Corporate Dealmaker Forum, Deceber 28, 2007:
Alan Alpert, a senior partner and leader of the global and U.S. M&A transaction services practices for Deloitte, has given CD Forum a quick-hit list of trends he's seeing for the New Year. David Carney, a principal with Deloitte Consulting LLP, also contributed to the list.
With corporate cash balances at their highest levels since 1985, strategic buyers have a near term market advantage. Savvy buyers with clear strategic growth objectives should be able to capitalize on shifting market dynamics driven from the credit crunch and general economic uncertainty, including less competition from PEIs and the need to bolster balance sheets or merge in competitive segments.
Stagnating capital deployment from the war chests that PEIs have amassed in recent years doesn't mean PEIs will sit idle on the sidelines while credit markets remain tight. Funds are looking for alternate transaction scenarios outside their typical space, such as portfolio company add-ons, smaller deals, bigger equity checks, private investments in public entities (PIPEs), joint ventures and/or minority stakes. With near-term exit strategies potentially impacted by economic uncertainty, some PEIs are focusing on improving portfolio companies’ performance and reevaluating debt loads on highly leveraged companies.
The emergence of new sources of capital and currency movements has created a new playing field for cross-border investment. Outbound activity from China and Japan is on the rise; PEI expansion into central eastern Europe is providing opportunities for larger equity stakes; and the BRIC nations are becoming a larger force in the world economy and deal making—with growing inbound and outbound activity. U.S. companies and assets hold particular appeal for foreign investors wanting to diversify their investment portfolios, and the role of sovereign wealth funds can't be ignored as they emerge more frequently at the deal table and potentially look to partner with PEIs or take controlling stakes.
Interest in infrastructure has crossed the pond into to the U.S. With an ageing infrastructure and increasing number of U.S. municipalities looking to monetize public assets, the U.S. is a greenfield opportunity for infrastructure deals. Despite the potential regulatory and political hurdles inherent in these transactions, more experienced offshore investors/operators and newly raised U.S. infrastructure funds are bidding on U.S. assets and bringing alternative investment structures and vehicles to the market.
In the wake of the deal boom, companies will need to reconsider the strategies driving previous mergers and acquisitions and whether transactions will realize expected synergies. Companies need to take a candid self assessment on their deals and take a "Day 2" approach to reignite and accelerate synergies or consider alternate means to create value.
Monday, December 31, 2007
Friday, December 28, 2007
M&A Ends 2007 With a Bang
Deal Journal, WSJ.com, December 28, 2007:
Reports of the M&A market’s demise may have been greatly exaggerated.
Much has been made of the slowdown in deal making and the toll the credit crunch is taking on M&A, especially on leveraged buyouts. That perhaps has overshadowed this simple fact: The biggest deal making year in history is ending quite strongly. In fact, deal making continues to chug along at levels not often seen before.
Companies and private-equity firms struck $1.093 trillion worth of transactions in the fourth quarter, according to Dealogic. That would rank it as the second biggest quarter this year and the third largest quarter in the past 12. Even if you subtract BHP Billiton’s $149.2 billion offer for Rio Tinto, that figure stands at about $944 billion and ranks ahead of six quarters since the beginning of 2005.
December marked the third straight month to top $300 billion in deal volume, according to Dealogic.
Even the U.S., which was hardest hit by the credit crunch, began to show signs of coming to life in December. Led by sovereign wealth funds scooping up stakes in U.S. financial institutions, foreign buyers increasingly found the U.S. attractive.
U.S. deal volume hit $121 billion in the month, surpassing $100 billion for the first time since July, and down just 8.4% from December 2006, according to Dealogic. Meanwhile, acquisitions of U.S. firms by foreign buyers surged to $107.8 billion in the fourth quarter — the largest quarterly total in the past 12.
With private-equity players still on the sideline, corporate buyers are indeed filling the void. Not only did corporate deal volume reach $955 billion in the fourth quarter, its second highest level of the year (the second quarter, which marked the peak of the boom, ranks higher). It also accounted for 87% of all deal volume – its largest percentage of the past four quarters.
Reports of the M&A market’s demise may have been greatly exaggerated.
Much has been made of the slowdown in deal making and the toll the credit crunch is taking on M&A, especially on leveraged buyouts. That perhaps has overshadowed this simple fact: The biggest deal making year in history is ending quite strongly. In fact, deal making continues to chug along at levels not often seen before.
Companies and private-equity firms struck $1.093 trillion worth of transactions in the fourth quarter, according to Dealogic. That would rank it as the second biggest quarter this year and the third largest quarter in the past 12. Even if you subtract BHP Billiton’s $149.2 billion offer for Rio Tinto, that figure stands at about $944 billion and ranks ahead of six quarters since the beginning of 2005.
December marked the third straight month to top $300 billion in deal volume, according to Dealogic.
Even the U.S., which was hardest hit by the credit crunch, began to show signs of coming to life in December. Led by sovereign wealth funds scooping up stakes in U.S. financial institutions, foreign buyers increasingly found the U.S. attractive.
U.S. deal volume hit $121 billion in the month, surpassing $100 billion for the first time since July, and down just 8.4% from December 2006, according to Dealogic. Meanwhile, acquisitions of U.S. firms by foreign buyers surged to $107.8 billion in the fourth quarter — the largest quarterly total in the past 12.
With private-equity players still on the sideline, corporate buyers are indeed filling the void. Not only did corporate deal volume reach $955 billion in the fourth quarter, its second highest level of the year (the second quarter, which marked the peak of the boom, ranks higher). It also accounted for 87% of all deal volume – its largest percentage of the past four quarters.
Friday, December 21, 2007
Judge Rules Against United Rentals in Deal Lawsuit
A Delaware judge ruled Friday that Cerberus Capital Management could not be forced to complete its $4 billion deal for United Rentals, a rental equipment operator.
After a two-day trial this week, William B. Chandler III of Delaware’s Court of Chancery said that the private equity firm need only pay a $100 million breakup fee, as stipulated in the deal agreement. United Rentals had argued that Cerberus could not unilaterally break off the deal.
“URI knew or should have known what Cerberus’ understanding of the merger agreement was,'’ Judge Chandler wrote in his ruling.
In a statement, Cerberus said:
We are gratified that Chancellor Chandler has ruled in favor of the Cerberus affiliates. The decision validates the Cerberus affiliates’ specifically negotiated ability to refrain from proceeding with the proposed transaction. The decision not to proceed was reached only after a great deal of deliberation and only after exploring all available alternatives. We regret the negative comments that were directed at us by URI, and are pleased that the court chose to decide the case on the merits and confirm that Cerberus acted in accordance with its rights and obligations.
Shares in United Rentals fell 17 percent Friday afternoon, closing at $17.91.
Go to Article from Bloomberg News »
After a two-day trial this week, William B. Chandler III of Delaware’s Court of Chancery said that the private equity firm need only pay a $100 million breakup fee, as stipulated in the deal agreement. United Rentals had argued that Cerberus could not unilaterally break off the deal.
“URI knew or should have known what Cerberus’ understanding of the merger agreement was,'’ Judge Chandler wrote in his ruling.
In a statement, Cerberus said:
We are gratified that Chancellor Chandler has ruled in favor of the Cerberus affiliates. The decision validates the Cerberus affiliates’ specifically negotiated ability to refrain from proceeding with the proposed transaction. The decision not to proceed was reached only after a great deal of deliberation and only after exploring all available alternatives. We regret the negative comments that were directed at us by URI, and are pleased that the court chose to decide the case on the merits and confirm that Cerberus acted in accordance with its rights and obligations.
Shares in United Rentals fell 17 percent Friday afternoon, closing at $17.91.
Go to Article from Bloomberg News »
Kicking the Poison-Pill Habit
Corporate governance groups might want to raise a toast this New Year’s: It seems they are making headway in pushing public companies toward shareholder-friendly reforms. At least, that’s what a recent study from law firm Shearman & Sterling suggests.
The firm’s fifth annual “Corporate Governance Survey” of the 100 biggest U.S. public companies found big declines in recent years in the number that have “poison pills,” which make hostile takeovers prohibitively expensive for acquirers, and classified boards, which make it difficult for an acquirer to shake up a company’s board of directors.
Just 17 of the 100 companies had poison pills in place in 2007, almost half the number in 2004, and only 33 of the companies in this year’s survey had classified boards, a nearly 40 percent decrease from 2004.
But the news from the corporate governance front was not all positive, as Jeff Nash of Financial Week reports. A study released earlier this week by Corporate Library’s researchers found that executive pay continued its steady climb in 2007. Mr. Nash noted that compensation for chief executives at S&P 500 companies increased by 23 percent in 2007, bringing the new median pay up to more than $8.8 million.
Go to Summary of Shearman & Sterling Survey »
Go to Article from FinancialWeek »
The firm’s fifth annual “Corporate Governance Survey” of the 100 biggest U.S. public companies found big declines in recent years in the number that have “poison pills,” which make hostile takeovers prohibitively expensive for acquirers, and classified boards, which make it difficult for an acquirer to shake up a company’s board of directors.
Just 17 of the 100 companies had poison pills in place in 2007, almost half the number in 2004, and only 33 of the companies in this year’s survey had classified boards, a nearly 40 percent decrease from 2004.
But the news from the corporate governance front was not all positive, as Jeff Nash of Financial Week reports. A study released earlier this week by Corporate Library’s researchers found that executive pay continued its steady climb in 2007. Mr. Nash noted that compensation for chief executives at S&P 500 companies increased by 23 percent in 2007, bringing the new median pay up to more than $8.8 million.
Go to Summary of Shearman & Sterling Survey »
Go to Article from FinancialWeek »
U.S. mergers hit new record, but lag Europe
PHILADELPHIA: Merger volume hit a record $1.57 trillion (786 million pounds) in the United States in 2007, according to research firm Thomson Financial, despite a sharp decline in dealmaking at mid-year when credit markets tightened and mergers became more costly to finance.
Globally, mergers totalled a record $4.38 trillion in 2007, up 21 percent from 2006, while U.S. volume rose 5.5 percent to $1.57 trillion, according to preliminary figures released by Thomson late on Wednesday. For the first time in five years, the U.S. lagged dealmaking in Europe, where mergers totalled $1.78 trillion.
The bulk of the U.S. merger volume in the first half of the year was fuelled by easily obtained debt financing that helped private equity firms and other buyers borrow large amounts of money at attractive rates.
Globally, mergers totalled a record $4.38 trillion in 2007, up 21 percent from 2006, while U.S. volume rose 5.5 percent to $1.57 trillion, according to preliminary figures released by Thomson late on Wednesday. For the first time in five years, the U.S. lagged dealmaking in Europe, where mergers totalled $1.78 trillion.
The bulk of the U.S. merger volume in the first half of the year was fuelled by easily obtained debt financing that helped private equity firms and other buyers borrow large amounts of money at attractive rates.
Wednesday, December 12, 2007
M&A forecasters on 2008: Middle market and cross-border deals
Corporate Dealmaker Forum, Decemeber 12, 2007:
'Tis the season for predictions, and we've just received two sets from two different M&A market participants. Middle-market investment bank Harris Williams & Co. expects: PE megadeals will continue to be on hold; valuations will ease somewhat; more cross-border activity, including foreigners shopping in the U.S.; and opportunities for strategic buyers.
PricewaterhouseCoopers' Transaction Services is on a similar wavelength, adding that international buyers are already busy acquiring U.S. targets. For the first 11 months of 2007, cross-border deal value was $354 billion, PwC says, representing 23% of the U.S. total, a 73% increase from the annual 2006 cross-border deal value of $204 billion. PwC's Bob Filek also sees a possible rebound for leveraged lending, and with it, some PE activity. “The core fundamentals of corporate borrowings on the leverage market are solid relative to historical standards. Leveraged lending caught a cold from the subprime mortgage market,” says Filek. — Kenneth Klee
See other Harris Williams M&S trend reports
More trends and analysis from PwC
'Tis the season for predictions, and we've just received two sets from two different M&A market participants. Middle-market investment bank Harris Williams & Co. expects: PE megadeals will continue to be on hold; valuations will ease somewhat; more cross-border activity, including foreigners shopping in the U.S.; and opportunities for strategic buyers.
PricewaterhouseCoopers' Transaction Services is on a similar wavelength, adding that international buyers are already busy acquiring U.S. targets. For the first 11 months of 2007, cross-border deal value was $354 billion, PwC says, representing 23% of the U.S. total, a 73% increase from the annual 2006 cross-border deal value of $204 billion. PwC's Bob Filek also sees a possible rebound for leveraged lending, and with it, some PE activity. “The core fundamentals of corporate borrowings on the leverage market are solid relative to historical standards. Leveraged lending caught a cold from the subprime mortgage market,” says Filek. — Kenneth Klee
See other Harris Williams M&S trend reports
More trends and analysis from PwC
Sallie Mae’s Buyers Walk Away from the Table
So long, Sallie.
The SLM Corporation, the big student lender known as Sallie Mae, said Wednesday that its offer to craft an “alternative transaction” with a group led by J.C. Flowers & Company had been rebuffed — an announcement that seemed to erase any hope that its embattled $25 billion buyout deal could be renegotiated. In a press release, SLM said the would-be buyer “does not wish to pursue” an opportunity to submit a new bid and indicated that it will “pursue all available recourse, including the company’s existing lawsuit against the buyer’s group.”
Shares of SLM fell nearly 10 percent after the statement was released. At $27.73, they were at their lowest level in at least five years, after adjusting for stock splits.
Sallie Mae and the bidding consortium, which also includes J.P. Morgan Chase and the Bank of America, have been feuding for months about whether the buyers can walk away from the deal without paying a $900 million termination fee. At the heart of the dispute is recently passed legislation that would hurt Sallie Mae’s business.
There is already a suit pending in Delaware’s Court of Chancery, with a tentative trial date in July.
Go to Press Release from SLM via PRNewswire »
The SLM Corporation, the big student lender known as Sallie Mae, said Wednesday that its offer to craft an “alternative transaction” with a group led by J.C. Flowers & Company had been rebuffed — an announcement that seemed to erase any hope that its embattled $25 billion buyout deal could be renegotiated. In a press release, SLM said the would-be buyer “does not wish to pursue” an opportunity to submit a new bid and indicated that it will “pursue all available recourse, including the company’s existing lawsuit against the buyer’s group.”
Shares of SLM fell nearly 10 percent after the statement was released. At $27.73, they were at their lowest level in at least five years, after adjusting for stock splits.
Sallie Mae and the bidding consortium, which also includes J.P. Morgan Chase and the Bank of America, have been feuding for months about whether the buyers can walk away from the deal without paying a $900 million termination fee. At the heart of the dispute is recently passed legislation that would hurt Sallie Mae’s business.
There is already a suit pending in Delaware’s Court of Chancery, with a tentative trial date in July.
Go to Press Release from SLM via PRNewswire »
Monday, December 10, 2007
Deal for Myers won't close as scheduled
Crain's Cleveland Business is reporting today that "the acquisition of Myers Industries Inc. (NYSE: MYE) for $22.50 a share by an affiliate of Goldman Sachs will not close by the end of this week as originally planned, if the deal ever is completed at all.
The Akron-based manufacturing and distribution company said the Goldman Sachs affiliate, GS Capital Partners, has requested more time to complete the acquisition of Myers. However, as part of the agreement to extend the closing deadline to April 30, 2008, from Dec. 15, 2007, Myers is free to respond to takeover proposals solicited or received from other parties during the extension period and will not be required to pay a termination fee to GS Capital Partners if it enters into an alternative transaction.The announcement caused the stock of Myers to plunge from the outset of trading today, and it has not improved throughout the session. Shortly after 1 p.m., Myers was trading for around $15.70 a share, down 27% from its Friday close of $21.56.In consideration for extending the closing date of the transaction, GS Capital Partners has agreed to make a non-refundable payment to Myers of a previously agreed upon $35 million fee. Myers said GS Capital Partners also has secured an extension of its debt financing commitments from Goldman Sachs Credit Partners and Key Bank, under which GS Capital Partners has agreed to contribute another $30 million of equity to the transaction.Myers said GS Capital has acknowledged that there has been no material adverse change in Myers’ business, and the deadline extension request “resulted from its desire to further evaluate conditions in certain industries in which Myers operates.”John C. Orr, Myers president and CEO, said in a statement: “Both sides continue to work closely to complete this transaction. In light of GSCP’s request for an extension, which we received the evening of Dec. 7, 2007, the board of directors determined that it is in the best interest of Myers’ shareholders to preserve this opportunity.” On Nov. 30, Myers made an exception to its policy of not responding to market rumors when it addressed rumors that its acquisition by GS Capital Partners would not close as scheduled. Myers said at the time it had not received any indication from its would-be acquirer that it did not intend to close the transaction within the time frame provided by their merger agreement.Myers in late April announced it had reached a definitive agreement to be acquired by GS Capital for $1.1 billion, including the assumption of certain debt. However, turmoil in the credit markets has caused some market observers to question whether the transaction will happen.In early November, Myers reported a sharp drop in third-quarter earnings despite a double-digit increase in sales. The company said net income in the period fell 75%, to $1.5 million, or four cents a share, from $6.1 million, or 17 cents a share.Myers said results in the latest third quarter were hurt by restructuring expenses, foreign currency transaction losses and expenses related to two acquisitions that were completed early this year. Myers also saw softness in several end markets and encountered increased resin prices.
The Akron-based manufacturing and distribution company said the Goldman Sachs affiliate, GS Capital Partners, has requested more time to complete the acquisition of Myers. However, as part of the agreement to extend the closing deadline to April 30, 2008, from Dec. 15, 2007, Myers is free to respond to takeover proposals solicited or received from other parties during the extension period and will not be required to pay a termination fee to GS Capital Partners if it enters into an alternative transaction.The announcement caused the stock of Myers to plunge from the outset of trading today, and it has not improved throughout the session. Shortly after 1 p.m., Myers was trading for around $15.70 a share, down 27% from its Friday close of $21.56.In consideration for extending the closing date of the transaction, GS Capital Partners has agreed to make a non-refundable payment to Myers of a previously agreed upon $35 million fee. Myers said GS Capital Partners also has secured an extension of its debt financing commitments from Goldman Sachs Credit Partners and Key Bank, under which GS Capital Partners has agreed to contribute another $30 million of equity to the transaction.Myers said GS Capital has acknowledged that there has been no material adverse change in Myers’ business, and the deadline extension request “resulted from its desire to further evaluate conditions in certain industries in which Myers operates.”John C. Orr, Myers president and CEO, said in a statement: “Both sides continue to work closely to complete this transaction. In light of GSCP’s request for an extension, which we received the evening of Dec. 7, 2007, the board of directors determined that it is in the best interest of Myers’ shareholders to preserve this opportunity.” On Nov. 30, Myers made an exception to its policy of not responding to market rumors when it addressed rumors that its acquisition by GS Capital Partners would not close as scheduled. Myers said at the time it had not received any indication from its would-be acquirer that it did not intend to close the transaction within the time frame provided by their merger agreement.Myers in late April announced it had reached a definitive agreement to be acquired by GS Capital for $1.1 billion, including the assumption of certain debt. However, turmoil in the credit markets has caused some market observers to question whether the transaction will happen.In early November, Myers reported a sharp drop in third-quarter earnings despite a double-digit increase in sales. The company said net income in the period fell 75%, to $1.5 million, or four cents a share, from $6.1 million, or 17 cents a share.Myers said results in the latest third quarter were hurt by restructuring expenses, foreign currency transaction losses and expenses related to two acquisitions that were completed early this year. Myers also saw softness in several end markets and encountered increased resin prices.
Are PE Firms Finding It Harder to Exit?
Deal Journal - WSJ.com, December 10, 2007, 10:13 am
Are PE Firms Finding It Harder to Exit?
Posted by Stephen Grocer
Saying goodbye seems to be getting more difficult these days.
It has been well documented here at Deal Journal — as well as most other financial publication — that the past four months have been a trying time for private-equity firms to make acquisitions. The data also suggest firms are finding it harder to exit the businesses they do buy.
World-wide volume for two private-equity exit strategies — secondary buyouts and trade sales — have been depressed the past four months, according to Dealogic. Secondary buyouts are the sale of a PE portfolio company to another buyout shop; trade sales occur when a private-equity firm sells a company it owns to another company in the same field. (And for those wondering about IPOs, The Wall Street Journal pointed out a few weeks ago that the IPO market may be becoming less hospitable to private-equity firms.)
Granted, this isn’t all that surprising. After all, the turmoil in the credit markets has hampered buyout firms from making acquisitions and whether it is a PE firm or company on the selling side wouldn’t affect that. Still, it is interesting to note the correlation.
For both global private-equity deal and exit volumes, each of the past four months rank among the five lowest monthly totals of the year, according to Dealogic. November’s exit volume from secondary buyouts and trade sales was the lowest of the year at $13.2 billion, down almost 75% from the high of July. The last month to witness lower volume from secondary buyouts and trade sales was September 2006.
Four months did come in lower than November in terms of world-wide private-equity deal volume, though November buyout volume was down 83% from its peak in May.
Are PE Firms Finding It Harder to Exit?
Posted by Stephen Grocer
Saying goodbye seems to be getting more difficult these days.
It has been well documented here at Deal Journal — as well as most other financial publication — that the past four months have been a trying time for private-equity firms to make acquisitions. The data also suggest firms are finding it harder to exit the businesses they do buy.
World-wide volume for two private-equity exit strategies — secondary buyouts and trade sales — have been depressed the past four months, according to Dealogic. Secondary buyouts are the sale of a PE portfolio company to another buyout shop; trade sales occur when a private-equity firm sells a company it owns to another company in the same field. (And for those wondering about IPOs, The Wall Street Journal pointed out a few weeks ago that the IPO market may be becoming less hospitable to private-equity firms.)
Granted, this isn’t all that surprising. After all, the turmoil in the credit markets has hampered buyout firms from making acquisitions and whether it is a PE firm or company on the selling side wouldn’t affect that. Still, it is interesting to note the correlation.
For both global private-equity deal and exit volumes, each of the past four months rank among the five lowest monthly totals of the year, according to Dealogic. November’s exit volume from secondary buyouts and trade sales was the lowest of the year at $13.2 billion, down almost 75% from the high of July. The last month to witness lower volume from secondary buyouts and trade sales was September 2006.
Four months did come in lower than November in terms of world-wide private-equity deal volume, though November buyout volume was down 83% from its peak in May.
Friday, December 07, 2007
Congress Moves Toward Agreement on Blocking U.S. Minimum Tax
Dec. 7 (Bloomberg) -- Congress moved closer to protecting 23 million households from the alternative minimum tax as Senate Democrats dropped a demand to link it to a tax increase on executives at private equity firms and hedge funds.
The Senate approved a one-year, stop-gap measure that temporarily indexes the minimum tax for inflation, sparing 23 million American households from an average tax increase of $2,000 this year.
The 88-5 vote puts pressure on the House to abandon its own legislation that links the minimum tax relief, aimed at middle- class families, to higher taxes on executives of hedge funds, buyout firms, as well as real estate and other partnerships.
Senate Majority Leader Harry Reid said House Democrats would accept the Senate action. Minutes later, House Ways and Means Chairman Charles Rangel, a New York Democrat, issued a statement saying he would try to alter the Senate measure to close a tax loophole that allows hedge fund managers to defer taxes on money in offshore accounts.
``The House will consider these amendments so that we may give the Senate another chance to do the right thing and pass responsible AMT relief,'' Rangel said.
Rangel earlier yesterday said he wouldn't oppose removing a provision that would boost the tax on so-called carried interest, the performance fees that managers of private equity firms, hedge funds and some real estate and oil and gas partnerships earn.
The Senate approved a one-year, stop-gap measure that temporarily indexes the minimum tax for inflation, sparing 23 million American households from an average tax increase of $2,000 this year.
The 88-5 vote puts pressure on the House to abandon its own legislation that links the minimum tax relief, aimed at middle- class families, to higher taxes on executives of hedge funds, buyout firms, as well as real estate and other partnerships.
Senate Majority Leader Harry Reid said House Democrats would accept the Senate action. Minutes later, House Ways and Means Chairman Charles Rangel, a New York Democrat, issued a statement saying he would try to alter the Senate measure to close a tax loophole that allows hedge fund managers to defer taxes on money in offshore accounts.
``The House will consider these amendments so that we may give the Senate another chance to do the right thing and pass responsible AMT relief,'' Rangel said.
Rangel earlier yesterday said he wouldn't oppose removing a provision that would boost the tax on so-called carried interest, the performance fees that managers of private equity firms, hedge funds and some real estate and oil and gas partnerships earn.
In Deal Opinions, Independence Takes a Back Seat
NYT.com, Dealbook, December 7, 2007
According to a recent study by Thomson Financial, only 12 percent of deals in which there was a fairness opinion involved an “independent” firm, as opposed to an investment bank that was getting other fees as part of the transaction. It’s a notable statistic, especially when juxtaposed with this one: Nearly three-fourths of the portfolio managers and analysts surveyed by Thomson said they favored using an independent firm for fairness opinions.
Fairness opinions have long been the subject of hand-wringing on Wall Street.
Companies involved in mergers often order up these opinions, but the harsh truth is that they are widely seen as a way to ward off future lawsuits — and not earnest requests for financial analysis.
In general, the firm that draws up the fairness opinion is an investment bank that already has skin in the game. This may be because the bank will get a big advisory fee (much bigger than the fee for the fairness opinion) if the merger is completed. Or it may be because it is also offering financing to the buyer, known as staple financing.
It may come as no surprise that these banks generally find that the proposed deal is, indeed, fair.
Marc Wolinsky, a partner at Wachtell Lipton Rosen & Katz, offered this unusually frank assessment in October: “A fairness opinion, you know — it’s the Lucy sitting in the box: ‘Fairness Opinions, 5 cents.’” (We would note that, for deals valued at more than $5 billion, the median fee for a fairness opinion these days is more like $1.8 million, according to Thomson.)
It is easy to frame the problem, but solutions aren’t so easy to find. Jeff Block, who wrote Thomson’s recent report on fairness opinions, points out that while independence may sound nice, even independent firms depend on referrals and repeat business.
If an independent firm has a reputation for not telling the board what it wants to hear, that firm may quickly find that its phone stops ringing.
Consider this cynical comment from an unnamed buyside equity analyst who took part in Thomson’s survey. Asked if companies should hire an independent third party to render an additional fairness opinion, the analyst said: “It would not introduce additional integrity into an already flawed process. It would only add to the number of pigs feeding at the trough.”
Go to Previous Item from DealBook »
According to a recent study by Thomson Financial, only 12 percent of deals in which there was a fairness opinion involved an “independent” firm, as opposed to an investment bank that was getting other fees as part of the transaction. It’s a notable statistic, especially when juxtaposed with this one: Nearly three-fourths of the portfolio managers and analysts surveyed by Thomson said they favored using an independent firm for fairness opinions.
Fairness opinions have long been the subject of hand-wringing on Wall Street.
Companies involved in mergers often order up these opinions, but the harsh truth is that they are widely seen as a way to ward off future lawsuits — and not earnest requests for financial analysis.
In general, the firm that draws up the fairness opinion is an investment bank that already has skin in the game. This may be because the bank will get a big advisory fee (much bigger than the fee for the fairness opinion) if the merger is completed. Or it may be because it is also offering financing to the buyer, known as staple financing.
It may come as no surprise that these banks generally find that the proposed deal is, indeed, fair.
Marc Wolinsky, a partner at Wachtell Lipton Rosen & Katz, offered this unusually frank assessment in October: “A fairness opinion, you know — it’s the Lucy sitting in the box: ‘Fairness Opinions, 5 cents.’” (We would note that, for deals valued at more than $5 billion, the median fee for a fairness opinion these days is more like $1.8 million, according to Thomson.)
It is easy to frame the problem, but solutions aren’t so easy to find. Jeff Block, who wrote Thomson’s recent report on fairness opinions, points out that while independence may sound nice, even independent firms depend on referrals and repeat business.
If an independent firm has a reputation for not telling the board what it wants to hear, that firm may quickly find that its phone stops ringing.
Consider this cynical comment from an unnamed buyside equity analyst who took part in Thomson’s survey. Asked if companies should hire an independent third party to render an additional fairness opinion, the analyst said: “It would not introduce additional integrity into an already flawed process. It would only add to the number of pigs feeding at the trough.”
Go to Previous Item from DealBook »
Tuesday, December 04, 2007
RiskMetrics Group’s 2008 Board Practices Study
Submitted by: Sarah Cohn, Marketing and Communications
RiskMetrics Group is pleased to present its 2008 Board Practices Study. Some of the key findings from the study revealed:
1) Board independence levels rose to 74 percent in 2007 after having leveled off at 72 percent in 2006 (the first year no increase at all was found from the prior year’s levels).
2) 45 percent of major U.S. companies had separated the posts of chairman and CEO at the time of their most recent shareholder meeting—an increase of 20 percentage points since 2000, and four percentage points over the previous year.
3) The number of companies with staggered boards continued to decline in 2007, to 52 percent overall, down from 55 percent in 2006.
To learn more about the findings from the study, please tune into the Board Practices interview with Carol Bowie of RiskMetrics Group’s Governance Institute, and Patrick McGurn, special counsel at RiskMetrics Group. To access the study, please visit here.
RiskMetrics Group is pleased to present its 2008 Board Practices Study. Some of the key findings from the study revealed:
1) Board independence levels rose to 74 percent in 2007 after having leveled off at 72 percent in 2006 (the first year no increase at all was found from the prior year’s levels).
2) 45 percent of major U.S. companies had separated the posts of chairman and CEO at the time of their most recent shareholder meeting—an increase of 20 percentage points since 2000, and four percentage points over the previous year.
3) The number of companies with staggered boards continued to decline in 2007, to 52 percent overall, down from 55 percent in 2006.
To learn more about the findings from the study, please tune into the Board Practices interview with Carol Bowie of RiskMetrics Group’s Governance Institute, and Patrick McGurn, special counsel at RiskMetrics Group. To access the study, please visit here.
Investors See End to Buyout Boom, Survey Says
How do limited partners feel about the recent shifts in the buyout landscape? More than a bit gloomy, according to a new survey by Coller Capital, which found that most institutional investors think the private equity boom is over, with North America likely to feel the pain most acutely.
The results of the survey, which polled more than 100 limited partners that invest in private equity funds, are hardly surprising given the turmoil in the credit markets, which has made private equity deals much harder and much more expensive.
The survey did produce at least one optimistic finding. Ninety-six percent of the respondents said they plan to increase their private equity investments, and 78 percent plan to increase their relationships with private equity fund managers. Evidently, these investors don’t see any better options for generating high returns on their money.
The private equity boom may be over, but it seems few alternatives have arisen to fill its place.
Go to Press Release from Coller Capital »
The results of the survey, which polled more than 100 limited partners that invest in private equity funds, are hardly surprising given the turmoil in the credit markets, which has made private equity deals much harder and much more expensive.
The survey did produce at least one optimistic finding. Ninety-six percent of the respondents said they plan to increase their private equity investments, and 78 percent plan to increase their relationships with private equity fund managers. Evidently, these investors don’t see any better options for generating high returns on their money.
The private equity boom may be over, but it seems few alternatives have arisen to fill its place.
Go to Press Release from Coller Capital »
Friday, November 30, 2007
Nov M&A slumps in United States
NEW YORK (Reuters) - The value of announced U.S. mergers and acquisitions fell 71 percent in November to $58.1 billion when compared to the same month last year, according to research firm Dealogic.
In November of 2006, M&A had reached $200 billion.
As lending markets remained tight and investment banks absorbed the fallout from mortgage losses, the M&A slowdown in the United States that started in August showed few signs of reversing course this month.
Dealogic said the second-half slump in U.S. mergers has reduced the year-on-year increase in U.S. deal volume to 7 percent, with $1.5 trillion of announced transactions compared to $1.4 trillion at this stage of 2006.
Abu Dhabi Investment Authority's $7.5 billion deal for a stake of up to 4.9 percent in Citigroup (C.N: Quote, Profile, Research) was the largest announced U.S. deal in November, Dealogic said.
Of the 10 largest U.S. deals announced this month, five involved foreign buyers and for 2007 year to date, 21 percent of all U.S. deals were announced by non-U.S. buyers, led by Britain with $45.7 billion of transactions and Canada with $39.5 billion.
STILL A RECORD YEAR
Leveraged buyouts involving private equity firms, which had helped take M&A to record levels, declined dramatically in size and volume in November.
"Private equity buyers continue to fade from view with just $25.8 billion announced financial sponsor buyouts globally and a mere $2.3 billion for U.S. targets - the lowest monthly volume since March 2002," said Dealogic in a report.
Globally, the average value of private equity deals has gone down from $1 billion at its peak in May to $325 million in November. In the United States, the average private equity deal was $2.6 billion in May and $127 million in November.
Thanks to the mergers boom in the first half of the year, global M&A for 2007 has reached a record $4.5 trillion year to date, up 28 percent on this stage of 2006.
Dealogic said Goldman Sachs (GS.N: Quote, Profile, Research) leads the 2007 global M&A advisory rankings with $1.3 trillion of announced deals, with Morgan Stanley (MS.N: Quote, Profile, Research) close behind with $1.2 trillion and JP Morgan (JPM.N: Quote, Profile, Research) third with $1 trillion.
The advisory rankings in the United States mirror the global top two, but Citigroup (C.N: Quote, Profile, Research) is currently in third place.
Dealogic said this is the first time that Morgan Stanley, JP Morgan and Citigroup have gone over the $1 trillion mark in the M&A league table.
(Reporting by Mark McSherry; Editing by Gary Hill)
In November of 2006, M&A had reached $200 billion.
As lending markets remained tight and investment banks absorbed the fallout from mortgage losses, the M&A slowdown in the United States that started in August showed few signs of reversing course this month.
Dealogic said the second-half slump in U.S. mergers has reduced the year-on-year increase in U.S. deal volume to 7 percent, with $1.5 trillion of announced transactions compared to $1.4 trillion at this stage of 2006.
Abu Dhabi Investment Authority's $7.5 billion deal for a stake of up to 4.9 percent in Citigroup (C.N: Quote, Profile, Research) was the largest announced U.S. deal in November, Dealogic said.
Of the 10 largest U.S. deals announced this month, five involved foreign buyers and for 2007 year to date, 21 percent of all U.S. deals were announced by non-U.S. buyers, led by Britain with $45.7 billion of transactions and Canada with $39.5 billion.
STILL A RECORD YEAR
Leveraged buyouts involving private equity firms, which had helped take M&A to record levels, declined dramatically in size and volume in November.
"Private equity buyers continue to fade from view with just $25.8 billion announced financial sponsor buyouts globally and a mere $2.3 billion for U.S. targets - the lowest monthly volume since March 2002," said Dealogic in a report.
Globally, the average value of private equity deals has gone down from $1 billion at its peak in May to $325 million in November. In the United States, the average private equity deal was $2.6 billion in May and $127 million in November.
Thanks to the mergers boom in the first half of the year, global M&A for 2007 has reached a record $4.5 trillion year to date, up 28 percent on this stage of 2006.
Dealogic said Goldman Sachs (GS.N: Quote, Profile, Research) leads the 2007 global M&A advisory rankings with $1.3 trillion of announced deals, with Morgan Stanley (MS.N: Quote, Profile, Research) close behind with $1.2 trillion and JP Morgan (JPM.N: Quote, Profile, Research) third with $1 trillion.
The advisory rankings in the United States mirror the global top two, but Citigroup (C.N: Quote, Profile, Research) is currently in third place.
Dealogic said this is the first time that Morgan Stanley, JP Morgan and Citigroup have gone over the $1 trillion mark in the M&A league table.
(Reporting by Mark McSherry; Editing by Gary Hill)
Wednesday, November 28, 2007
Red, White & Blue Plate Special: Foreign M&A Surges in U.S.
November 27, 2007, 3:59 pm
Posted by Dana Cimilluca, Deal Journal - WSJ.com:
The Redcoats are coming — again.
The weapon of choice in this British invasion, however, is money, not muskets, and the targets are companies, not rebels. U.K. companies have struck $46 billion of acquisition deals in the U.S. this year, more than any other country, according to Dealogic. That compares with just $34 billion in all of last year (when our former parent country ranked third after Canada and France.)
The Brits aren’t alone this year, however. Since the global merger boom began in around 2003, there has been a steady increase in the percentage of U.S. acquisitions made by foreign companies. Their share of such deals has increased to 20%, from 11% then, according to Dealogic. Even as the M&A engine in the U.S. sputters along with instability in the credit markets, foreigners keep snapping up U.S. assets, as highlighted by the Abu Dhabi Investment Authority’s surprise $7.5 billion investment in Citigroup.
What draws these overseas neighbors to our shores? The overflowing coffers of the state investment funds in countries including China and Abu Dhabi are part of it. The sharp decline in the U.S. dollar can’t hurt either, as it reduces the cost of U.S. deals for acquirers using euros, pounds or yuan.
Of course, given the fickle nature of the U.S. dollar and oil prices — whose marked movements have helped shift the M&A landscape — there is no guarantee they are here to stay. After all, in 2000, foreign deals accounted for 22% of all U.S. M&A, only to fall to 11% three years later as the tech bubble sent foreigners scurrying like the British after Yorktown.
Posted by Dana Cimilluca, Deal Journal - WSJ.com:
The Redcoats are coming — again.
The weapon of choice in this British invasion, however, is money, not muskets, and the targets are companies, not rebels. U.K. companies have struck $46 billion of acquisition deals in the U.S. this year, more than any other country, according to Dealogic. That compares with just $34 billion in all of last year (when our former parent country ranked third after Canada and France.)
The Brits aren’t alone this year, however. Since the global merger boom began in around 2003, there has been a steady increase in the percentage of U.S. acquisitions made by foreign companies. Their share of such deals has increased to 20%, from 11% then, according to Dealogic. Even as the M&A engine in the U.S. sputters along with instability in the credit markets, foreigners keep snapping up U.S. assets, as highlighted by the Abu Dhabi Investment Authority’s surprise $7.5 billion investment in Citigroup.
What draws these overseas neighbors to our shores? The overflowing coffers of the state investment funds in countries including China and Abu Dhabi are part of it. The sharp decline in the U.S. dollar can’t hurt either, as it reduces the cost of U.S. deals for acquirers using euros, pounds or yuan.
Of course, given the fickle nature of the U.S. dollar and oil prices — whose marked movements have helped shift the M&A landscape — there is no guarantee they are here to stay. After all, in 2000, foreign deals accounted for 22% of all U.S. M&A, only to fall to 11% three years later as the tech bubble sent foreigners scurrying like the British after Yorktown.
A November M&A Recovery? Appearances Are Deceiving
November 28, 2007, 7:30 am
Posted by Stephen Grocer, Deal Journal - WSJ.com:
As the months tick by since the credit crunch hit, one thing is clear — U.S. deal makers are left wondering where the party is.
With three days left in November, deal volume in the U.S. is down for a third straight month from a year earlier. Meanwhile, Europe and Asia both registered a jump in M&A activity.
All told, companies and private-equity firms announced $435.3 billion of acquisitions world-wide through Nov. 27, a 23% increase from the year-earlier period and up almost 45% from October, according to Dealogic. But let’s not crack open the champagne just yet.
While at first glance it would seem that the defibrillator paddles can be taken off the global M&A market, a closer look reveals that the outlook for deal making might not be so rosy. The reason? One deal –- BHP Billiton’s offer for Rio Tinto, which Dealogic values at $149.2 billion –- accounts for nearly a third of world-wide deal volume. Subtract that from the total, and November’s total represents a 5% decrease from October’s total, according to Dealogic. (Though with three days left in the month, November could close the gap.)
Compare that with April. Deal volume reached $599.3 billion that month, thanks in no small part to the Royal Bank of Scotland-led consortium’s $96.6 billion offer for ABN Amro. Subtract the ABN deal from the monthly total and you still have more than $500 billion in announced deals, and only two months in the past 12 would rank ahead of April.
Still, at $286.1 billion, November’s deal volume total would mark a healthy uptick from August and September.
Weighing down the global M&A market is the U.S., historically its main engine. In fact, there was little good news in November’s numbers for U.S. deal makers.
U.S. deal volume slid 73% from a year earlier to $51.1 billion, meaning that after hitting $84.1 billion in October, it has fallen back to the lows of August and September, according to the data. A sizable chunk –- about 37% — of that came from buyers outside the U.S. In a sign of the times, the United Arab Emirates, in terms of dollar value, led the way in November among foreign buyers of U.S. assets, with two deals valued at $8.1 billion.
And there is little hope that a recovery is around the corner. The credit markets, which just weeks ago seemed to be on the road to recovery, have weakened again. (Witness the postponed sale of loans related to the Chrysler buyout.) Talk of recession, which is hammering the stock market, may mean that companies won’t be in a buying mood this holiday season and beyond. And let us not forget the beating Wall Street’s banks are taking at the hands of the U.S.’s subprime-mortgage-related woes. It is unlikely they will return to a giving mood until after the subprime mess clears up.
Meanwhile, European deal makers have plenty to celebrate. European deal volume jumped 245% from a year earlier to $308.2 billion in November, according to Dealogic. That also marks the single largest monthly total of the past 20 months. And even if you subtract BHP’s offer for Rio Tinto, European deal making still jumped 78%.
Posted by Stephen Grocer, Deal Journal - WSJ.com:
As the months tick by since the credit crunch hit, one thing is clear — U.S. deal makers are left wondering where the party is.
With three days left in November, deal volume in the U.S. is down for a third straight month from a year earlier. Meanwhile, Europe and Asia both registered a jump in M&A activity.
All told, companies and private-equity firms announced $435.3 billion of acquisitions world-wide through Nov. 27, a 23% increase from the year-earlier period and up almost 45% from October, according to Dealogic. But let’s not crack open the champagne just yet.
While at first glance it would seem that the defibrillator paddles can be taken off the global M&A market, a closer look reveals that the outlook for deal making might not be so rosy. The reason? One deal –- BHP Billiton’s offer for Rio Tinto, which Dealogic values at $149.2 billion –- accounts for nearly a third of world-wide deal volume. Subtract that from the total, and November’s total represents a 5% decrease from October’s total, according to Dealogic. (Though with three days left in the month, November could close the gap.)
Compare that with April. Deal volume reached $599.3 billion that month, thanks in no small part to the Royal Bank of Scotland-led consortium’s $96.6 billion offer for ABN Amro. Subtract the ABN deal from the monthly total and you still have more than $500 billion in announced deals, and only two months in the past 12 would rank ahead of April.
Still, at $286.1 billion, November’s deal volume total would mark a healthy uptick from August and September.
Weighing down the global M&A market is the U.S., historically its main engine. In fact, there was little good news in November’s numbers for U.S. deal makers.
U.S. deal volume slid 73% from a year earlier to $51.1 billion, meaning that after hitting $84.1 billion in October, it has fallen back to the lows of August and September, according to the data. A sizable chunk –- about 37% — of that came from buyers outside the U.S. In a sign of the times, the United Arab Emirates, in terms of dollar value, led the way in November among foreign buyers of U.S. assets, with two deals valued at $8.1 billion.
And there is little hope that a recovery is around the corner. The credit markets, which just weeks ago seemed to be on the road to recovery, have weakened again. (Witness the postponed sale of loans related to the Chrysler buyout.) Talk of recession, which is hammering the stock market, may mean that companies won’t be in a buying mood this holiday season and beyond. And let us not forget the beating Wall Street’s banks are taking at the hands of the U.S.’s subprime-mortgage-related woes. It is unlikely they will return to a giving mood until after the subprime mess clears up.
Meanwhile, European deal makers have plenty to celebrate. European deal volume jumped 245% from a year earlier to $308.2 billion in November, according to Dealogic. That also marks the single largest monthly total of the past 20 months. And even if you subtract BHP’s offer for Rio Tinto, European deal making still jumped 78%.
Monday, November 19, 2007
United Rentals Sues Cerberus Over Failed Deal
Another collapsed buyout has hit a court’s docket.
United Rentals sued Cerberus Capital Management on Monday over the private equity firm’s cancellation of a $4 billion buyout of the company. The lawsuit, filed in Delaware’s Court of Chancery, seeks to force Cerberus to complete the deal and could test the use of breakup fees as a way to cancel merger agreements.
“United Rentals believes that the repudiation, which is unwarranted and incompatible with the covenants of the merger agreement, is nothing more than a naked ploy to extract a lower price at the expense of United Rentals’ shareholders,” United Rentals said in its statement. (Download the complaint below.)
United Rentals has now joined SLM, the parent of student lender Sallie Mae, and Genesco, a footwear company, in the plaintiff’s corner as they try to win legal relief amid their failed deals. Concerns over the credit market have played a major role in the demise of several deals, leaving the courts to sort through the mess.
Last week, Cerberus declared that it would walk away from the deal it struck in July. Oddly enough, it said it was not declaring a material adverse change in the rental equipment provider, a magic legal phrase that would let it end the deal without penalty. Instead, Cerberus said it would pay the $100 million breakup fee.
In its announcement Monday, United Rentals said that it had held a meeting last week with Cerberus’s chief executive, Stephen A. Feinberg. At that meeting, Mr. Feinberg told the company that his firm did not want to force its banks to fulfill their commitments. The private equity firm also confirmed that there was no adverse change.
United Rentals is arguing that Cerberus cannot claim financing difficulties, as it already has commitment letters from banks in hand. The company also says that a “specific performance” provision of the merger agreement requires the private equity firm to use that financing. Otherwise, it said, “irreparable damage would take place.”
It also argues that Cerberus is trying to buy the company on the cheap, thanks to the 32 percent stock price drop that transpired after last week’s news that the deal was faltering.
United Rentals sued Cerberus Capital Management on Monday over the private equity firm’s cancellation of a $4 billion buyout of the company. The lawsuit, filed in Delaware’s Court of Chancery, seeks to force Cerberus to complete the deal and could test the use of breakup fees as a way to cancel merger agreements.
“United Rentals believes that the repudiation, which is unwarranted and incompatible with the covenants of the merger agreement, is nothing more than a naked ploy to extract a lower price at the expense of United Rentals’ shareholders,” United Rentals said in its statement. (Download the complaint below.)
United Rentals has now joined SLM, the parent of student lender Sallie Mae, and Genesco, a footwear company, in the plaintiff’s corner as they try to win legal relief amid their failed deals. Concerns over the credit market have played a major role in the demise of several deals, leaving the courts to sort through the mess.
Last week, Cerberus declared that it would walk away from the deal it struck in July. Oddly enough, it said it was not declaring a material adverse change in the rental equipment provider, a magic legal phrase that would let it end the deal without penalty. Instead, Cerberus said it would pay the $100 million breakup fee.
In its announcement Monday, United Rentals said that it had held a meeting last week with Cerberus’s chief executive, Stephen A. Feinberg. At that meeting, Mr. Feinberg told the company that his firm did not want to force its banks to fulfill their commitments. The private equity firm also confirmed that there was no adverse change.
United Rentals is arguing that Cerberus cannot claim financing difficulties, as it already has commitment letters from banks in hand. The company also says that a “specific performance” provision of the merger agreement requires the private equity firm to use that financing. Otherwise, it said, “irreparable damage would take place.”
It also argues that Cerberus is trying to buy the company on the cheap, thanks to the 32 percent stock price drop that transpired after last week’s news that the deal was faltering.
If Buyout Firms Are So Smart, Why Are They So Wrong?
By ANDREW ROSS SORKIN
Published: November 18, 2007, New York Times
ENOUGH already.
Private equity firms have recently been reneging on their billion-dollar buyouts as if the deals came with a 30-day money-back guarantee. They don’t. But that hasn’t stopped the biggest firms from trying to bully — yes, let’s finally call it what it is — their way out of deals.
For the last few months, private equity firms have repeatedly broken their word when breaking a deal, trying to place blame on big, bad investment banks that they said were holding them hostage by threatening to withdraw financing.
It was an easy narrative to follow, but it obscured the truth: Private equity firms, widely hailed as the “smart money,” made some lousy deals in the second half of this year, and some are now having a bad case of buyer’s remorse. They have been more than happy to break the deals and let the banks be the fall guys.
To be fair, the banks cut some pretty lousy deals themselves and have been applying pressure to their clients. But if you have spent time with buyout bosses, you know it’s hard to pressure them into doing something they don’t want to do in the first place.
Witness the latest broken deal: Cerberus Capital Management, run by Stephen A. Feinberg, the powerful but intensely private financier, refused to complete its $4 billion acquisition of United Rentals unless the price was renegotiated downward. Cerberus didn’t even try to claim that United Rentals had suffered a “material adverse change” — the magic words that usually permit a buyer to walk away without a financial penalty — or that the banks were preventing it from completing the transaction.
Cerberus provided no explanation other than that it was willing to forfeit its $100 million reverse breakup fee to walk away. In a letter seeking its corporate divorce, Cerberus said simply that “after giving the matter careful consideration,” it was “not prepared to proceed with the acquisition of URI on the terms contemplated by the agreement.”
What? Yes, Cerberus just proved itself to be the ultimate flighty, hot-tempered partner.
“Any target dealing with them in the future would now be irresponsible to agree to a reverse termination provision,” Steven M. Davidoff, a law professor at Wayne State University in Detroit, wrote of Cerberus on his blog.
And what about reputational damage? It has again been brushed aside as a non-issue: apparently all is fair in love, war and private equity.
Everyone repeats the same line: “There’s no question that this summer the world changed,” Leon Black, founder of Apollo Management, said this month at a conference for The Deal, a magazine.
Well, yes, Mr. Black. The credit market did change; there is no question about that. But that doesn’t explain how private equity firms, whose entire business is premised on accurately forecasting a business’s potential and risk, called it wrong.
It is almost laughable to hear the buyers of Home Depot’s supply unit contend that the housing market’s slump caused the business to deteriorate so far beyond their expectations that they had to renegotiate the deal they struck just months earlier. If the buyers didn’t see that coming — if that possibility wasn’t baked into the firms’ models — then shame on them.
The same goes for J. Christopher Flowers and his effort to wiggle out of his acquisition of Sallie Mae. It is implausible that such a smart guy did not contemplate the possibility that federal legislation affecting Sallie Mae — some of which had already been introduced — might complicate the buyout.
And then there was the aborted deal by Kohlberg Kravis Roberts and Goldman Sachs for Harman International Industries. Five months after they agreed to the deal, the firms said that Harman’s business had fallen off a cliff. This may have been the most valid of the broken deals because Harman broke certain conditions of the transaction, but it still raises the question: Unless Harman misled them — and no one has publicly claimed that — how did these blue-chip firms miss the forecast that much?
Private equity investors — known as limited partners — have been quietly applauding the firms’ attempts to squirm out of potentially bad deals. And it is the firms’ fiduciary duty to return the highest dollar for their investors, which might argue for walking away. The advent of the reverse breakup fee, which limits the amount of money a firm has to pay to walk away, also provides buyout firms with a relatively cheap means of escape.
BUT investors in private equity firms should still be asking why firms made some of these deals in the first place. When debt was cheap, the game was easy; everything was a good investment. But private equity investors are paying for better judgment than that. After all, most of these firms charge “success fees” for acquiring a business, in part to pay for their hard work identifying, studying and winning an auction. (A perverse incentive, I know.)
So what’s the upshot?
If broken deals haven’t hurt these firms’ reputations yet, they should. The broken deals will also dent their wallets, which may hurt more. Other fallout is sure to come. Sellers to buyout firms are going to demand higher premiums — they are already under pressure from shareholders to do so — and prohibitively high breakup fees. Contracts may be written even tighter, but they are already tight.
Despite all of this, private equity firms seem to believe they have plenty of wiggle room. In many of the recently broken deals, they appear to have relied on litigation threats rather than contractual language when telling sellers they planned to back out.
As the law firm Weil Gotshal & Manges recently noted in a briefing to clients, “even a weak, but plausible” argument that a material financial change has occurred “may provide a buyer with significant leverage in renegotiating a deal.”
All of this is going to make outsize returns even harder to come by, at least until everyone has forgotten the lessons. As Mr. Black put it in his recent conference speech, “History has taught us that Wall Street has no institutional memory.”
Published: November 18, 2007, New York Times
ENOUGH already.
Private equity firms have recently been reneging on their billion-dollar buyouts as if the deals came with a 30-day money-back guarantee. They don’t. But that hasn’t stopped the biggest firms from trying to bully — yes, let’s finally call it what it is — their way out of deals.
For the last few months, private equity firms have repeatedly broken their word when breaking a deal, trying to place blame on big, bad investment banks that they said were holding them hostage by threatening to withdraw financing.
It was an easy narrative to follow, but it obscured the truth: Private equity firms, widely hailed as the “smart money,” made some lousy deals in the second half of this year, and some are now having a bad case of buyer’s remorse. They have been more than happy to break the deals and let the banks be the fall guys.
To be fair, the banks cut some pretty lousy deals themselves and have been applying pressure to their clients. But if you have spent time with buyout bosses, you know it’s hard to pressure them into doing something they don’t want to do in the first place.
Witness the latest broken deal: Cerberus Capital Management, run by Stephen A. Feinberg, the powerful but intensely private financier, refused to complete its $4 billion acquisition of United Rentals unless the price was renegotiated downward. Cerberus didn’t even try to claim that United Rentals had suffered a “material adverse change” — the magic words that usually permit a buyer to walk away without a financial penalty — or that the banks were preventing it from completing the transaction.
Cerberus provided no explanation other than that it was willing to forfeit its $100 million reverse breakup fee to walk away. In a letter seeking its corporate divorce, Cerberus said simply that “after giving the matter careful consideration,” it was “not prepared to proceed with the acquisition of URI on the terms contemplated by the agreement.”
What? Yes, Cerberus just proved itself to be the ultimate flighty, hot-tempered partner.
“Any target dealing with them in the future would now be irresponsible to agree to a reverse termination provision,” Steven M. Davidoff, a law professor at Wayne State University in Detroit, wrote of Cerberus on his blog.
And what about reputational damage? It has again been brushed aside as a non-issue: apparently all is fair in love, war and private equity.
Everyone repeats the same line: “There’s no question that this summer the world changed,” Leon Black, founder of Apollo Management, said this month at a conference for The Deal, a magazine.
Well, yes, Mr. Black. The credit market did change; there is no question about that. But that doesn’t explain how private equity firms, whose entire business is premised on accurately forecasting a business’s potential and risk, called it wrong.
It is almost laughable to hear the buyers of Home Depot’s supply unit contend that the housing market’s slump caused the business to deteriorate so far beyond their expectations that they had to renegotiate the deal they struck just months earlier. If the buyers didn’t see that coming — if that possibility wasn’t baked into the firms’ models — then shame on them.
The same goes for J. Christopher Flowers and his effort to wiggle out of his acquisition of Sallie Mae. It is implausible that such a smart guy did not contemplate the possibility that federal legislation affecting Sallie Mae — some of which had already been introduced — might complicate the buyout.
And then there was the aborted deal by Kohlberg Kravis Roberts and Goldman Sachs for Harman International Industries. Five months after they agreed to the deal, the firms said that Harman’s business had fallen off a cliff. This may have been the most valid of the broken deals because Harman broke certain conditions of the transaction, but it still raises the question: Unless Harman misled them — and no one has publicly claimed that — how did these blue-chip firms miss the forecast that much?
Private equity investors — known as limited partners — have been quietly applauding the firms’ attempts to squirm out of potentially bad deals. And it is the firms’ fiduciary duty to return the highest dollar for their investors, which might argue for walking away. The advent of the reverse breakup fee, which limits the amount of money a firm has to pay to walk away, also provides buyout firms with a relatively cheap means of escape.
BUT investors in private equity firms should still be asking why firms made some of these deals in the first place. When debt was cheap, the game was easy; everything was a good investment. But private equity investors are paying for better judgment than that. After all, most of these firms charge “success fees” for acquiring a business, in part to pay for their hard work identifying, studying and winning an auction. (A perverse incentive, I know.)
So what’s the upshot?
If broken deals haven’t hurt these firms’ reputations yet, they should. The broken deals will also dent their wallets, which may hurt more. Other fallout is sure to come. Sellers to buyout firms are going to demand higher premiums — they are already under pressure from shareholders to do so — and prohibitively high breakup fees. Contracts may be written even tighter, but they are already tight.
Despite all of this, private equity firms seem to believe they have plenty of wiggle room. In many of the recently broken deals, they appear to have relied on litigation threats rather than contractual language when telling sellers they planned to back out.
As the law firm Weil Gotshal & Manges recently noted in a briefing to clients, “even a weak, but plausible” argument that a material financial change has occurred “may provide a buyer with significant leverage in renegotiating a deal.”
All of this is going to make outsize returns even harder to come by, at least until everyone has forgotten the lessons. As Mr. Black put it in his recent conference speech, “History has taught us that Wall Street has no institutional memory.”
Friday, November 09, 2007
The $1 Trillion M&A Bloodbath
November 9, 2007, 8:59 am
Posted by Dana Cimilluca, DealJournal-WSJ.com:
How big will things get in the M&A market?
There seems to be a consensus shaping up among mergers-and-acquisitions bankers that deal making volume next year will fall by something on the order of 20% because of the turmoil in global financial markets. Reuters yesterday spoke to a number of prominent bankers, and they point to a 20% decline in the U.S. and something more moderate elsewhere in the world. One of them, Stefan Selig of Bank of America, predicts that could put overall activity in 2008 back to where it was in 2005.
Not so bad right? 2005 was a pretty robust year, with nearly $3 trillion of deals struck worldwide. But looked at another way, the picture isn’t so pretty. With 2007 already crossing the $4 trillion mark, a retreat to 2005 levels would mean the loss of more than $1 trillion of deal flow. Based on a very rough calculation of how much the average deal yields in fees, that means investment banks would have to find $5 billion in revenue elsewhere.
And that is not a very attractive prospect given the horrifying performance right now of other Wall Street businesses like fixed-income trading.
Posted by Dana Cimilluca, DealJournal-WSJ.com:
How big will things get in the M&A market?
There seems to be a consensus shaping up among mergers-and-acquisitions bankers that deal making volume next year will fall by something on the order of 20% because of the turmoil in global financial markets. Reuters yesterday spoke to a number of prominent bankers, and they point to a 20% decline in the U.S. and something more moderate elsewhere in the world. One of them, Stefan Selig of Bank of America, predicts that could put overall activity in 2008 back to where it was in 2005.
Not so bad right? 2005 was a pretty robust year, with nearly $3 trillion of deals struck worldwide. But looked at another way, the picture isn’t so pretty. With 2007 already crossing the $4 trillion mark, a retreat to 2005 levels would mean the loss of more than $1 trillion of deal flow. Based on a very rough calculation of how much the average deal yields in fees, that means investment banks would have to find $5 billion in revenue elsewhere.
And that is not a very attractive prospect given the horrifying performance right now of other Wall Street businesses like fixed-income trading.
Thursday, November 08, 2007
Private Equity’s Fund-Raising Gusher
Deal Journal - WSJ.com, November 8, 2007, 7:30 am
Private Equity’s Fund-Raising Gusher
Posted by Tennille Tracy
U.S. private-equity firms may not be doing a whole lot of deals these days, but that isn’t stopping them from raising more money.
PE firms have set a fund-raising record this year, pulling in a total of $263 billion, according to sister publication Private Equity Analyst, up from $258 billion raised last year. With nearly two months left in the year, there is a chance they could surpass $300 billion.
It might seem an odd time for private-equitiy firms to set a fund-raising record. After all, the debt markets have curbed new buyout activity. Buyout shops announced just $8.5 billion of new deals in October, roughly a fifth of the $42.2 billion a year earlier, according to Dealogic. Then, there are those pesky economists who lately have been warning of the possibility of recession, which would threaten the health of existing PE-backed companies.
Amid such a cloudy environment, Deal Journal can’t help but wonder: Just what would it take to shut off the fund-raising spigot? U.S. institutional investors are smitten with private-equity funds, while Chinese and Middle Eastern sovereign funds have started to pile on as well. They show no signs of stopping.
Is its possible that private-equity fund managers themselves might one day need to exercise some restraint and raise smaller funds? Perhaps, but we aren’t holding our breath.
Private Equity’s Fund-Raising Gusher
Posted by Tennille Tracy
U.S. private-equity firms may not be doing a whole lot of deals these days, but that isn’t stopping them from raising more money.
PE firms have set a fund-raising record this year, pulling in a total of $263 billion, according to sister publication Private Equity Analyst, up from $258 billion raised last year. With nearly two months left in the year, there is a chance they could surpass $300 billion.
It might seem an odd time for private-equitiy firms to set a fund-raising record. After all, the debt markets have curbed new buyout activity. Buyout shops announced just $8.5 billion of new deals in October, roughly a fifth of the $42.2 billion a year earlier, according to Dealogic. Then, there are those pesky economists who lately have been warning of the possibility of recession, which would threaten the health of existing PE-backed companies.
Amid such a cloudy environment, Deal Journal can’t help but wonder: Just what would it take to shut off the fund-raising spigot? U.S. institutional investors are smitten with private-equity funds, while Chinese and Middle Eastern sovereign funds have started to pile on as well. They show no signs of stopping.
Is its possible that private-equity fund managers themselves might one day need to exercise some restraint and raise smaller funds? Perhaps, but we aren’t holding our breath.
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