M&A Is Back! Well, Almost. Maybe

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

Signs of an Upswing in Merger Activity

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

July in M&A

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

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

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

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

An End to Management Fees at Buy-Out Shops?

From TheDeal.com, July 6, 2009:

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

40% Drop in M&A Deals in First Half

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

Study Projects Upsurge in M.& A. Activity

From DealBook.blog, June 17, 2009:

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

Distressed deals: Strategics coming on strong

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

Deal Activity Is Down 40% So Far This Year

From DealBook, June 4, 2009:

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

Buyout Firms Face $400 Billion Overhang

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

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

From TheDeal.com, May 22, 2009:

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

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

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

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

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

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

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

Administration Plans to Strengthen Antitrust Rules

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

SEC Enforcement: Past, Present and Future

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

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

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

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

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Another View: A Bailout for the Plaintiff’s Bar

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

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

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

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

Q1 Worldwide M&A League Table

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

Nail the Shorts?

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

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

Will the stimulus package stimulate M&A?

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

Angel Investors’ Wings Are Being Clipped

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

Naked Short Selling

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

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

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

From TheCorporateCounsel.net Blog, March 13, 2009:

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

Buffett on Private Equity

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

VCs challenge Obama plan to up carried interest tax

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

Survey: VC, Startups Feel the Pain

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

The American Recovery and Reinvestment Act

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

Congress strengthens executives’ pay limits

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

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

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

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

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

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

Another View: Lessons From the Budweiser Battle

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

Don't eulogize private equity, Kravis says

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

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

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

Venture capital fund-raising down sharply

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

Credit Markets’ Spring Awakening May Help Mergers

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.

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.

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.

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