proposed restrictions applied only to banks that receive “exceptional assistance” from the government. It set a $500,000 cap on pay for top executives and limited bonuses or additional compensation to restricted stock that could only be claimed after the firm had paid the government back.
The stimulus bill, however, sets executive bonus limits on all banks that receive infusions from the government’s $700 billion financial rescue fund. The number of executives affected depends on the amount of government assistance they receive. But as a rule, top executives will be prohibited from getting bonuses or incentives except as restricted stock that vests only after bailout funds are repaid and that is no greater than one-third of the executive’s annual compensation.
The prohibition would not apply to bonuses that are spelled out in an executive’s contract signed before Feb. 11, 2009.
At banks that received $25 million or less, the bonus restriction would apply only to the highest paid executives. At banks that receive $500 million or more, all senior executives and at least 20 of the next most highly compensated employees would fall under the bonus limits.
The White House claimed partial victory in this area. Officials also said that it would be up to Geithner to implement the bill and cautioned that the administration might be able to work out a deal with leaders on the Hill to modify some of the rules later.
The original bill said all banks receiving bailout money could give no bonuses to their top 25 employees. The White House worried that would dissuade smaller banks from taking — or keeping for long — the bailout money, which would slow their lending rates.
Administration officials also said they were worried Dodd’s plan would still allow multimillion dollar paychecks, just not structured as bonuses. The Obama plan would cap the entire compensation at $500,000 — with anything above that coming from restricted stock. Dodd’s plan provides no limit to base salary pay, which typically is relatively small but supplemented with gigantic bonuses.
Even so, the final bill was far stricter than the White House wanted.
“As he has already expressed, the president shares a deep concern about excessive executive compensation at financial firms that are receiving extraordinary assistance from American taxpayers,” spokeswoman Jen Psaki said Saturday.
White House officials took credit for influencing other parts of Congress’ plan, including shareholder say on pay and a requirement for companies to disclose luxury expenditures, administration officials said.
Negotiators had removed a $400,000 pay cap included in an earlier draft. The Congressional Budget Office said it would cost some $11 billion in lost tax revenues by 2019.
Associated Press writers Jim Kuhnhenn in Washington and Martin Crutsinger in Rome contributed to this report.
Sen. Christopher Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee, inserted strict rules into the $787 billion economic stimulus package over the White House’s objections. Dodd’s limits on bankers’ bonuses are significantly more aggressive than those sought by Obama or Geithner in recent days, with much fanfare.
Dodd, D-Conn., said the restrictions — an executive making $1 million a year in salary could receive only $500,000 in bonus money, for example — are necessary if Obama plans to ask Congress for more money to save the financial sector.
“It will never happen as long as the public perceives that there are people getting rich,” Dodd said in an interview. “Save their pay or save capitalism.”
That tone among Democrats flavored much of the discussion about how to write the stimulus bill, which the president planned to sign on Tuesday in Denver. Despite direct appeals from Geithner, Summers and White House officials, Democrats didn’t budge, according to administration officials.
The Obama administration’s proposed restrictions applied only to banks that receive “exceptional assistance” from the government. It set a $500,000 cap on pay for top executives and limited bonuses or additional compensation to restricted stock that could only be claimed after the firm had paid the government back.
The stimulus bill, however, sets executive bonus limits on all banks that receive infusions from the government’s $700 billion financial rescue fund. The number of executives affected depends on the amount of government assistance they receive. But as a rule, top executives will be prohibited from getting bonuses or incentives except as restricted stock that vests only after bailout funds are repaid and that is no greater than one-third of the executive’s annual compensation.
The prohibition would not apply to bonuses that are spelled out in an executive’s contract signed before Feb. 11, 2009.
At banks that received $25 million or less, the bonus restriction would apply only to the highest paid executives. At banks that receive $500 million or more, all senior executives and at least 20 of the next most highly compensated employees would fall under the bonus limits.
The White House claimed partial victory in this area. Officials also said that it would be up to Geithner to implement the bill and cautioned that the administration might be able to work out a deal with leaders on the Hill to modify some of the rules later.
The original bill said all banks receiving bailout money could give no bonuses to their top 25 employees. The White House worried that would dissuade smaller banks from taking — or keeping for long — the bailout money, which would slow their lending rates.
Administration officials also said they were worried Dodd’s plan would still allow multimillion dollar paychecks, just not structured as bonuses. The Obama plan would cap the entire compensation at $500,000 — with anything above that coming from restricted stock. Dodd’s plan provides no limit to base salary pay, which typically is relatively small but supplemented with gigantic bonuses.
Even so, the final bill was far stricter than the White House wanted.
“As he has already expressed, the president shares a deep concern about excessive executive compensation at financial firms that are receiving extraordinary assistance from American taxpayers,” spokeswoman Jen Psaki said Saturday.
White House officials took credit for influencing other parts of Congress’ plan, including shareholder say on pay and a requirement for companies to disclose luxury expenditures, administration officials said.
Negotiators had removed a $400,000 pay cap included in an earlier draft. The Congressional Budget Office said it would cost some $11 billion in lost tax revenues by 2019.
Associated Press writers Jim Kuhnhenn in Washington and Martin Crutsinger in Rome contributed to this report.
Wednesday, February 04, 2009
Pssst Wall Street: Change the Name from Bonuses to “Making Work Pay” Credits
From Truth on the Market, by Thom Lambert, February 2, 2009
President Obama, widely admired for his willingness and ability to engage in nuanced analysis, painted with pretty broad strokes when he attacked the bonuses recently paid by Wall Street banks:
"One point I want to make is that all of us are going to have responsibilities to get this economy moving again. And when I saw an article today indicating that Wall Street bankers had given themselves $20 billion worth of bonuses — the same amount of bonuses as they gave themselves in 2004 — at a time when most of these institutions were teetering on collapse and they are asking for taxpayers to help sustain them, and when taxpayers find themselves in the difficult position that if they don’t provide help that the entire system could come down on top of our heads — that is the height of irresponsibility. It is shameful."
Obama’s message has resonated with millions of Americans and no doubt scored him lots of “forthrightness” points. Indeed, two of my colleagues, both of whom I respect greatly, told me how refreshing it was to hear their leader speak in such black and white terms, calling this sort of behavior “shameful.”
With all due respect, I’m afraid I must dissent.
Putting aside that it’s generally unfair (un-nuanced?) to lump groups of disparate individuals together to make a political point, it’s important to note:
* that many of the institutions in this bonus pool didn’t receive TARP money;
* that a number of the banks (the biggies in particular) didn’t “ask[] for taxpayers to help sustain them,” as this article explains (and note Secretary Geithner’s presence at the meeting described);
* that the bonuses were generally for the rank and file salespeople, not for senior executives, and were based on their individual performances;
* that the bonus pool was down 44% from last year; and
* that “Wall Street” (a group of disparate stock brokers, commodities traders, investment bankers, and administrative professionals who don’t work in concert) really had no more to do with this crisis than did the real estate agents who sold (and earned commissions on) homes they knew to be overvalued and who are now benefiting from Treasury’s purchase of mortgage-related assets.
Most importantly, though, it’s important to recognize that these “shameful” bonuses are effectively the wages of the working folks who did a good job this past year. Imagine you’re a salesperson at a company. In order to create an incentive for you to bust your tail, the company negotiates with you a leveraged compensation plan under which you receive a relatively small base salary plus fairly generous commissions on the sales you close. Suppose you do a bang up job one year, but the company as a whole suffers a loss because of some poor decisions beyond your control (or because of developments in the macroeconomy, such as the bursting of an asset bubble facilitated by government-sponsored entities). Now imagine that the government perceives your company to be strategically important and therefore decides to subsidize it by, say, buying its preferred stock or extending it a loan. Would it be “the height of irresponsibility” for your employer to honor your legitimate compensation expectations and pay you the wages that you effectively earned under your implicit deal with the firm? And what would happen if your employer didn’t pay you what you legitimately expected? Wouldn’t you and the other successful salespeople at your company immediately bolt, leaving the company with a much less effective sales force?
Look, I agree that private firms that get in bed with the government open themselves up to all sorts of meddling in their affairs and that it’s appropriate for the government to exercise some measure of control over the firms it subsidizes. But our leaders need to be fair in recognizing that the bonuses in this industry are really legitimate wages; that the rank-and-file workers to whom they’re being paid are not responsible for the mess we’re in; that the bonus recipients are the ones who did a good job last year and who deserve to have their legitimate wage expectations honored; and that we U.S. citizens — as preferred stockholders in these financial institutions — have an interest in retaining the firms’ best workers and in maintaining the sort of leveraged, “eat what you kill” compensation scheme that has proven to best incentivize performance.
In the end, these so-called shameful bonuses are really just a matter of “making work pay” in these struggling financial firms. Who could rail against that?
President Obama, widely admired for his willingness and ability to engage in nuanced analysis, painted with pretty broad strokes when he attacked the bonuses recently paid by Wall Street banks:
"One point I want to make is that all of us are going to have responsibilities to get this economy moving again. And when I saw an article today indicating that Wall Street bankers had given themselves $20 billion worth of bonuses — the same amount of bonuses as they gave themselves in 2004 — at a time when most of these institutions were teetering on collapse and they are asking for taxpayers to help sustain them, and when taxpayers find themselves in the difficult position that if they don’t provide help that the entire system could come down on top of our heads — that is the height of irresponsibility. It is shameful."
Obama’s message has resonated with millions of Americans and no doubt scored him lots of “forthrightness” points. Indeed, two of my colleagues, both of whom I respect greatly, told me how refreshing it was to hear their leader speak in such black and white terms, calling this sort of behavior “shameful.”
With all due respect, I’m afraid I must dissent.
Putting aside that it’s generally unfair (un-nuanced?) to lump groups of disparate individuals together to make a political point, it’s important to note:
* that many of the institutions in this bonus pool didn’t receive TARP money;
* that a number of the banks (the biggies in particular) didn’t “ask[] for taxpayers to help sustain them,” as this article explains (and note Secretary Geithner’s presence at the meeting described);
* that the bonuses were generally for the rank and file salespeople, not for senior executives, and were based on their individual performances;
* that the bonus pool was down 44% from last year; and
* that “Wall Street” (a group of disparate stock brokers, commodities traders, investment bankers, and administrative professionals who don’t work in concert) really had no more to do with this crisis than did the real estate agents who sold (and earned commissions on) homes they knew to be overvalued and who are now benefiting from Treasury’s purchase of mortgage-related assets.
Most importantly, though, it’s important to recognize that these “shameful” bonuses are effectively the wages of the working folks who did a good job this past year. Imagine you’re a salesperson at a company. In order to create an incentive for you to bust your tail, the company negotiates with you a leveraged compensation plan under which you receive a relatively small base salary plus fairly generous commissions on the sales you close. Suppose you do a bang up job one year, but the company as a whole suffers a loss because of some poor decisions beyond your control (or because of developments in the macroeconomy, such as the bursting of an asset bubble facilitated by government-sponsored entities). Now imagine that the government perceives your company to be strategically important and therefore decides to subsidize it by, say, buying its preferred stock or extending it a loan. Would it be “the height of irresponsibility” for your employer to honor your legitimate compensation expectations and pay you the wages that you effectively earned under your implicit deal with the firm? And what would happen if your employer didn’t pay you what you legitimately expected? Wouldn’t you and the other successful salespeople at your company immediately bolt, leaving the company with a much less effective sales force?
Look, I agree that private firms that get in bed with the government open themselves up to all sorts of meddling in their affairs and that it’s appropriate for the government to exercise some measure of control over the firms it subsidizes. But our leaders need to be fair in recognizing that the bonuses in this industry are really legitimate wages; that the rank-and-file workers to whom they’re being paid are not responsible for the mess we’re in; that the bonus recipients are the ones who did a good job last year and who deserve to have their legitimate wage expectations honored; and that we U.S. citizens — as preferred stockholders in these financial institutions — have an interest in retaining the firms’ best workers and in maintaining the sort of leveraged, “eat what you kill” compensation scheme that has proven to best incentivize performance.
In the end, these so-called shameful bonuses are really just a matter of “making work pay” in these struggling financial firms. Who could rail against that?
Another View: Lessons From the Budweiser Battle
Sabine Chalmers, the chief legal officer of Anheuser-Busch InBev, and Frank Aquila, a partner in the mergers and acquisitions group of Sullivan & Crowmell, were InBev’s lead internal and external lawyers, respectively, on the company’s successful bid to acquire Anheuser-Busch last year. Below, Mr. Aquila and Ms. Chalmers offer their views on what other unsolicited buyers can learn from this takeover battle.
Hostile to Whom? Unsolicited Offers Become MainstreamLessons From InBev’s Acquisition of Anheuser-Busch
The tactics and objectives of unsolicited offers in the 1970s and 1980s justifiably evoked images of raiders and pirates. Yet while these terms continue to be used — hostile bidder, bear hugs, poison pills and white knights — today’s strategic buyers have little in common with the greenmailers and corporate bust-up artists of that era. Today, such buyers view unsolicited bids as just another tool in their chest to achieve strategic objectives.
InBev was not alone among multinational strategic buyers in making unsolicited bids in 2008. Microsoft, United Technologies, Samsung, BHP Billiton and Electronic Arts, a veritable “who’s who” of multinational companies, were just a few that did so in the last year. Other blue-chip companies, including G.E. and I.B.M., have also pursued unsolicited offers as part of their M.&A. repertoire.
In the months and years to come, there will likely be a steady stream of such proposals. The continuing trend towards global consolidation, the current level of economic uncertainty and the recent precipitous drop in share prices come at a time when seller price expectations remain high and unsolicited bids are becoming increasingly respectable.
When undertaking any significant acquisition, solicited or unsolicited, planning is essential, because once an announcement is made, the deal team is at full stretch. No detail is too small, and every contingency must be given a thorough, 360-degree review well before the news is made public. While each situation will have its own dynamics, the lessons from InBev’s successful bid for Anheuser-Busch can be broadly applied by others considering a similar approach.
Lesson One: Define Success. An unsolicited acquisition that prevails at any cost may earn advisers a fee, but is unlikely to achieve all of the buyer’s key objectives. While the ultimate purpose of any acquisition is for the bidder to acquire the target company, the bidder will always have more nuanced objectives. From the outset, the InBev team was clear that it wanted its bid executed in such a way that the acquisition of Anheuser-Busch would proceed as quickly as possible, with a minimum of hostility and with financial discipline. This meant that while we had to move quickly, we would not vilify the other side or simply prevail by paying more than fair value. With these considerations in mind, the deal team developed an in depth plan that would set out to achieve all of InBev’s objectives.
Lesson Two: Turn Weaknesses to Advantage. Given the then developing credit crisis, we recognized that A-B’s board would focus on our financing and would likely reject our offer if there was the slightest weakness in the financing package. The deal team therefore explored the best and firmest financing arrangements that could be made available for the bid. As a consequence, InBev put in place an exceptionally strong, United Kingdom-style “certain funds” package. This not only removed financing as an issue in our negotiations with A-B, it ultimately allowed InBev to close a $55 billion financing in the midst of the severest credit crunch in more than a century.
Lesson Three: Anticipate Challenges and Be Proactive. From the outset, we had a carefully developed communications strategy ready for most possible scenarios. For example, we were ready with messages geared to the key constituencies. An outreach strategy was in place to address, early in the process, critical concerns of the employees, the wholesalers and the communities in which A-B operated. Beyond this initial program, we attempted to anticipate potential challenges to the bid and developed complete responses — press releases with detailed Q&As — that were ready to go when needed. This allowed InBev to respond to any rumor or charge within hours. Issues that might have played out over several days and become major distractions, instead became nonevents within less than a single news cycle.
Lesson Four: Don’t Expect to Win Round One. Developing a plan is important, executing that plan is essential. When the A-B board rejected InBev’s initial proposal, our hope of a quick, friendly deal began to evaporate. Rather than spending days contemplating our next move, the next phase of the plan went into high gear within hours of the A-B board’s decision. That same day, InBev filed a motion for declaratory judgment in Delaware Chancery Court making clear the company’s intention to remove and replace the A-B board by written consent. Without a moment’s hesitation, we began assembling our slate of nominees and our preparations for the consent solicitation.
Lesson Five: Dare to Think Big. In putting together our proposed slate of nominees for the A-B board, we sought well-known names that would give the consent solicitation process instant credibility. Hank McKinnell, the retired chairman and chief executive officer of Pfizer, led our director slate of former chief executives and business luminaries. Mr. McKinnell is the chairman emeritus of the Business Roundtable, the “trade group” of America’s top C.E.O.’s, and a highly regarded business leader. A slate that also included Adolphus A. Busch IV, a leading member of the Busch family, and well-known former C.E.O.’s such as Mr. McKinnell, Ernie Mario, John Lilly, Bill Yost and Allen Loren clearly made a strong statement to the business world. It was unveiled on July 7; within hours, the A-B board met and discussions between InBev and Anheuser-Busch began the next day. The deal was approved by the two boards a few days later.
* * * *
A takeover battle that many predicted would never succeed, and most believed would play out over many months at a very minimum, was resolved with an agreed deal just 32 days after the initial proposal. Not only did InBev achieve its main objective of acquiring Anheuser-Busch, it did so in a quick and friendly way, and at a fair price.
While no two deals are ever the same, planning will always be crucial. Once the plan has been developed, it must be implemented with skill and discipline. InBev and its advisers anticipated a long and hard-fought battle, but by developing tactics that reflected InBev’s true objectives, we were able to achieve a quick resolution on a basis that was ultimately beneficial to all parties.
The views and opinions expressed in this article are the authors’ own and do not necessarily represent those of either Anheuser-Busch InBev NV/SA or Sullivan & Cromwell L.L.P.
Hostile to Whom? Unsolicited Offers Become MainstreamLessons From InBev’s Acquisition of Anheuser-Busch
The tactics and objectives of unsolicited offers in the 1970s and 1980s justifiably evoked images of raiders and pirates. Yet while these terms continue to be used — hostile bidder, bear hugs, poison pills and white knights — today’s strategic buyers have little in common with the greenmailers and corporate bust-up artists of that era. Today, such buyers view unsolicited bids as just another tool in their chest to achieve strategic objectives.
InBev was not alone among multinational strategic buyers in making unsolicited bids in 2008. Microsoft, United Technologies, Samsung, BHP Billiton and Electronic Arts, a veritable “who’s who” of multinational companies, were just a few that did so in the last year. Other blue-chip companies, including G.E. and I.B.M., have also pursued unsolicited offers as part of their M.&A. repertoire.
In the months and years to come, there will likely be a steady stream of such proposals. The continuing trend towards global consolidation, the current level of economic uncertainty and the recent precipitous drop in share prices come at a time when seller price expectations remain high and unsolicited bids are becoming increasingly respectable.
When undertaking any significant acquisition, solicited or unsolicited, planning is essential, because once an announcement is made, the deal team is at full stretch. No detail is too small, and every contingency must be given a thorough, 360-degree review well before the news is made public. While each situation will have its own dynamics, the lessons from InBev’s successful bid for Anheuser-Busch can be broadly applied by others considering a similar approach.
Lesson One: Define Success. An unsolicited acquisition that prevails at any cost may earn advisers a fee, but is unlikely to achieve all of the buyer’s key objectives. While the ultimate purpose of any acquisition is for the bidder to acquire the target company, the bidder will always have more nuanced objectives. From the outset, the InBev team was clear that it wanted its bid executed in such a way that the acquisition of Anheuser-Busch would proceed as quickly as possible, with a minimum of hostility and with financial discipline. This meant that while we had to move quickly, we would not vilify the other side or simply prevail by paying more than fair value. With these considerations in mind, the deal team developed an in depth plan that would set out to achieve all of InBev’s objectives.
Lesson Two: Turn Weaknesses to Advantage. Given the then developing credit crisis, we recognized that A-B’s board would focus on our financing and would likely reject our offer if there was the slightest weakness in the financing package. The deal team therefore explored the best and firmest financing arrangements that could be made available for the bid. As a consequence, InBev put in place an exceptionally strong, United Kingdom-style “certain funds” package. This not only removed financing as an issue in our negotiations with A-B, it ultimately allowed InBev to close a $55 billion financing in the midst of the severest credit crunch in more than a century.
Lesson Three: Anticipate Challenges and Be Proactive. From the outset, we had a carefully developed communications strategy ready for most possible scenarios. For example, we were ready with messages geared to the key constituencies. An outreach strategy was in place to address, early in the process, critical concerns of the employees, the wholesalers and the communities in which A-B operated. Beyond this initial program, we attempted to anticipate potential challenges to the bid and developed complete responses — press releases with detailed Q&As — that were ready to go when needed. This allowed InBev to respond to any rumor or charge within hours. Issues that might have played out over several days and become major distractions, instead became nonevents within less than a single news cycle.
Lesson Four: Don’t Expect to Win Round One. Developing a plan is important, executing that plan is essential. When the A-B board rejected InBev’s initial proposal, our hope of a quick, friendly deal began to evaporate. Rather than spending days contemplating our next move, the next phase of the plan went into high gear within hours of the A-B board’s decision. That same day, InBev filed a motion for declaratory judgment in Delaware Chancery Court making clear the company’s intention to remove and replace the A-B board by written consent. Without a moment’s hesitation, we began assembling our slate of nominees and our preparations for the consent solicitation.
Lesson Five: Dare to Think Big. In putting together our proposed slate of nominees for the A-B board, we sought well-known names that would give the consent solicitation process instant credibility. Hank McKinnell, the retired chairman and chief executive officer of Pfizer, led our director slate of former chief executives and business luminaries. Mr. McKinnell is the chairman emeritus of the Business Roundtable, the “trade group” of America’s top C.E.O.’s, and a highly regarded business leader. A slate that also included Adolphus A. Busch IV, a leading member of the Busch family, and well-known former C.E.O.’s such as Mr. McKinnell, Ernie Mario, John Lilly, Bill Yost and Allen Loren clearly made a strong statement to the business world. It was unveiled on July 7; within hours, the A-B board met and discussions between InBev and Anheuser-Busch began the next day. The deal was approved by the two boards a few days later.
* * * *
A takeover battle that many predicted would never succeed, and most believed would play out over many months at a very minimum, was resolved with an agreed deal just 32 days after the initial proposal. Not only did InBev achieve its main objective of acquiring Anheuser-Busch, it did so in a quick and friendly way, and at a fair price.
While no two deals are ever the same, planning will always be crucial. Once the plan has been developed, it must be implemented with skill and discipline. InBev and its advisers anticipated a long and hard-fought battle, but by developing tactics that reflected InBev’s true objectives, we were able to achieve a quick resolution on a basis that was ultimately beneficial to all parties.
The views and opinions expressed in this article are the authors’ own and do not necessarily represent those of either Anheuser-Busch InBev NV/SA or Sullivan & Cromwell L.L.P.
Friday, January 30, 2009
Don't eulogize private equity, Kravis says
By William L. Watts, MarketWatch
Last update: 5:51 a.m. EST Jan. 30, 2009
DAVOS, Switzerland (MarketWatch) -- Times are tough in the private equity business, but the industry will survive, Kohlberg Kravis Roberts founding partner Henry Kravis insisted Friday at the World Economic Forum's annual meeting.
"Private equity is not dead," Kravis said in a panel discussion on the global financial system at this year's gathering of corporate executives, politicians, regulators and others in the Swiss Alps.
Credit constraints have made deals more difficult, but not for the first time, he said, recalling a prime rate of 21% in 1979 accompanied by then-Federal Reserve Chairman Paul Volcker's subsequent decision to slap on credit controls that barred non-purpose lending.
"That was tough," Kravis said. Things weren't much better during the savings-and-loan crisis of 1990-91 when credit essentially dried up.
It's a similar situation today in the wake of the banking crisis, but money is available from a range of sources, he said, and there are opportunities for private equity.
The next three years will see about $1.7 trillion in debt in the United States come due, with about $1.5 trillion of that investment grade. Over five years, the figure is $3 trillion, he said.
Unless credit markets thaw, "there's going to be a real need for private equity," Kravis said.
Commitments by sovereign wealth funds and other sources mean around $400 billion is available for private equity firms, he said.
And private equity firms can still raise long-term debt, albeit on a smaller scale and from different sources, Kravis said. Sovereign wealth funds and pension funds, for example, are willing to invest in debt.
Finally, the amount of leverage needed buy stakes in companies has "obviously come down substantially" due to much lower purchase prices.
William L. Watts is a reporter for MarketWatch in London.
Last update: 5:51 a.m. EST Jan. 30, 2009
DAVOS, Switzerland (MarketWatch) -- Times are tough in the private equity business, but the industry will survive, Kohlberg Kravis Roberts founding partner Henry Kravis insisted Friday at the World Economic Forum's annual meeting.
"Private equity is not dead," Kravis said in a panel discussion on the global financial system at this year's gathering of corporate executives, politicians, regulators and others in the Swiss Alps.
Credit constraints have made deals more difficult, but not for the first time, he said, recalling a prime rate of 21% in 1979 accompanied by then-Federal Reserve Chairman Paul Volcker's subsequent decision to slap on credit controls that barred non-purpose lending.
"That was tough," Kravis said. Things weren't much better during the savings-and-loan crisis of 1990-91 when credit essentially dried up.
It's a similar situation today in the wake of the banking crisis, but money is available from a range of sources, he said, and there are opportunities for private equity.
The next three years will see about $1.7 trillion in debt in the United States come due, with about $1.5 trillion of that investment grade. Over five years, the figure is $3 trillion, he said.
Unless credit markets thaw, "there's going to be a real need for private equity," Kravis said.
Commitments by sovereign wealth funds and other sources mean around $400 billion is available for private equity firms, he said.
And private equity firms can still raise long-term debt, albeit on a smaller scale and from different sources, Kravis said. Sovereign wealth funds and pension funds, for example, are willing to invest in debt.
Finally, the amount of leverage needed buy stakes in companies has "obviously come down substantially" due to much lower purchase prices.
William L. Watts is a reporter for MarketWatch in London.
Tuesday, January 20, 2009
Venture capital fund-raising down sharply
Venture capital fund-raising dropped sharply last year, with U.S. venture firms collecting a total of $27.9 billion from limited partners, a 21.4 percent decline from the $35.5 billion raised in 2007, according to figures from the National Venture Capital Association.
Go to Article from The Boston Globe»
Go to Press Release from the National Venture Capital Association (PDF)»
Go to Article from The Boston Globe»
Go to Press Release from the National Venture Capital Association (PDF)»
Thursday, January 08, 2009
Credit Markets’ Spring Awakening May Help Mergers
Posted by Heidi N. Moore at Deal Journal, WSJ.com:
While much of the country languishes in a post-New Year’s, dead-of-winter coma, it feels like spring in the corporate debt market–spring 2008, that is.
The collapse of Bear Stearns in March 2008 froze the credit markets. It is only now, after several more companies went under, a $700 billion bailout was put in place and the auto industry was saved, that companies have been able to find buyers for their debt in the public markets in any appreciable number.
This week already is the best week for corporate debt sales since May 18, 2008, with proceeds totaling $19.9 billion, according to Thomson Reuters, though it still doesn’t match the $33.1 billion of that week in May. The second quarter of 2008 was a record for the debt markets as companies paid banks $5.5 billion in fees in just three months, according to Dealogic data.
The biggest debt issuance this week comes courtesy of a big takeover: InBev’s acquisition of Anheuser-Busch. Anheuser-Busch Inbev, rated BBB+, raised nearly $5 billion Wednesday, according to Thomson Reuters.
In addition, junk-rated Cablevision Systems Corp.’s CSC Holdings Inc. launched the first junk bond offering of the year Thursday and is expected to sell $500 million of bonds in the afternoon at a discounted price to yield 11% or more.
For banks, this is good news on two fronts. Most obviously, they can start making money by selling debt on the markets. Banks took a big hit as that business evaporated last year. Debt capital markets generated revenue of $13.6 billion in 2008, down 38% from 2007. Investment grade issuance earned banks $5.9 billion in fees–for the whole year–down 21% from 2007, while high yield issuance earned banks $1.0 billion in fees, down 69%, Dealogic reported.
InBev’s creditworthiness surely helped, as highly rated companies come back to the markets. Credit-worthy issuers with AAA ratings accounted for $6.7 billion of this week’s issuance, the highest level since the week of April 13, 2008. The good news there is that it means that nearly two-thirds of this week’s issuance, or $13.2 billion, comes from companies that aren’t necessarily the highest-rated. That signals that the gates on the credit markets may finally be starting to open.
One sector that stands to benefit from an ability to sell debt is the pharmaceutical industry, which appears poised for a wave of mergers. Pfizer and Merck have both indicated they are searching for companies to buy. Generics giant Actavis appears headed for the auction block according to our brother Health Blog, and its potential buyers include Big Pharma players Pfizer, Sanofi-Aventis, Novartis and GlaxoSmithKline.
While much of the country languishes in a post-New Year’s, dead-of-winter coma, it feels like spring in the corporate debt market–spring 2008, that is.
The collapse of Bear Stearns in March 2008 froze the credit markets. It is only now, after several more companies went under, a $700 billion bailout was put in place and the auto industry was saved, that companies have been able to find buyers for their debt in the public markets in any appreciable number.
This week already is the best week for corporate debt sales since May 18, 2008, with proceeds totaling $19.9 billion, according to Thomson Reuters, though it still doesn’t match the $33.1 billion of that week in May. The second quarter of 2008 was a record for the debt markets as companies paid banks $5.5 billion in fees in just three months, according to Dealogic data.
The biggest debt issuance this week comes courtesy of a big takeover: InBev’s acquisition of Anheuser-Busch. Anheuser-Busch Inbev, rated BBB+, raised nearly $5 billion Wednesday, according to Thomson Reuters.
In addition, junk-rated Cablevision Systems Corp.’s CSC Holdings Inc. launched the first junk bond offering of the year Thursday and is expected to sell $500 million of bonds in the afternoon at a discounted price to yield 11% or more.
For banks, this is good news on two fronts. Most obviously, they can start making money by selling debt on the markets. Banks took a big hit as that business evaporated last year. Debt capital markets generated revenue of $13.6 billion in 2008, down 38% from 2007. Investment grade issuance earned banks $5.9 billion in fees–for the whole year–down 21% from 2007, while high yield issuance earned banks $1.0 billion in fees, down 69%, Dealogic reported.
InBev’s creditworthiness surely helped, as highly rated companies come back to the markets. Credit-worthy issuers with AAA ratings accounted for $6.7 billion of this week’s issuance, the highest level since the week of April 13, 2008. The good news there is that it means that nearly two-thirds of this week’s issuance, or $13.2 billion, comes from companies that aren’t necessarily the highest-rated. That signals that the gates on the credit markets may finally be starting to open.
One sector that stands to benefit from an ability to sell debt is the pharmaceutical industry, which appears poised for a wave of mergers. Pfizer and Merck have both indicated they are searching for companies to buy. Generics giant Actavis appears headed for the auction block according to our brother Health Blog, and its potential buyers include Big Pharma players Pfizer, Sanofi-Aventis, Novartis and GlaxoSmithKline.
RiskMetrics Group Releases 2009 Board Practices Study
Submitted by: Sarah Cohn, Communications
RiskMetrics has released the 2009 edition of its annual Board Practices study, which analyzes the structure and composition of boards of directors at S&P 1,500 companies. Most notably, the study finds a continuing increase in the prevalence of companies with board chairs who are not the CEO—46% now have that structure in place, with more than 150 companies having adopted the practice in the last five years.
Each year, RiskMetrics evaluates the practices of boards of directors to identify the latest trends. To access the key findings from RiskMetrics’ 2009 Board Practices study, please visit here. The entire study can be purchased here.
RiskMetrics has released the 2009 edition of its annual Board Practices study, which analyzes the structure and composition of boards of directors at S&P 1,500 companies. Most notably, the study finds a continuing increase in the prevalence of companies with board chairs who are not the CEO—46% now have that structure in place, with more than 150 companies having adopted the practice in the last five years.
Each year, RiskMetrics evaluates the practices of boards of directors to identify the latest trends. To access the key findings from RiskMetrics’ 2009 Board Practices study, please visit here. The entire study can be purchased here.
U.S. Private Equity Firms Raise $265.6 Billion in 2008, 18% Less Than 2007 as Fund-Raising Pulls Back in 4Q
Dow Jones Private Equity Analyst: U.S. Firms Raise $40 Billion in 4Q08, Down 60%; Fund-Raising May Decline Further As Firms Cut Fund Sizes, Delay Closings
NEW YORK, Jan. 8 /PRNewswire/ -- After three strong quarters of resistance, private equity fund-raising slowed to a virtual standstill in the fourth quarter of 2008, according to analysis released today by Dow Jones Private Equity Analyst.
Based on statistics from the LP Source database (www.privateequity.dowjones.com), the newsletter reports that 99 funds raised approximately $43 billion in the fourth quarter, down significantly from the nearly $100 billion raised by 208 funds during the same period in 2007. Overall, 363 U.S.-based private equity funds raised $265.6 billion in 2008, 18% below the recorded $325.8 billion raised by 506 funds in 2007.
"The drop in fund-raising we saw in the 4th quarter marked a dramatic reversal from the first three quarters of the year, when private equity firms had been running slightly ahead of 2007's fund record pace," said Jennifer Rossa, Managing Editor of Dow Jones Private Equity Analyst. "While 2008 was still easily the second-best year on record, the decline we saw in the most recent quarter may steepen in the coming months, as some large buyout shops are considering fund size cuts and many limited partners are going to have trouble finding money to commit."
Economic Pains Felt Across Most of Private Equity Industry
According to Dow Jones Private Equity Analyst, very few areas of the private equity industry have proved immune from the economic crisis triggered by the Lehman Brothers bankruptcy in early September. In particular, the buyout industry has seen its problems compound with fund-raising down 26% from $244.6 billion across 222 funds in 2007 to $181 billion across 143 funds in 2008--on par with levels seen in 2006. At the nine-month mark, the buyout sector was only down 3% year-over-year.
For the first time in many years, buyout firms' proportion of overall fund-raising declined, from 75% in 2007 to 68% in 2008.
Venture capital fund-raising, which had been up by around 4% at the end of the third quarter, also saw a drop-off by the end of the year. Venture firms raked in $24.7 billion across 150 funds in 2008, down 25% from $33.1 billion raised by 182 funds in 2007. This also marks the lowest fund-raising total for the venture industry since 2004.
Mezzanine fund-raising was the lone bright spot, as fund-raising in this sector soared to record heights on the back of Goldman Sachs Capital Partners' $20-billion GS Mezzanine Partners V LP fund. Funds of funds and even secondary funds, normally considered well-positioned to benefit from market chaos, posted weak fund-raising totals, down 55% and 36%, respectively.
To learn more about Dow Jones Private Equity Analyst, view a sample issue or subscribe, visit www.privateequity.dowjones.com or call (877) 633-8663.
NEW YORK, Jan. 8 /PRNewswire/ -- After three strong quarters of resistance, private equity fund-raising slowed to a virtual standstill in the fourth quarter of 2008, according to analysis released today by Dow Jones Private Equity Analyst.
Based on statistics from the LP Source database (www.privateequity.dowjones.com), the newsletter reports that 99 funds raised approximately $43 billion in the fourth quarter, down significantly from the nearly $100 billion raised by 208 funds during the same period in 2007. Overall, 363 U.S.-based private equity funds raised $265.6 billion in 2008, 18% below the recorded $325.8 billion raised by 506 funds in 2007.
"The drop in fund-raising we saw in the 4th quarter marked a dramatic reversal from the first three quarters of the year, when private equity firms had been running slightly ahead of 2007's fund record pace," said Jennifer Rossa, Managing Editor of Dow Jones Private Equity Analyst. "While 2008 was still easily the second-best year on record, the decline we saw in the most recent quarter may steepen in the coming months, as some large buyout shops are considering fund size cuts and many limited partners are going to have trouble finding money to commit."
Economic Pains Felt Across Most of Private Equity Industry
According to Dow Jones Private Equity Analyst, very few areas of the private equity industry have proved immune from the economic crisis triggered by the Lehman Brothers bankruptcy in early September. In particular, the buyout industry has seen its problems compound with fund-raising down 26% from $244.6 billion across 222 funds in 2007 to $181 billion across 143 funds in 2008--on par with levels seen in 2006. At the nine-month mark, the buyout sector was only down 3% year-over-year.
For the first time in many years, buyout firms' proportion of overall fund-raising declined, from 75% in 2007 to 68% in 2008.
Venture capital fund-raising, which had been up by around 4% at the end of the third quarter, also saw a drop-off by the end of the year. Venture firms raked in $24.7 billion across 150 funds in 2008, down 25% from $33.1 billion raised by 182 funds in 2007. This also marks the lowest fund-raising total for the venture industry since 2004.
Mezzanine fund-raising was the lone bright spot, as fund-raising in this sector soared to record heights on the back of Goldman Sachs Capital Partners' $20-billion GS Mezzanine Partners V LP fund. Funds of funds and even secondary funds, normally considered well-positioned to benefit from market chaos, posted weak fund-raising totals, down 55% and 36%, respectively.
To learn more about Dow Jones Private Equity Analyst, view a sample issue or subscribe, visit www.privateequity.dowjones.com or call (877) 633-8663.
Wednesday, January 07, 2009
I.P.O. Chill May Last Through 2010, Analysts Say
The frozen market for initial public offerings won’t thaw in 2009 — or even the year after that, according to Bernstein Research. Bernstein’s analysts say they do not expect the market for new stock sales to bottom out until 2010 at the earliest, followed by a modest recovery.
If they are right, the result will be less fees for underwriters like Goldman Sachs and Morgan Stanley and hard times for companies and venture investors that have been patiently waiting to cash out by going public.
Companies tend to go public when stock markets are rising, volatility is low and equity fund flows are healthy. That clearly was not the case in 2008, as the global credit crisis roiled world markets and sent investors fleeing to the sidelines.
Last year, the number of initial public offerings experienced a huge downswing, with total I.P.O. volume declining 45 percent compared with the previous year. A record-setting 86 I.P.O.’s were canceled, and the average size of the I.P.O.’s shrank significantly.
Equity capital markets professionals at the investment banks shouldn’t expect a quick recovery, Bernstein says. Based on an analysis of historical data, Bernstein said it expects I.P.O. volumes to fall an additional 25 percent in 2009, followed by a 10 percent decline in 2010. This implies a 60 percent peak-to-trough decline in I.P.O. volumes from 2007 to 2010.
These predictions of an extended drought come as investment banks are suffering slowdowns in nearly every other segment of their business (merger advice, convertible and risk arbitrage, prime brokerage, asset management and retail brokerage).
Equity underwriting is one of the highest-margin businesses on Wall Street. Goldman Sachs and Morgan Stanley each generated about 4 to 5 percent of their total revenues from equity underwriting. That profit center will be taking quite a hit. Bernstein expects combined equity underwriting revenues for the two firms to decline by 35 percent annually in 2009 (after a 19 percent drop in 2008) and then fall by another by 5 percent in 2010, before a modest recovery of 15 percent in 2011 and 2012.
And then there are the private equity shops and venture investors that hoped to cash out of their investments and take their portfolio companies public.
The money these firms have wrapped up in their current investment will have to stay put until the I.P.O. market recovers, meaning there will be less money available for new projects. Entrepreneurs, who fear the shortage of funding could stifle innovation, are surely hoping Bernstein’s dire predictions don’t pan out.
– Cyrus Sanati, NYT DealBook, January 7, 2009
If they are right, the result will be less fees for underwriters like Goldman Sachs and Morgan Stanley and hard times for companies and venture investors that have been patiently waiting to cash out by going public.
Companies tend to go public when stock markets are rising, volatility is low and equity fund flows are healthy. That clearly was not the case in 2008, as the global credit crisis roiled world markets and sent investors fleeing to the sidelines.
Last year, the number of initial public offerings experienced a huge downswing, with total I.P.O. volume declining 45 percent compared with the previous year. A record-setting 86 I.P.O.’s were canceled, and the average size of the I.P.O.’s shrank significantly.
Equity capital markets professionals at the investment banks shouldn’t expect a quick recovery, Bernstein says. Based on an analysis of historical data, Bernstein said it expects I.P.O. volumes to fall an additional 25 percent in 2009, followed by a 10 percent decline in 2010. This implies a 60 percent peak-to-trough decline in I.P.O. volumes from 2007 to 2010.
These predictions of an extended drought come as investment banks are suffering slowdowns in nearly every other segment of their business (merger advice, convertible and risk arbitrage, prime brokerage, asset management and retail brokerage).
Equity underwriting is one of the highest-margin businesses on Wall Street. Goldman Sachs and Morgan Stanley each generated about 4 to 5 percent of their total revenues from equity underwriting. That profit center will be taking quite a hit. Bernstein expects combined equity underwriting revenues for the two firms to decline by 35 percent annually in 2009 (after a 19 percent drop in 2008) and then fall by another by 5 percent in 2010, before a modest recovery of 15 percent in 2011 and 2012.
And then there are the private equity shops and venture investors that hoped to cash out of their investments and take their portfolio companies public.
The money these firms have wrapped up in their current investment will have to stay put until the I.P.O. market recovers, meaning there will be less money available for new projects. Entrepreneurs, who fear the shortage of funding could stifle innovation, are surely hoping Bernstein’s dire predictions don’t pan out.
– Cyrus Sanati, NYT DealBook, January 7, 2009
Wednesday, December 31, 2008
PwC: 2009 M&A to be fueled by 'merger of necessity'
- Baz Hiralal, The Deal.com, December 31, 2009:
Robert Filek, a partner in PricewaterhouseCoopers' transaction services group -- and a former CD Forum moderator -- said "troubled companies will look to align with larger, stronger players in order to survive, creating the perfect storm for mergers of necessity," PwC said in a lengthy report that the deal landscape will be dominated by distressed investments across sectors including financial services, automotive, consumer products and retail.
The report analyzes major sectors including energy and healthcare, among others. It notes the new administration's goals include expanding access to quality and affordable health insurance, modernizing healthcare, reducing costs, and promoting public health, prevention and wellness. "This will create an uptick in 2009."
PwC also notes a "wild card," posing this question: Could public company valuations get so low that the public-to-private transaction could re-emerge? We'll see what the new year brings -- hopefully some looser credit markets.
Go to the PwC 2009 M&A report
Robert Filek, a partner in PricewaterhouseCoopers' transaction services group -- and a former CD Forum moderator -- said "troubled companies will look to align with larger, stronger players in order to survive, creating the perfect storm for mergers of necessity," PwC said in a lengthy report that the deal landscape will be dominated by distressed investments across sectors including financial services, automotive, consumer products and retail.
The report analyzes major sectors including energy and healthcare, among others. It notes the new administration's goals include expanding access to quality and affordable health insurance, modernizing healthcare, reducing costs, and promoting public health, prevention and wellness. "This will create an uptick in 2009."
PwC also notes a "wild card," posing this question: Could public company valuations get so low that the public-to-private transaction could re-emerge? We'll see what the new year brings -- hopefully some looser credit markets.
Go to the PwC 2009 M&A report
Friday, December 12, 2008
E&Y: 2008 M&A recap and '09 outlook
Ernst & Young has issued a report on mergers and acquisitions that shows 2008 deal volume slowed to 2003 levels, valuations fell, and cash rich corporations are shopping cautiously. The report notes even corporations with cash on hand and strong balance sheets -- which previously faced competition from PE firms -- are now confronted with new players arriving on the scene: sovereign wealth funds and other foreign buyers looking to acquire undervalued and distressed U.S. assets.
E&Y makes note that in 2009 that those without a certain level of liquidity will need to figure out a way to re-engineer their capital position to survive the current cycle.
The report also contains numbers on private equity, emerging markets and a breakdown for M&A in the financial services, pharmaceutical, oil and gas, media and entertainment, technology, and auto sectors.
E&Y makes note that in 2009 that those without a certain level of liquidity will need to figure out a way to re-engineer their capital position to survive the current cycle.
The report also contains numbers on private equity, emerging markets and a breakdown for M&A in the financial services, pharmaceutical, oil and gas, media and entertainment, technology, and auto sectors.
Wednesday, December 10, 2008
Global I.P.O. Activity Hits 13-Year Low
Ernst & Young has released its Global I.P.O. update and it should come as no surprise that the numbers are dismal.
The total number of global initial public offerings brought to market over the last 11 months was the lowest since 1995, according to the survey.
A total of 745 I.P.O.s worldwide raised $95.3 billion in capital in the first 11 months of 2008, compared with 1,790 I.P.O.s raising $256.9 billion over the same period last year.
So far this year, 298 I.P.O.s have been postponed or withdrawn and I.P.O. activity is at the lowest level recorded over the same 11-month period since 1995, which saw 374 I.P.O.s raise $52.4 billion in capital between 1 January and 30 November, according to data from Dealogic
Full-year figures for 2008 aren’t expected to show any improvement on the bleak performance thus far, the report said. The poor showing is particularly stark when compared with 2007, when a record-breaking 1,979 deals were completed, raising $287.1 billion.
Go to Press Release from Ernst &Young via MarketWatch »
The total number of global initial public offerings brought to market over the last 11 months was the lowest since 1995, according to the survey.
A total of 745 I.P.O.s worldwide raised $95.3 billion in capital in the first 11 months of 2008, compared with 1,790 I.P.O.s raising $256.9 billion over the same period last year.
So far this year, 298 I.P.O.s have been postponed or withdrawn and I.P.O. activity is at the lowest level recorded over the same 11-month period since 1995, which saw 374 I.P.O.s raise $52.4 billion in capital between 1 January and 30 November, according to data from Dealogic
Full-year figures for 2008 aren’t expected to show any improvement on the bleak performance thus far, the report said. The poor showing is particularly stark when compared with 2007, when a record-breaking 1,979 deals were completed, raising $287.1 billion.
Go to Press Release from Ernst &Young via MarketWatch »
Monday, December 08, 2008
Predicting More Pain for M&A
The worst is yet to come for the mergers and acquisitions market: That is the conclusion of a new analysis by Bernstein Research, which projects that the drop-off in M&A activity will accelerate in 2009 and won’t bottom out until 2010.
Such a prolonged decay would be a blow to the bottom lines of Morgan Stanley and Goldman Sachs, which are now more dependent on the revenues generated from deal-making because they can no longer rely on their trading arms — until recently heavily leveraged — to rake in the dough. It could also have a devastating effect on boutique investment banks, such as Greenhill and Evercore, which draw the bulk of their income from advisory work, the report said.
For most industries, the merger game is a pro-cyclical business. Strategic M&A activity has historically been correlated with favorable economic conditions. The same seems to be true of private equity deals, according to Bernstein’s analysis.
Bernstein projects that total M&A volume, including private equity and strategic deals, will decline by 25 percent in 2009 from the previous year, followed by a 15 percent year-over-year decline in 2010. This implies that the trough of the M&A market will be in the second half of 2010 and will mark a 45 percent decline from the peak 2007 levels.
That drop-off implies that peak-to-trough advisory revenues will decline by 52 percent. That is apt to hurt Goldman Sachs more than Morgan Stanley, because Goldman is more dependent on advisory revenue than its uptown rival, the report suggested.
There is a bit of a silver lining. M&A activity is still hot in some sectors where there isn’t a lot of emphasis put on leverage — like energy. Also, industries such as health care, which are not as affected by the downturn in the economy, should continue to be a source of deals, the report said.
And it could have been worse. The projected 45 percent decline this cycle is nowhere near as steep as the one that occurred in the last downturn from 2000 to 2003, after the tech bubble burst. Back then, M&A activity saw a peak-to-trough decline of 70 percent.
– Cyrus Sanati, NYT DealBook
Such a prolonged decay would be a blow to the bottom lines of Morgan Stanley and Goldman Sachs, which are now more dependent on the revenues generated from deal-making because they can no longer rely on their trading arms — until recently heavily leveraged — to rake in the dough. It could also have a devastating effect on boutique investment banks, such as Greenhill and Evercore, which draw the bulk of their income from advisory work, the report said.
For most industries, the merger game is a pro-cyclical business. Strategic M&A activity has historically been correlated with favorable economic conditions. The same seems to be true of private equity deals, according to Bernstein’s analysis.
Bernstein projects that total M&A volume, including private equity and strategic deals, will decline by 25 percent in 2009 from the previous year, followed by a 15 percent year-over-year decline in 2010. This implies that the trough of the M&A market will be in the second half of 2010 and will mark a 45 percent decline from the peak 2007 levels.
That drop-off implies that peak-to-trough advisory revenues will decline by 52 percent. That is apt to hurt Goldman Sachs more than Morgan Stanley, because Goldman is more dependent on advisory revenue than its uptown rival, the report suggested.
There is a bit of a silver lining. M&A activity is still hot in some sectors where there isn’t a lot of emphasis put on leverage — like energy. Also, industries such as health care, which are not as affected by the downturn in the economy, should continue to be a source of deals, the report said.
And it could have been worse. The projected 45 percent decline this cycle is nowhere near as steep as the one that occurred in the last downturn from 2000 to 2003, after the tech bubble burst. Back then, M&A activity saw a peak-to-trough decline of 70 percent.
– Cyrus Sanati, NYT DealBook
Monday, December 01, 2008
Postmortem: Nearly as Many Cancelled Mergers as New Ones
Deal Journal - WSJ.com - December 1, 2008, 10:51 am
Postmortem: Nearly as Many Cancelled Mergers as New Ones
Posted by Heidi N. Moore
Deal Journal readers, welcome back from the Thanksgiving weekend. Let us catch you up on things in the deal world.
Monday’s disheartening statistic du jour comes from Thomson Reuters, which totted up the effect of last week’s abandoned $188 billion offer for Rio Tinto by BHP Billiton. (Deal Journal puts the acquisition price of that deal at $66 billion, but Thomson Reuters includes in the price the Rio Tinto debt BHP would have assumed in a deal as well as the value under the original share price.)
By that counting, the collapse of the BHP-Rio Tinto deal pushed the seesaw of merger volume to a rarely-seen balance: the value of busted mergers in the fourth quarter is nearly equal to the value of the mergers that were signed.
According to Thomson Reuters data, there have been $322 billion of withdrawn M&A deals in the fourth quarter, compared with $362 billion of announced deals. For every 100 mergers or acquisitions announced in the fourth quarter, seven were called off.
It probably won’t stop there. There are some gigantic proposed deals still very much on the wire. The squeeze in the credit markets has made it highly unlikely that Swiss pharmaceuticals giant Roche Holding will find banks willing to underwrite the $45 billion loan it needs to buy the majority of Genentech it doesn’t already own. The $42 billion takeover of BCE may be scuttled by an accounting firm’s preliminary opinion that the parent of Bell Canada wouldn’t be solvent after the deal.
Investment banks are already awash in losses and will dearly miss the accompanying lost merger fees. The BHP-Rio deal alone would have meant $304 million in fees spread out across a coterie of 16 banks including UBS, BNP Paribas, Goldman Sachs Group, Gresham Partners, Lazard, HSBC Holdings, Merrill Lynch and Citigroup, Rothschild, Deutsche Bank, Macquarie Group, Societe Generale, Morgan Stanley, JP Morgan Cazenove, Credit Suisse Group and Royal Bank of Scotland Group.
Of course, what the banks lose in merger fees on busted deals they often gain in peace of mind. A dead deal, after all, means that the banks don’t have to underwrite tens of billions of dollars of loans for which there are few buyers.
Postmortem: Nearly as Many Cancelled Mergers as New Ones
Posted by Heidi N. Moore
Deal Journal readers, welcome back from the Thanksgiving weekend. Let us catch you up on things in the deal world.
Monday’s disheartening statistic du jour comes from Thomson Reuters, which totted up the effect of last week’s abandoned $188 billion offer for Rio Tinto by BHP Billiton. (Deal Journal puts the acquisition price of that deal at $66 billion, but Thomson Reuters includes in the price the Rio Tinto debt BHP would have assumed in a deal as well as the value under the original share price.)
By that counting, the collapse of the BHP-Rio Tinto deal pushed the seesaw of merger volume to a rarely-seen balance: the value of busted mergers in the fourth quarter is nearly equal to the value of the mergers that were signed.
According to Thomson Reuters data, there have been $322 billion of withdrawn M&A deals in the fourth quarter, compared with $362 billion of announced deals. For every 100 mergers or acquisitions announced in the fourth quarter, seven were called off.
It probably won’t stop there. There are some gigantic proposed deals still very much on the wire. The squeeze in the credit markets has made it highly unlikely that Swiss pharmaceuticals giant Roche Holding will find banks willing to underwrite the $45 billion loan it needs to buy the majority of Genentech it doesn’t already own. The $42 billion takeover of BCE may be scuttled by an accounting firm’s preliminary opinion that the parent of Bell Canada wouldn’t be solvent after the deal.
Investment banks are already awash in losses and will dearly miss the accompanying lost merger fees. The BHP-Rio deal alone would have meant $304 million in fees spread out across a coterie of 16 banks including UBS, BNP Paribas, Goldman Sachs Group, Gresham Partners, Lazard, HSBC Holdings, Merrill Lynch and Citigroup, Rothschild, Deutsche Bank, Macquarie Group, Societe Generale, Morgan Stanley, JP Morgan Cazenove, Credit Suisse Group and Royal Bank of Scotland Group.
Of course, what the banks lose in merger fees on busted deals they often gain in peace of mind. A dead deal, after all, means that the banks don’t have to underwrite tens of billions of dollars of loans for which there are few buyers.
Wednesday, November 19, 2008
Broken Deals: Who’s to Blame?
Posted by Holger Spamann, co-editor, Harvard Law School Corporate Governance Blog, on Wednesday November 19, 2008 at 12:13 pm
Insights from Practice, Mergers and Acquisitions, Program Events -->
Who’s to blame when a signed deal falls through? This question is especially relevant with respect to LBO buyers these days. Deals negotiated when times were good and credit was easy look much less appealing if not disastrous now that the short term economic outlook is bleak and the credit environment has soured. In particular, banks are weary of lending into LBOs when their ability to securitize and sell off the loans has waned. Private equity buyers may want to extricate themselves from signed deals, or be forced to do so because debt financing is not forthcoming. What contractual rights do sellers, buyers, and financiers have against one another in such a situation? What reputational effects, if any, constrain them from exercising those rights? And how should a seller’s board trade off deal certainty against price when choosing between competing transactions? Isaac Corré of Eton Park, Steven Davidoff a/k/a The Deal Professor, John Finley of Simpson Thacher, and Jim Morphy of Sullivan & Cromwell debated these questions with Vice Chancellor Leo Strine, Jr. and Professor Robert C. Clark in their Mergers, Acquisitions, and Split-Ups class here at Harvard Law School last week.
The video of the event is available here.
Insights from Practice, Mergers and Acquisitions, Program Events -->
Who’s to blame when a signed deal falls through? This question is especially relevant with respect to LBO buyers these days. Deals negotiated when times were good and credit was easy look much less appealing if not disastrous now that the short term economic outlook is bleak and the credit environment has soured. In particular, banks are weary of lending into LBOs when their ability to securitize and sell off the loans has waned. Private equity buyers may want to extricate themselves from signed deals, or be forced to do so because debt financing is not forthcoming. What contractual rights do sellers, buyers, and financiers have against one another in such a situation? What reputational effects, if any, constrain them from exercising those rights? And how should a seller’s board trade off deal certainty against price when choosing between competing transactions? Isaac Corré of Eton Park, Steven Davidoff a/k/a The Deal Professor, John Finley of Simpson Thacher, and Jim Morphy of Sullivan & Cromwell debated these questions with Vice Chancellor Leo Strine, Jr. and Professor Robert C. Clark in their Mergers, Acquisitions, and Split-Ups class here at Harvard Law School last week.
The video of the event is available here.
Tuesday, November 11, 2008
More Oversight for Private Players?
Hedge funds and private equity firms may come in for more regulatory oversight, if Senator Charles Schumer has his way.
The Deal.com noted that the New York Democrat, speaking at the Securities Industry and Financial Markets Association’s Summit on the Troubled Asset Relief Program Monday, predicts that any regulatory reform would include more oversight of private capital players such as hedge funds or buyout shops, whose failure could present a systemic threat.
“All market participants [regulated and unregulated] are linked as counterparties,” he said.
Go to Article from The Deal.com »
The Deal.com noted that the New York Democrat, speaking at the Securities Industry and Financial Markets Association’s Summit on the Troubled Asset Relief Program Monday, predicts that any regulatory reform would include more oversight of private capital players such as hedge funds or buyout shops, whose failure could present a systemic threat.
“All market participants [regulated and unregulated] are linked as counterparties,” he said.
Go to Article from The Deal.com »
Tuesday, November 04, 2008
Middle-market tech deals getting done
Posted on November 4, 2008 at 10:39 AM, The Deal.com:
M&A activity slowed considerably over the past three months, and most analysts we've talked with, including Booz & Co.'s Gerald Adolph and Cravath, Swaine & Moore's Jim Woolery, expect more slowing through the end of the year. But our colleague Alain Sherter over at Tech Confidential reports Tuesday on one industry segment that's maintaining respectable levels of M&A: the middle-market technology sector.Referencing a report from the boutique investment bank TM Capital, Sherter writes that:
Providers of enterprise application software, infrastructure management tools and information technology services saw 439 deals in the third quarter, roughly level with deal activity in the previous quarter and slightly ahead of totals in the year-ago period.The total value of tech deals, however, is off from last year, as strategic acquirers focus on smaller deals. - Suzanne Stevens
M&A activity slowed considerably over the past three months, and most analysts we've talked with, including Booz & Co.'s Gerald Adolph and Cravath, Swaine & Moore's Jim Woolery, expect more slowing through the end of the year. But our colleague Alain Sherter over at Tech Confidential reports Tuesday on one industry segment that's maintaining respectable levels of M&A: the middle-market technology sector.Referencing a report from the boutique investment bank TM Capital, Sherter writes that:
Providers of enterprise application software, infrastructure management tools and information technology services saw 439 deals in the third quarter, roughly level with deal activity in the previous quarter and slightly ahead of totals in the year-ago period.The total value of tech deals, however, is off from last year, as strategic acquirers focus on smaller deals. - Suzanne Stevens
Friday, October 24, 2008
Lipton, Friedman and Rice on the Future of M&A
NYT DealBook, October 24, 2008
Three high-powered figures in the financial industry gathered at New York University’s law school on Thursday to discuss the future of mergers and acquisitions in the post-credit-bubble world.
The panelists — Stephen Friedman, the retired chairman of Goldman Sachs and the current Chairman of the Federal Reserve Bank of New York; Martin Lipton, the founding partner of the law firm Wachtell, Lipton, Rosen & Katz; and Joseph Rice III, the founder and chairman of private equity firm Clayton Dubilier & Rice — took turns discussing the challenges and opportunities ahead, as well as reflecting on the current economic crisis.
Mr. Rice said he was convinced that “human greed” took control of the system. But the bubble was egged on, he added, because “there was clearly too much capital around” and “people needed to find something to do with it.” He went on to say that “there is no question that there will be more regulation.”
As for the future of private equity, Mr. Rice sounded optimistic and expressed no doubt that it would make a comeback. “As respect to the buyout business, it is not going away — it’s comatose right now,” he said. “We will see a series of small deals next year and then they will grow in size… It is a perfectly good business, and it’s going to be around as long as there is a financial institution.”
Mr. Friedman spoke at length about the current crisis, which he described as the greatest financial panic since the Great Depression. Part of the problem, he said, was that “people will play the way you pay them,” meaning that the incentive structures that were in place encouraged bad lending and faulty business practices. He said he blamed the banks, consumers and the rating agencies for playing a part in the financial debacle.
He also lashed out at Wall Street bonuses, which he described as a “perverse incentive” that were “structured in a sort of way that you don’t have to give it back.”
Mr. Friedman praised regulators for their decisive and strong actions in 2008, calling them “heroic.” But he said that no one can say they had “done a first-rate job before then.”
Mr. Lipton, pictured above, spoke of a new financial order that he said will be dominated by large banks and filled with lots of smaller boutiques. “Capital raising will be in the hands of the big universal bank,” he said. “They will have the capital and the networks to do it.”
He said he believes the current economic crisis will last between three to five years, but was upbeat about the future of M&A.
“There will always be M&A,” he said, but added that “M&A is very psychological, and C.E.O.’s don’t like to go their boards in this type of economy” and ask to do a deal.
Three high-powered figures in the financial industry gathered at New York University’s law school on Thursday to discuss the future of mergers and acquisitions in the post-credit-bubble world.
The panelists — Stephen Friedman, the retired chairman of Goldman Sachs and the current Chairman of the Federal Reserve Bank of New York; Martin Lipton, the founding partner of the law firm Wachtell, Lipton, Rosen & Katz; and Joseph Rice III, the founder and chairman of private equity firm Clayton Dubilier & Rice — took turns discussing the challenges and opportunities ahead, as well as reflecting on the current economic crisis.
Mr. Rice said he was convinced that “human greed” took control of the system. But the bubble was egged on, he added, because “there was clearly too much capital around” and “people needed to find something to do with it.” He went on to say that “there is no question that there will be more regulation.”
As for the future of private equity, Mr. Rice sounded optimistic and expressed no doubt that it would make a comeback. “As respect to the buyout business, it is not going away — it’s comatose right now,” he said. “We will see a series of small deals next year and then they will grow in size… It is a perfectly good business, and it’s going to be around as long as there is a financial institution.”
Mr. Friedman spoke at length about the current crisis, which he described as the greatest financial panic since the Great Depression. Part of the problem, he said, was that “people will play the way you pay them,” meaning that the incentive structures that were in place encouraged bad lending and faulty business practices. He said he blamed the banks, consumers and the rating agencies for playing a part in the financial debacle.
He also lashed out at Wall Street bonuses, which he described as a “perverse incentive” that were “structured in a sort of way that you don’t have to give it back.”
Mr. Friedman praised regulators for their decisive and strong actions in 2008, calling them “heroic.” But he said that no one can say they had “done a first-rate job before then.”
Mr. Lipton, pictured above, spoke of a new financial order that he said will be dominated by large banks and filled with lots of smaller boutiques. “Capital raising will be in the hands of the big universal bank,” he said. “They will have the capital and the networks to do it.”
He said he believes the current economic crisis will last between three to five years, but was upbeat about the future of M&A.
“There will always be M&A,” he said, but added that “M&A is very psychological, and C.E.O.’s don’t like to go their boards in this type of economy” and ask to do a deal.
Tuesday, October 21, 2008
Deal Making Surpasses $3 Trillion
October 21, 2008, 1:12 pm
Posted by Stephen Grocer - DealJournal - WSJ.com
Perhaps you didn’t hear the M&A gong Monday, but global deal volume has passed $3 trillion–the fifth time that has happened though, not surprisingly, it took roughly three months longer than it did last year.
It did so on the backs of the new kings of deal making. No, not Henry Kravis or Stephen Schwarzman or Steve Ballmer or any other titan of industry, for that matter. No, this year’s M&A king makers earn far less, but wield far more power and capital. They are Hank Paulson and Ben Bernanke and, across the pond, Gordon Brown and Alistair Darling.
At a time when the financial crisis is sapping the life out of M&A–$149.1 billion of announced deals have been withdrawn since Sept. 1–the dramatic interventions of the U.S. and British governments have helped propel M&A activity in the financial sector, according to Dealogic.
Government investment in financial institutions has reached $76 billion this year, according to the data. That is almost eight times as much as in all of 2007, the previous high water mark. And this year’s total doesn’t include the planned U.S. investments in nine banks, which will top $120 billion, or the number of deals the federal government had a hand in orchestrating–think J.P. Morgan-Bear Stearns and J.P. Morgan Chase-Washington Mutual.
At the very least, the increased role of governments is representative of numerous issues buffeting the M&A marketplace. With the credit markets and global financial industry both frozen, governments are lenders and buyers of last resort.
Posted by Stephen Grocer - DealJournal - WSJ.com
Perhaps you didn’t hear the M&A gong Monday, but global deal volume has passed $3 trillion–the fifth time that has happened though, not surprisingly, it took roughly three months longer than it did last year.
It did so on the backs of the new kings of deal making. No, not Henry Kravis or Stephen Schwarzman or Steve Ballmer or any other titan of industry, for that matter. No, this year’s M&A king makers earn far less, but wield far more power and capital. They are Hank Paulson and Ben Bernanke and, across the pond, Gordon Brown and Alistair Darling.
At a time when the financial crisis is sapping the life out of M&A–$149.1 billion of announced deals have been withdrawn since Sept. 1–the dramatic interventions of the U.S. and British governments have helped propel M&A activity in the financial sector, according to Dealogic.
Government investment in financial institutions has reached $76 billion this year, according to the data. That is almost eight times as much as in all of 2007, the previous high water mark. And this year’s total doesn’t include the planned U.S. investments in nine banks, which will top $120 billion, or the number of deals the federal government had a hand in orchestrating–think J.P. Morgan-Bear Stearns and J.P. Morgan Chase-Washington Mutual.
At the very least, the increased role of governments is representative of numerous issues buffeting the M&A marketplace. With the credit markets and global financial industry both frozen, governments are lenders and buyers of last resort.
Friday, October 17, 2008
Lehman Brothers Sale
FRI 17 Oct 2008
An auction of Lehman’s Neuberger Berman unit and other investment management bits and pieces moved closer yesterday with bid procedures getting clearance from a New York judge.Private equity groups Bain Capital and Hellman & Friedman agreed last month to purchase Lehman’s prized asset management unit for $2.15 billion, and they will be the lead bidders at an auction for the unit in December.In a status update prior to the judge’s ruling, Lehman’s lead attorney, Harvey Miller, said prosecutors had opened three grand jury investigations into the investment bank’s demise. The New York Post reported that disgraced CEO Dick Fuld is among 12 Lehman executives being subpoenaed. Fuld, questioned by a U.S. congressional panel earlier this month, denied deceiving shareholders.Politicians and the public are calling for heads to roll on Wall Street. Looking into Lehman are federal prosecutors as well as at least one state attorney general. And the FBI is in the early stages of examining mortgage finance companies Fannie Mae and Freddie Mac and insurer American International Group, which were bailed out by the government after getting caught in the credit crunch.Did anyone actually understand the rocket science behind the engineering of the credit default swaps and other complex financial tools that blew up behind the scenes? If not, then it might be a hard sell to convince anyone that investors were intentionally misled.In the brave new financial world that emerges from the chaos of the ‘08 crash, will Wall Street executives be expected to understand everything their firms are doing? Sounds reasonable, if unlikely.
An auction of Lehman’s Neuberger Berman unit and other investment management bits and pieces moved closer yesterday with bid procedures getting clearance from a New York judge.Private equity groups Bain Capital and Hellman & Friedman agreed last month to purchase Lehman’s prized asset management unit for $2.15 billion, and they will be the lead bidders at an auction for the unit in December.In a status update prior to the judge’s ruling, Lehman’s lead attorney, Harvey Miller, said prosecutors had opened three grand jury investigations into the investment bank’s demise. The New York Post reported that disgraced CEO Dick Fuld is among 12 Lehman executives being subpoenaed. Fuld, questioned by a U.S. congressional panel earlier this month, denied deceiving shareholders.Politicians and the public are calling for heads to roll on Wall Street. Looking into Lehman are federal prosecutors as well as at least one state attorney general. And the FBI is in the early stages of examining mortgage finance companies Fannie Mae and Freddie Mac and insurer American International Group, which were bailed out by the government after getting caught in the credit crunch.Did anyone actually understand the rocket science behind the engineering of the credit default swaps and other complex financial tools that blew up behind the scenes? If not, then it might be a hard sell to convince anyone that investors were intentionally misled.In the brave new financial world that emerges from the chaos of the ‘08 crash, will Wall Street executives be expected to understand everything their firms are doing? Sounds reasonable, if unlikely.
Monday, October 13, 2008
United Technologies Withdraws Bid for Diebold
United Technologies said on Monday that it has withdrawn its $2.6 billion offer for Diebold, the maker of automated teller machines and electronic voting machines.
It is the second offer withdrawn on Monday, after Waste Management withdrew a hostile offer for fellow garbage collector Republic Services. Waste Management cited the turbulent markets as its reason for pulling its tender offer.
In a short letter sent to Diebold, United Technologies’ chairman, George David, cited Diebold’s continued refusal to hold talks or release financial information to its unwanted suitor. United Technologies had offered $40 a share, after having pursued Diebold for two years.
“We had hoped we could negotiate a transaction that would have created substantial value for both your and our shareholders,” Mr. David wrote in the letter. “It’s unfortunate this won’t happen.”
In Diebold, United Technologies sought to expand its electronic security business with one of the field’s largest players. Last year, United Technologies bought Initial Electronic Security Systems for about $1.2 billion.
It is the second offer withdrawn on Monday, after Waste Management withdrew a hostile offer for fellow garbage collector Republic Services. Waste Management cited the turbulent markets as its reason for pulling its tender offer.
In a short letter sent to Diebold, United Technologies’ chairman, George David, cited Diebold’s continued refusal to hold talks or release financial information to its unwanted suitor. United Technologies had offered $40 a share, after having pursued Diebold for two years.
“We had hoped we could negotiate a transaction that would have created substantial value for both your and our shareholders,” Mr. David wrote in the letter. “It’s unfortunate this won’t happen.”
In Diebold, United Technologies sought to expand its electronic security business with one of the field’s largest players. Last year, United Technologies bought Initial Electronic Security Systems for about $1.2 billion.
Tuesday, October 07, 2008
PE Fund-Raising Still Going Strong. Buyout Shops, Not So Much
October 7, 2008, 6:30 am
Posted by Deal Journal
The investors who give private-equity firms the money to do deals still are plowing cash into the asset class, but increasingly it is being funneled away from buyout funds to more specialized investors.
Three-quarters of the way through the year, fund-raising by North American private-equity firms–a category that includes buyout, venture capital, mezzanine, distressed and several other types of firms–is ahead of last year’s pace. Through the end of September, 264 funds had raked in $222.6 billion, well ahead of the $200.4 billion raised by 298 funds at this time last year, according to data from LPSource.
That may seem a little nutty, given that the freeze-up in credit markets and the slower-growing economy stand to have a big impact on the private-equity asset class. But after the last downturn, in 2001 and 2002, many investors, known as limited partners, stopped investing in private equity, which turned out to be a bad move, as funds raised at that time eventually proved to be big winners. LPs say they have learned that lesson and will keep investing this time around.
That isn’t to say they aren’t hedging their bets. Buyout firms, which have been hardest hit by the credit crunch, raised $103.3 billion across 77 funds, down 12% from 98 funds that raised $118 billion last year. And venture capital fund-raising was flat, with 107 funds raising $19.7 billion compared with 103 funds raising $19 billion a year earlier.
Other types of firms–those perceived as most likely to benefit in the current environment–gained ground. Mezzanine funds, which invest in debt that also carries characteristics of equity, continue to have a strong year, gathering in $36.9 billion across 13 funds, compared with the $3 billion across nine funds through the third quarter of last year. Distressed firms also have well exceeded last year’s total through the third quarter. Eighteen funds have raised $37.9 billion, up 28% from $29.5 billion raised by 16 funds at this time last year.
“Instead of halting or materially decreasing investing in private equity–as was done in 2000 to 2002–this time around investors are looking to be more tactical investing capital in areas which may benefit in the current economic and business cycle,” said Brett Nelson, head of private equity at consulting firm Ennis Knupp + Associates.
–Keenan Skelly is a reporter for Private Equity Analyst, a Dow Jones publication and a contributor to Deal Journal.
Posted by Deal Journal
The investors who give private-equity firms the money to do deals still are plowing cash into the asset class, but increasingly it is being funneled away from buyout funds to more specialized investors.
Three-quarters of the way through the year, fund-raising by North American private-equity firms–a category that includes buyout, venture capital, mezzanine, distressed and several other types of firms–is ahead of last year’s pace. Through the end of September, 264 funds had raked in $222.6 billion, well ahead of the $200.4 billion raised by 298 funds at this time last year, according to data from LPSource.
That may seem a little nutty, given that the freeze-up in credit markets and the slower-growing economy stand to have a big impact on the private-equity asset class. But after the last downturn, in 2001 and 2002, many investors, known as limited partners, stopped investing in private equity, which turned out to be a bad move, as funds raised at that time eventually proved to be big winners. LPs say they have learned that lesson and will keep investing this time around.
That isn’t to say they aren’t hedging their bets. Buyout firms, which have been hardest hit by the credit crunch, raised $103.3 billion across 77 funds, down 12% from 98 funds that raised $118 billion last year. And venture capital fund-raising was flat, with 107 funds raising $19.7 billion compared with 103 funds raising $19 billion a year earlier.
Other types of firms–those perceived as most likely to benefit in the current environment–gained ground. Mezzanine funds, which invest in debt that also carries characteristics of equity, continue to have a strong year, gathering in $36.9 billion across 13 funds, compared with the $3 billion across nine funds through the third quarter of last year. Distressed firms also have well exceeded last year’s total through the third quarter. Eighteen funds have raised $37.9 billion, up 28% from $29.5 billion raised by 16 funds at this time last year.
“Instead of halting or materially decreasing investing in private equity–as was done in 2000 to 2002–this time around investors are looking to be more tactical investing capital in areas which may benefit in the current economic and business cycle,” said Brett Nelson, head of private equity at consulting firm Ennis Knupp + Associates.
–Keenan Skelly is a reporter for Private Equity Analyst, a Dow Jones publication and a contributor to Deal Journal.
Thursday, October 02, 2008
CD Forum: Dealmakers take a measure of the market
From The Deal.com, October 2, 2008:
The opening panel at The Deal's Corporate Dealmaker Forum reviewed the current state of an M&A market going through one of its most turbulent times in years.
Dealmakers Kenneth R. Meyers, the vice president of mergers and acquisitions at Siemens Corp.; David Drake, president of Georgeson Inc.; and Douglas L. Braunstein, J.P. Morgan Chase & Co.'s head of investment banking discussed the raft of opportunities opening up to corporate buyers.
"Debt is more expansive," said Drake, "but the prices are cheaper."
"Capital on balance sheet and liquidity are critical," Braunstein added. "Having access to liquidity and cash creates a great opportunity for certain corporate buyers. Those that are prepared for this are going to have some great buying opportunities."
Siemens' Meyers agreed, commenting, "These are the kinds of times that it paid off to be conservative and have a strong balance sheet. There are structural advantages to being a large corporate now."
All of the panelists agreed that the best opportunities for acquirers lay in the future since valuations will likely continue to fall, although the mindset of shareholders at target companies is proving resistant to change.
"Over the past year we've seen old habits dying hard," said Georgeson's Drake. "A lot of arbs and hedge funds are really getting burned as private equity firms and others walk away from deals." Citing the Microsoft Corp.-Yahoo! Inc. and Take-Two Interactive Software Inc.-Electronic Arts Inc. cases, he said, "In both cases some investors lost a lot. I do think it's going to be a game of chicken between the buyer's and the target's shareholders now that prices are coming down." "Pricing hasn't come down enough for people to take advantage of opportunities, but I think we're only about three to four months away from that," Braunstein added. "The buying power of strategics are eventually going to align [with valuations]. The problem is that prices haven't yet fallen enough for that to happen. When those align, I think you're going to see a lot more activity at that point." - George White
The opening panel at The Deal's Corporate Dealmaker Forum reviewed the current state of an M&A market going through one of its most turbulent times in years.
Dealmakers Kenneth R. Meyers, the vice president of mergers and acquisitions at Siemens Corp.; David Drake, president of Georgeson Inc.; and Douglas L. Braunstein, J.P. Morgan Chase & Co.'s head of investment banking discussed the raft of opportunities opening up to corporate buyers.
"Debt is more expansive," said Drake, "but the prices are cheaper."
"Capital on balance sheet and liquidity are critical," Braunstein added. "Having access to liquidity and cash creates a great opportunity for certain corporate buyers. Those that are prepared for this are going to have some great buying opportunities."
Siemens' Meyers agreed, commenting, "These are the kinds of times that it paid off to be conservative and have a strong balance sheet. There are structural advantages to being a large corporate now."
All of the panelists agreed that the best opportunities for acquirers lay in the future since valuations will likely continue to fall, although the mindset of shareholders at target companies is proving resistant to change.
"Over the past year we've seen old habits dying hard," said Georgeson's Drake. "A lot of arbs and hedge funds are really getting burned as private equity firms and others walk away from deals." Citing the Microsoft Corp.-Yahoo! Inc. and Take-Two Interactive Software Inc.-Electronic Arts Inc. cases, he said, "In both cases some investors lost a lot. I do think it's going to be a game of chicken between the buyer's and the target's shareholders now that prices are coming down." "Pricing hasn't come down enough for people to take advantage of opportunities, but I think we're only about three to four months away from that," Braunstein added. "The buying power of strategics are eventually going to align [with valuations]. The problem is that prices haven't yet fallen enough for that to happen. When those align, I think you're going to see a lot more activity at that point." - George White
Wednesday, September 24, 2008
What We Really Need from a Bailout Bill: 58 Trillion Reasons
The CorporateCounsel.Net blog, Sept. 24, 2008:
Predictably, the bare-boned Treasury proposal for a bailout bill - frought with Constitutional problems - is receiving backlash on the Hill. Also predictable - given that elections are coming up - many key Republicans have come around to the notion that the bailout bill should include limits on executive pay (see this Washington Post article and NY Times' article).
However, the bailout plan is missing a strategy to fix the problems that caused all the problems that the market faces. Without a going-forward plan, I don't see an end to shoveling money to the bailout. Simply banning short sales ain't gonna do it. Yesterday, SEC Chairman Cox testified about some of these problems before the Senate Banking Committee - here is an excerpt:
"The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps - double the amount outstanding in 2006 - is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.
Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can “naked short” the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. As the Congress considers fundamental reform of the financial system, I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets."
Predictably, the bare-boned Treasury proposal for a bailout bill - frought with Constitutional problems - is receiving backlash on the Hill. Also predictable - given that elections are coming up - many key Republicans have come around to the notion that the bailout bill should include limits on executive pay (see this Washington Post article and NY Times' article).
However, the bailout plan is missing a strategy to fix the problems that caused all the problems that the market faces. Without a going-forward plan, I don't see an end to shoveling money to the bailout. Simply banning short sales ain't gonna do it. Yesterday, SEC Chairman Cox testified about some of these problems before the Senate Banking Committee - here is an excerpt:
"The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps - double the amount outstanding in 2006 - is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.
Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can “naked short” the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. As the Congress considers fundamental reform of the financial system, I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets."
Wednesday, September 03, 2008
Sovereign Funds Agree on Voluntary Rules
NYT DealBook, September 3, 2008:
A working group of the International Monetary Fund said it reached a preliminary agreement on guidelines for sovereign wealth funds that invest abroad. It didn’t disclose specifics of the voluntary code of conduct, which is to be presented to I.M.F. members in October.
Government-run funds in the Mideast and Asia have recently stepped up their investments in overseas assets, taking minority stakes in companies — and especially troubled financial firms — in the United States, Europe and elsewhere.
This trend has created concern in some circles, because these sovereign funds generally disclose little information about their strategies or holdings. In some cases, these investments have generated a debate about potential national security implications.
The International Working Group of Sovereign Wealth Funds, whose members include representatives from more than 20 countries, including the United States and the United Arab Emirates, agreed on a set of principles after a two-day meeting in Santiago, Chile, that ended Tuesday.
In a joint statement, the group’s two co-chairs, Hamad al Suwaidi of the Abu Dhabi Investment Authority and Jaime Caruana, director of the International Monetary Funds Monetary and Capital Markets department, said, “These principles and practices will promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”
The details of the new guidelines weren’t revealed, but some are already speculating that they may not address all of the concerns out there.
“A voluntary set of principles and practices goes a long way to help de-mystify the methodology of sovereign wealth funds and how they invest, Debbie Fuller of law firm Eversheds told the BBC News. “However, a voluntary code will not satisfy certain governments who were hoping for some form of compulsory transparency rules.”
Go to Article from BBC News »Go to Press Release from the International Working Group of Sovereign Wealth Funds »
A working group of the International Monetary Fund said it reached a preliminary agreement on guidelines for sovereign wealth funds that invest abroad. It didn’t disclose specifics of the voluntary code of conduct, which is to be presented to I.M.F. members in October.
Government-run funds in the Mideast and Asia have recently stepped up their investments in overseas assets, taking minority stakes in companies — and especially troubled financial firms — in the United States, Europe and elsewhere.
This trend has created concern in some circles, because these sovereign funds generally disclose little information about their strategies or holdings. In some cases, these investments have generated a debate about potential national security implications.
The International Working Group of Sovereign Wealth Funds, whose members include representatives from more than 20 countries, including the United States and the United Arab Emirates, agreed on a set of principles after a two-day meeting in Santiago, Chile, that ended Tuesday.
In a joint statement, the group’s two co-chairs, Hamad al Suwaidi of the Abu Dhabi Investment Authority and Jaime Caruana, director of the International Monetary Funds Monetary and Capital Markets department, said, “These principles and practices will promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”
The details of the new guidelines weren’t revealed, but some are already speculating that they may not address all of the concerns out there.
“A voluntary set of principles and practices goes a long way to help de-mystify the methodology of sovereign wealth funds and how they invest, Debbie Fuller of law firm Eversheds told the BBC News. “However, a voluntary code will not satisfy certain governments who were hoping for some form of compulsory transparency rules.”
Go to Article from BBC News »Go to Press Release from the International Working Group of Sovereign Wealth Funds »
Tuesday, September 02, 2008
With Much Applause: DOJ Revises Attorney-Client Privilege Guidelines
Last Thursday, the DOJ released a new set of guidelines regarding how it would charge companies. The new guidelines are effective immediately and they revoke earlier - and heavily criticized - guidelines issued under then-Deputy Attorney General Larry Thompson, which were then subsequently revised by then-Deputy Attorney General Paul McNulty. Here is the DOJ press release - and remarks from Deputy Attorney General Mark Filip.
The new guidelines parallel the legislative proposals contained in the reborn "Attorney-Client Privilege Protection Act of 2008," which has passed in the House and pending in the Senate. So we ponder the big question: whether the new guidance sufficently protects the attorney-client privilege and work product protection, or whether congressional legislation is still desirable?
Apparently, the sponsor of the legislation thinks so. Sen. Arlen Specter issued a statement Thursday that says: “The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.”
The new guidelines parallel the legislative proposals contained in the reborn "Attorney-Client Privilege Protection Act of 2008," which has passed in the House and pending in the Senate. So we ponder the big question: whether the new guidance sufficently protects the attorney-client privilege and work product protection, or whether congressional legislation is still desirable?
Apparently, the sponsor of the legislation thinks so. Sen. Arlen Specter issued a statement Thursday that says: “The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.”
Wednesday, August 27, 2008
How Tightening Credit Is Hitting Venture Debt Firms
DealJournal, WSJ.com, August 27, 2008:
Providers of loans to start-up and other venture-backed companies are feeling the pinch of the credit problems plaguing Wall Street.
The latest is publicly traded venture debt provider Hercules Technology Growth Capital, which on Monday said it secured a $50 million line of credit from Wells Fargo–much smaller than the $250 million in available credit it secured from Citigroup and Deutsche Bank last year. “We’ve been in discussions, and continue to be in discussions [with Citigroup and Deutsche Bank] about continuing the existing facility, but their appetite to expand the facility we have with them is somewhat limited,” said Scott Harvey, Hercules Technology’s chief legal officer.
Most venture debt providers use a combination of equity and debt to provide loans to small, privately held life science and technology businesses. These firms will still be able to make loans from their own equity, but expect fewer venture-backed companies to be on the receiving end of those loans. “The best companies can still find credit at attractive terms, but as the available credit shrinks, the marginal companies are having more trouble getting deals done,” as are those companies looking for bigger financings, said Maurice Werdegar, an investment partner with Western Technology.
But even the highest-quality venture-backed companies might begin to see tougher terms and higher interest rates as the credit crunch continues. “It’s fair to say that this is starting to trickle down into the borrowing base. As the cost of capital goes up, that has to get passed along,” said Harvey, who added that he expects to begin seeing higher rates in the next three to six months.
Harvey said $50 million is adequate to meet the firm’s needs, and Hercules won’t be looking to add to the facility for at least another three months, but could raise as much as $300 million over the next two years. Harvey added that the company is being cautious about expanding the line of credit because there is a nonuse fee built into it.
Hercules, which has made about $1.3 billion in commitments to life science and technology companies since its inception in 2003, isn’t alone. This month, Western Technology Investment disclosed that its $125 million credit facility is being pulled by J.P. Morgan Chase and Deutsche Bank. “This is not isolated to us or our industry. Basically, the banks are unwinding the lending process,” said Ron Swenson, Western Technology’s chief executive.
Western Technology still has $220 million in equity remaining in its twelfth and most recent fund, which closed in February 2007.
–Scott Denne is a reporter at VentureWire, a Dow Jones publication and a contributor to Deal Journal.
Providers of loans to start-up and other venture-backed companies are feeling the pinch of the credit problems plaguing Wall Street.
The latest is publicly traded venture debt provider Hercules Technology Growth Capital, which on Monday said it secured a $50 million line of credit from Wells Fargo–much smaller than the $250 million in available credit it secured from Citigroup and Deutsche Bank last year. “We’ve been in discussions, and continue to be in discussions [with Citigroup and Deutsche Bank] about continuing the existing facility, but their appetite to expand the facility we have with them is somewhat limited,” said Scott Harvey, Hercules Technology’s chief legal officer.
Most venture debt providers use a combination of equity and debt to provide loans to small, privately held life science and technology businesses. These firms will still be able to make loans from their own equity, but expect fewer venture-backed companies to be on the receiving end of those loans. “The best companies can still find credit at attractive terms, but as the available credit shrinks, the marginal companies are having more trouble getting deals done,” as are those companies looking for bigger financings, said Maurice Werdegar, an investment partner with Western Technology.
But even the highest-quality venture-backed companies might begin to see tougher terms and higher interest rates as the credit crunch continues. “It’s fair to say that this is starting to trickle down into the borrowing base. As the cost of capital goes up, that has to get passed along,” said Harvey, who added that he expects to begin seeing higher rates in the next three to six months.
Harvey said $50 million is adequate to meet the firm’s needs, and Hercules won’t be looking to add to the facility for at least another three months, but could raise as much as $300 million over the next two years. Harvey added that the company is being cautious about expanding the line of credit because there is a nonuse fee built into it.
Hercules, which has made about $1.3 billion in commitments to life science and technology companies since its inception in 2003, isn’t alone. This month, Western Technology Investment disclosed that its $125 million credit facility is being pulled by J.P. Morgan Chase and Deutsche Bank. “This is not isolated to us or our industry. Basically, the banks are unwinding the lending process,” said Ron Swenson, Western Technology’s chief executive.
Western Technology still has $220 million in equity remaining in its twelfth and most recent fund, which closed in February 2007.
–Scott Denne is a reporter at VentureWire, a Dow Jones publication and a contributor to Deal Journal.
Tuesday, August 26, 2008
A Record Pace for Buying Minority Stakes in Companies
WSJ DealJournal, August 26, 2008:
Takeover activity may be down in the dumps, but acquisitions of minority stakes in companies are on a record pace, with financial industry purchases dominating the category.
Roughly $496 billion has been spent this year buying minority stakes in companies, the highest year-to-date figure recorded by data provider Dealogic, and 30% more than the $381 million of deals struck in the year-earlier period. The financial sector is the most targeted industry, with acquisitions totaling $88.9 billion, followed by mining sector and oil-and-gas companies, at $49.8 billion and $44.4 billion, respectively.
The largest completed acquisition of a minority stake this year is Aluminium Corp. of China and Alcoa’s spending $14.3 billion to buy a 12% stake in miner Rio Tinto. Last month’s $9.1 billion purchase by German ball-bearing concern Schaeffler Group of a stake in tire maker Continental is the most recent large deal.
U.S. companies have been the most targeted, with deals valued at $83.9 billion completed this year, followed by the U.K. at $60 billion and Germany at $37.1 billion.
Goldman Sachs Group tops the rankings for advising on minority acquisitions, with deal credits totaling $49.5 billion, $6 million ahead of second-place Credit Suisse Group.
–Harry Wilson is investment banking editor at Financial News, a Dow Jones publication and a contributor to Deal Journal.
Takeover activity may be down in the dumps, but acquisitions of minority stakes in companies are on a record pace, with financial industry purchases dominating the category.
Roughly $496 billion has been spent this year buying minority stakes in companies, the highest year-to-date figure recorded by data provider Dealogic, and 30% more than the $381 million of deals struck in the year-earlier period. The financial sector is the most targeted industry, with acquisitions totaling $88.9 billion, followed by mining sector and oil-and-gas companies, at $49.8 billion and $44.4 billion, respectively.
The largest completed acquisition of a minority stake this year is Aluminium Corp. of China and Alcoa’s spending $14.3 billion to buy a 12% stake in miner Rio Tinto. Last month’s $9.1 billion purchase by German ball-bearing concern Schaeffler Group of a stake in tire maker Continental is the most recent large deal.
U.S. companies have been the most targeted, with deals valued at $83.9 billion completed this year, followed by the U.K. at $60 billion and Germany at $37.1 billion.
Goldman Sachs Group tops the rankings for advising on minority acquisitions, with deal credits totaling $49.5 billion, $6 million ahead of second-place Credit Suisse Group.
–Harry Wilson is investment banking editor at Financial News, a Dow Jones publication and a contributor to Deal Journal.
When will Lehman Brothers die?
NYT DealBook, by Andrew Ross Sorkin, August 26, 2008:
Judging by the headlines, you’d think the troubled investment bank would go belly up any day now. In fact, it probably never will.
Lehman may not be too big to fail, but it may be too important to fail. Why? Because Richard S. Fuld Jr., Lehman’s chairman and chief executive, is too important. He is a member of an exclusive club: the board of directors of the Federal Reserve Bank of New York.
It’s hard to believe that the Fed would let one of its own fail the way Bear Stearns did. Another member of club Fed, James Dimon, JPMorgan Chase’s chief executive, was handed the deal of a lifetime. Alan D. Schwartz of Bear Stearns? Not a member.
Given Mr. Fuld’s access to Fed chief Ben S. Bernanke and Mr. Bernanke’s man on Wall Street, Timothy F. Geithner, Mr. Fuld is in a much better position than his rivals to keep his firm alive. A prediction: Watch the Fed’s discount window for loans to brokerage firms. It won’t close until Mr. Fuld is out of the woods.
Judging by the headlines, you’d think the troubled investment bank would go belly up any day now. In fact, it probably never will.
Lehman may not be too big to fail, but it may be too important to fail. Why? Because Richard S. Fuld Jr., Lehman’s chairman and chief executive, is too important. He is a member of an exclusive club: the board of directors of the Federal Reserve Bank of New York.
It’s hard to believe that the Fed would let one of its own fail the way Bear Stearns did. Another member of club Fed, James Dimon, JPMorgan Chase’s chief executive, was handed the deal of a lifetime. Alan D. Schwartz of Bear Stearns? Not a member.
Given Mr. Fuld’s access to Fed chief Ben S. Bernanke and Mr. Bernanke’s man on Wall Street, Timothy F. Geithner, Mr. Fuld is in a much better position than his rivals to keep his firm alive. A prediction: Watch the Fed’s discount window for loans to brokerage firms. It won’t close until Mr. Fuld is out of the woods.
Monday, August 25, 2008
PE Sales to Strategic Buyers Defy Weak Exit Market
WSJ DealJournal, August 25, 2008:
With a lackluster IPO market and continued weakness in the appetite of financial buyers, strategic acquirers have been a key source of liquidity for firms that look to sell assets.
U.S. sales to strategic, or corporate, buyers by private-equity firms are up 46% to $63.1 billion through Aug. 20, from $43.1 billion a year earlier, according to data provider Dealogic. though the number of such deals fell to 70 from 88.
This theme is playing out more modestly around the globe. Sales to corporate buyers world-wide are up 8% to $107.5 billion from $99.4 billion, with the number of deals falling to 255 from 356. By contrast, secondary buyouts–or sales to other PE firms–are down 93% in the U.S. and 83% globally.
Buyout shop executives and intermediaries alike say since the credit markets seized up, strategic buyers have come back with a vengeance, after previously losing auctions repeatedly to cash-rich financial sponsors. For PE firms, it is a silver lining in an otherwise bleak exit environment.
Chicago Growth Partners and ClearLight Partners stand to receive more than three times their money when their sale of campus-services company U.S. Education to education concern DeVry for $290 million is complete. while Carlyle Venture Partners, Wachovia Capital Partners and Spire Capital Partners sold security company Sonitrol to Stanley Works last month for $276 million, or about 10 times earnings before interest, taxes, depreciation and amortization. That is more than twice what the PE firms paid for Sonitrol in 2004 and on top of a sonitrol dividend the sponsors paid themselves in 2005.
With a lackluster IPO market and continued weakness in the appetite of financial buyers, strategic acquirers have been a key source of liquidity for firms that look to sell assets.
U.S. sales to strategic, or corporate, buyers by private-equity firms are up 46% to $63.1 billion through Aug. 20, from $43.1 billion a year earlier, according to data provider Dealogic. though the number of such deals fell to 70 from 88.
This theme is playing out more modestly around the globe. Sales to corporate buyers world-wide are up 8% to $107.5 billion from $99.4 billion, with the number of deals falling to 255 from 356. By contrast, secondary buyouts–or sales to other PE firms–are down 93% in the U.S. and 83% globally.
Buyout shop executives and intermediaries alike say since the credit markets seized up, strategic buyers have come back with a vengeance, after previously losing auctions repeatedly to cash-rich financial sponsors. For PE firms, it is a silver lining in an otherwise bleak exit environment.
Chicago Growth Partners and ClearLight Partners stand to receive more than three times their money when their sale of campus-services company U.S. Education to education concern DeVry for $290 million is complete. while Carlyle Venture Partners, Wachovia Capital Partners and Spire Capital Partners sold security company Sonitrol to Stanley Works last month for $276 million, or about 10 times earnings before interest, taxes, depreciation and amortization. That is more than twice what the PE firms paid for Sonitrol in 2004 and on top of a sonitrol dividend the sponsors paid themselves in 2005.
Wednesday, August 20, 2008
Germany backs law to protect firms from foreigners
BERLIN, Aug 20 (Reuters) - Germany's cabinet agreed on Wednesday to bring in rules to protect domestic firms from foreign buyers, notably sovereign wealth funds (SWFs), who could exert political influence, a German government official said.
Under the new rules, the government will be able to review and veto purchases of stakes of 25 percent or more in German firms made by buyers outside the EU or European Free Trade Association if it deems German security is at risk.
The rules, to stop cash-rich SWFs from countries including Russia, China and Gulf states exerting leverage in strategic sectors, extend the law -- which currently applies only to the arms industry -- to all sectors.
SWFs control an estimated $3 trillion in assets globally.
Economists and some industry groups have warned that any signs the government of the world's No.1 goods exporter is taking steps which could be viewed by markets as protectionist may frighten off foreign investors.
The government has stressed it would intervene only in exceptional cases.
The Economy Ministry will be able to look at a purchase up to three months after the acquisition is made or the intention to make an acquisition is made public. It then has two months to decide whether to veto the purchase.
Parliament still has to pass the plans. For a factbox on the rules, please click on [ID:nLJ374737] (Reporting by Madeline Chambers; Editing by Louise Ireland)
Under the new rules, the government will be able to review and veto purchases of stakes of 25 percent or more in German firms made by buyers outside the EU or European Free Trade Association if it deems German security is at risk.
The rules, to stop cash-rich SWFs from countries including Russia, China and Gulf states exerting leverage in strategic sectors, extend the law -- which currently applies only to the arms industry -- to all sectors.
SWFs control an estimated $3 trillion in assets globally.
Economists and some industry groups have warned that any signs the government of the world's No.1 goods exporter is taking steps which could be viewed by markets as protectionist may frighten off foreign investors.
The government has stressed it would intervene only in exceptional cases.
The Economy Ministry will be able to look at a purchase up to three months after the acquisition is made or the intention to make an acquisition is made public. It then has two months to decide whether to veto the purchase.
Parliament still has to pass the plans. For a factbox on the rules, please click on [ID:nLJ374737] (Reporting by Madeline Chambers; Editing by Louise Ireland)
Monday, August 18, 2008
In an Ohio State of Mind
August 15, 2008, NYT Times DealBook, by Steven M. Davidoff, The Deal Professor.
In light of Delaware’s dominance of takeover regulation, it is easy to forget that other states have their own, sometimes very different, takeover laws and procedures.
California rejects Delaware’s Revlon doctrine, which requires that a board obtain the highest price reasonably available when a break-up or sale of the company is inevitable; Texas requires a two-thirds vote to approve a takeover via a merger; and Pennsylvania has the toughest antitakeover laws in the nation, the result of an attempt in the 1980s to protect its industrial enterprises from out-of-state acquirers.
I was thinking about this in light of Thursday’s moves by Harbinger Capital Management.
Harbinger, a hedge-fund firm much in the headlines these days, has delivered a control share acquisition statement to Cleveland-Cliffs under Ohio’s Control Share Acquisition Statute, proposing to acquire up to one-third of Cleveland-Cliffs.
Cleveland-Cliffs is a mining company incorporated under the laws of Ohio and therefore governed by Ohio’s takeover laws. Harbinger took this step in order to block Cleveland’s pending acquisition of Alpha Natural Resources.
Cleveland is the proposed acquirer of Alpha, but it is required to hold a vote to approve the acquisition under Ohio law (and New York Stock Exchange rules, for that matter).
A quirky Ohio antitakeover statute (Section 1701.83 of the Ohio General Corporate law) requires Cleveland-Cliffs to have a vote of its shareholders to approve any issuance of its shares in an acquisition transaction in which it issues stock representing more than than one-sixth of its voting power.
The vote requirement is not the quirk; NYSE rules require a similar vote if a company issues more than 20 percent of its voting power. But rather the quirk is that two-thirds of Cleveland’s shareholders must approve the acquisition under the statute.
This is a problem for Cleveland. Harbinger already owns 15.57 percent of the company. If it acquires all of the shares it seeks, or even a significant portion of them, it will be able to block Cleveland-Cliffs’ acquisition of Alpha.
But before Harbinger can acquire this position, it must comply with another Ohio law, the Ohio Control Share Acquisition Statute (Section 1701.831 of the Ohio General Corporate Law).
This species of law is common in many states, but is not the law of Delaware. Control share acquisition statutes, along with other state antitakeover laws, were often passed in the 1980s to stem hostile takeovers of local enterprises.
Ohio’s version of the control share acquisition statute requires that shareholders pre-approve any acquisition that, when added to the proposed buyer’s current share ownership, would equal one-fifth or more of the company’s voting power as relates to the election of directors.
So, Harbinger’s delivery of a control share acquisition statement is the first step required in this process.
Ultimately, the statute requires that Harbinger’s acquisition be approved by a majority of those shares that are present at the shareholder meeting voting on this acquisition. However, the count excludes all interested shares; interested shares are defined to include the acquiring person’s shares (in this case Harbinger).
Notably, Ohio, in its infinite wisdom, has also adopted an anti-arbitrageur provision to this statute. This so-called “arb” provision was added in 2003 after Northrop Grumman’s acquisition of TRW, which was based in Ohio. It effectively disenfranchises from voting at the meeting, for the purposes of the control share acquisition statute, any shareholder who acquires a block of shares constituting more than 0.5 percent of the company — in this situation, Cleveland-Cliffs — after the announcement of the control share acquisition.
In Cleveland’s case, that cutoff date was Thursday. Be careful out there.
Now, Cleveland is in a race, with two separate shareholder meetings on the horizon. One is to approve or reject the Alpha Natural Resources acquisition. The second will decide whether or not Harbinger can acquire a sufficient number of shares to block the Alpha transaction.
The question is this: Can Cleveland hold a vote to approve the acquisition of Alpha before the vote to authorize Harbinger’s acquisition of more shares in order to block the transaction?
Or, more appropriately, can Cleveland set the record date for the Alpha meeting — the date on which it counts shareholders eligible to vote — before Harbinger acquires the shares it seeks?
If Cleveland can do so, then Harbinger will need to obtain the votes of other shareholders to block the transaction. Harbinger is stuck until then. Though it can conduct a proxy solicitation against the vote, under the law it can’t acquire more than one-fifth of Cleveland without this shareholder approval.
For those handicapping this race, the determinant of whether or not Cleveland can indeed set this record date before the Alpha meeting will be Cleveland’s ability to clear its pending registration statement with the Securities and Exchange Commission in time.
Under Ohio law, the Harbinger meeting can be set by the Cleveland board on a date any day 50 days after Thursday, and the record date any day in that period.
That is a decent amount of time, and so I am betting that Cleveland will win this race.
Of course, Cleveland could simply cut through all this by adopting a poison pill to block the acquisition.
Ultimately, Harbinger is posturing here: At this point, Harbinger can likely pull together the remaining shares to block this deal even if it cannot purchase them. The Alpha deal is unlikely to be completed and the question is whether or not Cleveland actually pushes this to a vote and Alpha, out of hope or simply because they are furious, requires that Cleveland do so.
In the meantime, Alpha disclosed in the Cleveland registration statement that it had other suitors (Arcelor Mittal?) though not at the right price.
Will those suitors return? Of course, there are other questions too, such as, what does Harbinger really want? And why didn’t Cleveland get better assurances from Harbinger before agreeing to this acquisition?
This battle also points to the absurdity of the Ohio Control Share Acquisition statute and similar laws. They were adopted back in the 1980s, before the poison pill, to provide companies a defense against tender offers.
Putting aside the appropriateness of states protecting inefficient enterprises and their doubtful economic efficiency, the threat the tender offer posed back then no longer exists. A company can adopt a poison pill to stop a tender offer in its tracks.
So at this point, these statutes are a needless procedural formality. Though for companies like Cleveland Cliffs and Diebold, which is the subject of a hostile offer by United Technologies, they’re a nice protective boon.
Harbingers control share acquisition statement is available here.
In light of Delaware’s dominance of takeover regulation, it is easy to forget that other states have their own, sometimes very different, takeover laws and procedures.
California rejects Delaware’s Revlon doctrine, which requires that a board obtain the highest price reasonably available when a break-up or sale of the company is inevitable; Texas requires a two-thirds vote to approve a takeover via a merger; and Pennsylvania has the toughest antitakeover laws in the nation, the result of an attempt in the 1980s to protect its industrial enterprises from out-of-state acquirers.
I was thinking about this in light of Thursday’s moves by Harbinger Capital Management.
Harbinger, a hedge-fund firm much in the headlines these days, has delivered a control share acquisition statement to Cleveland-Cliffs under Ohio’s Control Share Acquisition Statute, proposing to acquire up to one-third of Cleveland-Cliffs.
Cleveland-Cliffs is a mining company incorporated under the laws of Ohio and therefore governed by Ohio’s takeover laws. Harbinger took this step in order to block Cleveland’s pending acquisition of Alpha Natural Resources.
Cleveland is the proposed acquirer of Alpha, but it is required to hold a vote to approve the acquisition under Ohio law (and New York Stock Exchange rules, for that matter).
A quirky Ohio antitakeover statute (Section 1701.83 of the Ohio General Corporate law) requires Cleveland-Cliffs to have a vote of its shareholders to approve any issuance of its shares in an acquisition transaction in which it issues stock representing more than than one-sixth of its voting power.
The vote requirement is not the quirk; NYSE rules require a similar vote if a company issues more than 20 percent of its voting power. But rather the quirk is that two-thirds of Cleveland’s shareholders must approve the acquisition under the statute.
This is a problem for Cleveland. Harbinger already owns 15.57 percent of the company. If it acquires all of the shares it seeks, or even a significant portion of them, it will be able to block Cleveland-Cliffs’ acquisition of Alpha.
But before Harbinger can acquire this position, it must comply with another Ohio law, the Ohio Control Share Acquisition Statute (Section 1701.831 of the Ohio General Corporate Law).
This species of law is common in many states, but is not the law of Delaware. Control share acquisition statutes, along with other state antitakeover laws, were often passed in the 1980s to stem hostile takeovers of local enterprises.
Ohio’s version of the control share acquisition statute requires that shareholders pre-approve any acquisition that, when added to the proposed buyer’s current share ownership, would equal one-fifth or more of the company’s voting power as relates to the election of directors.
So, Harbinger’s delivery of a control share acquisition statement is the first step required in this process.
Ultimately, the statute requires that Harbinger’s acquisition be approved by a majority of those shares that are present at the shareholder meeting voting on this acquisition. However, the count excludes all interested shares; interested shares are defined to include the acquiring person’s shares (in this case Harbinger).
Notably, Ohio, in its infinite wisdom, has also adopted an anti-arbitrageur provision to this statute. This so-called “arb” provision was added in 2003 after Northrop Grumman’s acquisition of TRW, which was based in Ohio. It effectively disenfranchises from voting at the meeting, for the purposes of the control share acquisition statute, any shareholder who acquires a block of shares constituting more than 0.5 percent of the company — in this situation, Cleveland-Cliffs — after the announcement of the control share acquisition.
In Cleveland’s case, that cutoff date was Thursday. Be careful out there.
Now, Cleveland is in a race, with two separate shareholder meetings on the horizon. One is to approve or reject the Alpha Natural Resources acquisition. The second will decide whether or not Harbinger can acquire a sufficient number of shares to block the Alpha transaction.
The question is this: Can Cleveland hold a vote to approve the acquisition of Alpha before the vote to authorize Harbinger’s acquisition of more shares in order to block the transaction?
Or, more appropriately, can Cleveland set the record date for the Alpha meeting — the date on which it counts shareholders eligible to vote — before Harbinger acquires the shares it seeks?
If Cleveland can do so, then Harbinger will need to obtain the votes of other shareholders to block the transaction. Harbinger is stuck until then. Though it can conduct a proxy solicitation against the vote, under the law it can’t acquire more than one-fifth of Cleveland without this shareholder approval.
For those handicapping this race, the determinant of whether or not Cleveland can indeed set this record date before the Alpha meeting will be Cleveland’s ability to clear its pending registration statement with the Securities and Exchange Commission in time.
Under Ohio law, the Harbinger meeting can be set by the Cleveland board on a date any day 50 days after Thursday, and the record date any day in that period.
That is a decent amount of time, and so I am betting that Cleveland will win this race.
Of course, Cleveland could simply cut through all this by adopting a poison pill to block the acquisition.
Ultimately, Harbinger is posturing here: At this point, Harbinger can likely pull together the remaining shares to block this deal even if it cannot purchase them. The Alpha deal is unlikely to be completed and the question is whether or not Cleveland actually pushes this to a vote and Alpha, out of hope or simply because they are furious, requires that Cleveland do so.
In the meantime, Alpha disclosed in the Cleveland registration statement that it had other suitors (Arcelor Mittal?) though not at the right price.
Will those suitors return? Of course, there are other questions too, such as, what does Harbinger really want? And why didn’t Cleveland get better assurances from Harbinger before agreeing to this acquisition?
This battle also points to the absurdity of the Ohio Control Share Acquisition statute and similar laws. They were adopted back in the 1980s, before the poison pill, to provide companies a defense against tender offers.
Putting aside the appropriateness of states protecting inefficient enterprises and their doubtful economic efficiency, the threat the tender offer posed back then no longer exists. A company can adopt a poison pill to stop a tender offer in its tracks.
So at this point, these statutes are a needless procedural formality. Though for companies like Cleveland Cliffs and Diebold, which is the subject of a hostile offer by United Technologies, they’re a nice protective boon.
Harbingers control share acquisition statement is available here.
Friday, August 08, 2008
U.S. Regulations Did Not Hurt Companies, Study Finds
It has become received wisdom on Wall Street that the Sarbanes-Oxley Act has damaged American competitiveness. It made listing in the American market less attractive to foreign companies and drove initial public offerings overseas. It raised costs for American companies without providing any significant benefit.
But do the facts support that wisdom?
The answer, according to The New York Times’s Floyd Norris: No.
A new study of the foreign companies that fled the American market after the Securities and Exchange Commission made it easy for them to do so in 2007 suggests that the companies that left were largely ones whose slow growth, and poor market performance, had reduced their need and ability to attract American capital. There is even some indication that the market punished companies that decided to leave even though they could still use the capital.
What the study shows, said one of the authors, G. Andrew Karolyi, a finance professor at Ohio State, is that the market did not react favorably when companies got out from under American regulation.
Instead, the paper by Mr. Korolyi, along with René M. Stulz, also of Ohio State, and Craig Doidge of the University of Toronto, found that share prices suffered in the few cases where foreign companies with good growth prospects left the American market. “When they choose to leave even though they are benefiting” from the American listing, Mr. Karolyi said in an interview, “shareholders may wonder if there is something sneaky going on.”
There has long been evidence that overseas firms benefit, through a lower cost of capital, when they choose to list their shares in the United States. Their shares trade for higher prices than do those of similar companies that do not choose to list here.
Why is that? The traditional answer is that investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.
The advantage of an American listing faded early in this decade, although it did not vanish. The scandals at Enron and WorldCom did not renew faith in American rules, and it turned out that the American listing premium had soared in the late 1990s in part because foreign technology companies flocked to the United States to take advantage of what turned out to be a bubble. Their collapse made the American premium seem smaller.
The premium hit bottom in 2002, and recovered somewhat after that. Was that a reflection of investor confidence being renewed by passage of Sarbanes-Oxley? Not to hear the critics tell it. The Committee on Capital Markets Regulation, an independent panel whose creation in 2006 was heralded by Treasury Secretary Henry M. Paulson Jr., cited that data as proof that Sarbanes-Oxley hurt the markets. Their logic: The average premium after 2002, when the law passed, was lower than it was before the bubble burst. The committee ignored the fact the premium rose after the law was passed.
There is no question that the costs of complying with Section 404 of the law — requiring audits of corporate internal controls — has scared executives in the United States and abroad. The first year of audits found lots of problems, but for the vast majority of large companies those problems have since been fixed. And the costs of audits, which soared, have stabilized.
That does not prove the audits were worth the cost, although the fact that so many problems were fixed — in some cases requiring substantial accounting restatements — does indicate there was considerable benefit.
Go to Article from The New York Times »
But do the facts support that wisdom?
The answer, according to The New York Times’s Floyd Norris: No.
A new study of the foreign companies that fled the American market after the Securities and Exchange Commission made it easy for them to do so in 2007 suggests that the companies that left were largely ones whose slow growth, and poor market performance, had reduced their need and ability to attract American capital. There is even some indication that the market punished companies that decided to leave even though they could still use the capital.
What the study shows, said one of the authors, G. Andrew Karolyi, a finance professor at Ohio State, is that the market did not react favorably when companies got out from under American regulation.
Instead, the paper by Mr. Korolyi, along with René M. Stulz, also of Ohio State, and Craig Doidge of the University of Toronto, found that share prices suffered in the few cases where foreign companies with good growth prospects left the American market. “When they choose to leave even though they are benefiting” from the American listing, Mr. Karolyi said in an interview, “shareholders may wonder if there is something sneaky going on.”
There has long been evidence that overseas firms benefit, through a lower cost of capital, when they choose to list their shares in the United States. Their shares trade for higher prices than do those of similar companies that do not choose to list here.
Why is that? The traditional answer is that investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.
The advantage of an American listing faded early in this decade, although it did not vanish. The scandals at Enron and WorldCom did not renew faith in American rules, and it turned out that the American listing premium had soared in the late 1990s in part because foreign technology companies flocked to the United States to take advantage of what turned out to be a bubble. Their collapse made the American premium seem smaller.
The premium hit bottom in 2002, and recovered somewhat after that. Was that a reflection of investor confidence being renewed by passage of Sarbanes-Oxley? Not to hear the critics tell it. The Committee on Capital Markets Regulation, an independent panel whose creation in 2006 was heralded by Treasury Secretary Henry M. Paulson Jr., cited that data as proof that Sarbanes-Oxley hurt the markets. Their logic: The average premium after 2002, when the law passed, was lower than it was before the bubble burst. The committee ignored the fact the premium rose after the law was passed.
There is no question that the costs of complying with Section 404 of the law — requiring audits of corporate internal controls — has scared executives in the United States and abroad. The first year of audits found lots of problems, but for the vast majority of large companies those problems have since been fixed. And the costs of audits, which soared, have stabilized.
That does not prove the audits were worth the cost, although the fact that so many problems were fixed — in some cases requiring substantial accounting restatements — does indicate there was considerable benefit.
Go to Article from The New York Times »
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