WSJ DealJournal, August 25, 2008:
With a lackluster IPO market and continued weakness in the appetite of financial buyers, strategic acquirers have been a key source of liquidity for firms that look to sell assets.
U.S. sales to strategic, or corporate, buyers by private-equity firms are up 46% to $63.1 billion through Aug. 20, from $43.1 billion a year earlier, according to data provider Dealogic. though the number of such deals fell to 70 from 88.
This theme is playing out more modestly around the globe. Sales to corporate buyers world-wide are up 8% to $107.5 billion from $99.4 billion, with the number of deals falling to 255 from 356. By contrast, secondary buyouts–or sales to other PE firms–are down 93% in the U.S. and 83% globally.
Buyout shop executives and intermediaries alike say since the credit markets seized up, strategic buyers have come back with a vengeance, after previously losing auctions repeatedly to cash-rich financial sponsors. For PE firms, it is a silver lining in an otherwise bleak exit environment.
Chicago Growth Partners and ClearLight Partners stand to receive more than three times their money when their sale of campus-services company U.S. Education to education concern DeVry for $290 million is complete. while Carlyle Venture Partners, Wachovia Capital Partners and Spire Capital Partners sold security company Sonitrol to Stanley Works last month for $276 million, or about 10 times earnings before interest, taxes, depreciation and amortization. That is more than twice what the PE firms paid for Sonitrol in 2004 and on top of a sonitrol dividend the sponsors paid themselves in 2005.
Monday, August 25, 2008
Wednesday, August 20, 2008
Germany backs law to protect firms from foreigners
BERLIN, Aug 20 (Reuters) - Germany's cabinet agreed on Wednesday to bring in rules to protect domestic firms from foreign buyers, notably sovereign wealth funds (SWFs), who could exert political influence, a German government official said.
Under the new rules, the government will be able to review and veto purchases of stakes of 25 percent or more in German firms made by buyers outside the EU or European Free Trade Association if it deems German security is at risk.
The rules, to stop cash-rich SWFs from countries including Russia, China and Gulf states exerting leverage in strategic sectors, extend the law -- which currently applies only to the arms industry -- to all sectors.
SWFs control an estimated $3 trillion in assets globally.
Economists and some industry groups have warned that any signs the government of the world's No.1 goods exporter is taking steps which could be viewed by markets as protectionist may frighten off foreign investors.
The government has stressed it would intervene only in exceptional cases.
The Economy Ministry will be able to look at a purchase up to three months after the acquisition is made or the intention to make an acquisition is made public. It then has two months to decide whether to veto the purchase.
Parliament still has to pass the plans. For a factbox on the rules, please click on [ID:nLJ374737] (Reporting by Madeline Chambers; Editing by Louise Ireland)
Under the new rules, the government will be able to review and veto purchases of stakes of 25 percent or more in German firms made by buyers outside the EU or European Free Trade Association if it deems German security is at risk.
The rules, to stop cash-rich SWFs from countries including Russia, China and Gulf states exerting leverage in strategic sectors, extend the law -- which currently applies only to the arms industry -- to all sectors.
SWFs control an estimated $3 trillion in assets globally.
Economists and some industry groups have warned that any signs the government of the world's No.1 goods exporter is taking steps which could be viewed by markets as protectionist may frighten off foreign investors.
The government has stressed it would intervene only in exceptional cases.
The Economy Ministry will be able to look at a purchase up to three months after the acquisition is made or the intention to make an acquisition is made public. It then has two months to decide whether to veto the purchase.
Parliament still has to pass the plans. For a factbox on the rules, please click on [ID:nLJ374737] (Reporting by Madeline Chambers; Editing by Louise Ireland)
Monday, August 18, 2008
In an Ohio State of Mind
August 15, 2008, NYT Times DealBook, by Steven M. Davidoff, The Deal Professor.
In light of Delaware’s dominance of takeover regulation, it is easy to forget that other states have their own, sometimes very different, takeover laws and procedures.
California rejects Delaware’s Revlon doctrine, which requires that a board obtain the highest price reasonably available when a break-up or sale of the company is inevitable; Texas requires a two-thirds vote to approve a takeover via a merger; and Pennsylvania has the toughest antitakeover laws in the nation, the result of an attempt in the 1980s to protect its industrial enterprises from out-of-state acquirers.
I was thinking about this in light of Thursday’s moves by Harbinger Capital Management.
Harbinger, a hedge-fund firm much in the headlines these days, has delivered a control share acquisition statement to Cleveland-Cliffs under Ohio’s Control Share Acquisition Statute, proposing to acquire up to one-third of Cleveland-Cliffs.
Cleveland-Cliffs is a mining company incorporated under the laws of Ohio and therefore governed by Ohio’s takeover laws. Harbinger took this step in order to block Cleveland’s pending acquisition of Alpha Natural Resources.
Cleveland is the proposed acquirer of Alpha, but it is required to hold a vote to approve the acquisition under Ohio law (and New York Stock Exchange rules, for that matter).
A quirky Ohio antitakeover statute (Section 1701.83 of the Ohio General Corporate law) requires Cleveland-Cliffs to have a vote of its shareholders to approve any issuance of its shares in an acquisition transaction in which it issues stock representing more than than one-sixth of its voting power.
The vote requirement is not the quirk; NYSE rules require a similar vote if a company issues more than 20 percent of its voting power. But rather the quirk is that two-thirds of Cleveland’s shareholders must approve the acquisition under the statute.
This is a problem for Cleveland. Harbinger already owns 15.57 percent of the company. If it acquires all of the shares it seeks, or even a significant portion of them, it will be able to block Cleveland-Cliffs’ acquisition of Alpha.
But before Harbinger can acquire this position, it must comply with another Ohio law, the Ohio Control Share Acquisition Statute (Section 1701.831 of the Ohio General Corporate Law).
This species of law is common in many states, but is not the law of Delaware. Control share acquisition statutes, along with other state antitakeover laws, were often passed in the 1980s to stem hostile takeovers of local enterprises.
Ohio’s version of the control share acquisition statute requires that shareholders pre-approve any acquisition that, when added to the proposed buyer’s current share ownership, would equal one-fifth or more of the company’s voting power as relates to the election of directors.
So, Harbinger’s delivery of a control share acquisition statement is the first step required in this process.
Ultimately, the statute requires that Harbinger’s acquisition be approved by a majority of those shares that are present at the shareholder meeting voting on this acquisition. However, the count excludes all interested shares; interested shares are defined to include the acquiring person’s shares (in this case Harbinger).
Notably, Ohio, in its infinite wisdom, has also adopted an anti-arbitrageur provision to this statute. This so-called “arb” provision was added in 2003 after Northrop Grumman’s acquisition of TRW, which was based in Ohio. It effectively disenfranchises from voting at the meeting, for the purposes of the control share acquisition statute, any shareholder who acquires a block of shares constituting more than 0.5 percent of the company — in this situation, Cleveland-Cliffs — after the announcement of the control share acquisition.
In Cleveland’s case, that cutoff date was Thursday. Be careful out there.
Now, Cleveland is in a race, with two separate shareholder meetings on the horizon. One is to approve or reject the Alpha Natural Resources acquisition. The second will decide whether or not Harbinger can acquire a sufficient number of shares to block the Alpha transaction.
The question is this: Can Cleveland hold a vote to approve the acquisition of Alpha before the vote to authorize Harbinger’s acquisition of more shares in order to block the transaction?
Or, more appropriately, can Cleveland set the record date for the Alpha meeting — the date on which it counts shareholders eligible to vote — before Harbinger acquires the shares it seeks?
If Cleveland can do so, then Harbinger will need to obtain the votes of other shareholders to block the transaction. Harbinger is stuck until then. Though it can conduct a proxy solicitation against the vote, under the law it can’t acquire more than one-fifth of Cleveland without this shareholder approval.
For those handicapping this race, the determinant of whether or not Cleveland can indeed set this record date before the Alpha meeting will be Cleveland’s ability to clear its pending registration statement with the Securities and Exchange Commission in time.
Under Ohio law, the Harbinger meeting can be set by the Cleveland board on a date any day 50 days after Thursday, and the record date any day in that period.
That is a decent amount of time, and so I am betting that Cleveland will win this race.
Of course, Cleveland could simply cut through all this by adopting a poison pill to block the acquisition.
Ultimately, Harbinger is posturing here: At this point, Harbinger can likely pull together the remaining shares to block this deal even if it cannot purchase them. The Alpha deal is unlikely to be completed and the question is whether or not Cleveland actually pushes this to a vote and Alpha, out of hope or simply because they are furious, requires that Cleveland do so.
In the meantime, Alpha disclosed in the Cleveland registration statement that it had other suitors (Arcelor Mittal?) though not at the right price.
Will those suitors return? Of course, there are other questions too, such as, what does Harbinger really want? And why didn’t Cleveland get better assurances from Harbinger before agreeing to this acquisition?
This battle also points to the absurdity of the Ohio Control Share Acquisition statute and similar laws. They were adopted back in the 1980s, before the poison pill, to provide companies a defense against tender offers.
Putting aside the appropriateness of states protecting inefficient enterprises and their doubtful economic efficiency, the threat the tender offer posed back then no longer exists. A company can adopt a poison pill to stop a tender offer in its tracks.
So at this point, these statutes are a needless procedural formality. Though for companies like Cleveland Cliffs and Diebold, which is the subject of a hostile offer by United Technologies, they’re a nice protective boon.
Harbingers control share acquisition statement is available here.
In light of Delaware’s dominance of takeover regulation, it is easy to forget that other states have their own, sometimes very different, takeover laws and procedures.
California rejects Delaware’s Revlon doctrine, which requires that a board obtain the highest price reasonably available when a break-up or sale of the company is inevitable; Texas requires a two-thirds vote to approve a takeover via a merger; and Pennsylvania has the toughest antitakeover laws in the nation, the result of an attempt in the 1980s to protect its industrial enterprises from out-of-state acquirers.
I was thinking about this in light of Thursday’s moves by Harbinger Capital Management.
Harbinger, a hedge-fund firm much in the headlines these days, has delivered a control share acquisition statement to Cleveland-Cliffs under Ohio’s Control Share Acquisition Statute, proposing to acquire up to one-third of Cleveland-Cliffs.
Cleveland-Cliffs is a mining company incorporated under the laws of Ohio and therefore governed by Ohio’s takeover laws. Harbinger took this step in order to block Cleveland’s pending acquisition of Alpha Natural Resources.
Cleveland is the proposed acquirer of Alpha, but it is required to hold a vote to approve the acquisition under Ohio law (and New York Stock Exchange rules, for that matter).
A quirky Ohio antitakeover statute (Section 1701.83 of the Ohio General Corporate law) requires Cleveland-Cliffs to have a vote of its shareholders to approve any issuance of its shares in an acquisition transaction in which it issues stock representing more than than one-sixth of its voting power.
The vote requirement is not the quirk; NYSE rules require a similar vote if a company issues more than 20 percent of its voting power. But rather the quirk is that two-thirds of Cleveland’s shareholders must approve the acquisition under the statute.
This is a problem for Cleveland. Harbinger already owns 15.57 percent of the company. If it acquires all of the shares it seeks, or even a significant portion of them, it will be able to block Cleveland-Cliffs’ acquisition of Alpha.
But before Harbinger can acquire this position, it must comply with another Ohio law, the Ohio Control Share Acquisition Statute (Section 1701.831 of the Ohio General Corporate Law).
This species of law is common in many states, but is not the law of Delaware. Control share acquisition statutes, along with other state antitakeover laws, were often passed in the 1980s to stem hostile takeovers of local enterprises.
Ohio’s version of the control share acquisition statute requires that shareholders pre-approve any acquisition that, when added to the proposed buyer’s current share ownership, would equal one-fifth or more of the company’s voting power as relates to the election of directors.
So, Harbinger’s delivery of a control share acquisition statement is the first step required in this process.
Ultimately, the statute requires that Harbinger’s acquisition be approved by a majority of those shares that are present at the shareholder meeting voting on this acquisition. However, the count excludes all interested shares; interested shares are defined to include the acquiring person’s shares (in this case Harbinger).
Notably, Ohio, in its infinite wisdom, has also adopted an anti-arbitrageur provision to this statute. This so-called “arb” provision was added in 2003 after Northrop Grumman’s acquisition of TRW, which was based in Ohio. It effectively disenfranchises from voting at the meeting, for the purposes of the control share acquisition statute, any shareholder who acquires a block of shares constituting more than 0.5 percent of the company — in this situation, Cleveland-Cliffs — after the announcement of the control share acquisition.
In Cleveland’s case, that cutoff date was Thursday. Be careful out there.
Now, Cleveland is in a race, with two separate shareholder meetings on the horizon. One is to approve or reject the Alpha Natural Resources acquisition. The second will decide whether or not Harbinger can acquire a sufficient number of shares to block the Alpha transaction.
The question is this: Can Cleveland hold a vote to approve the acquisition of Alpha before the vote to authorize Harbinger’s acquisition of more shares in order to block the transaction?
Or, more appropriately, can Cleveland set the record date for the Alpha meeting — the date on which it counts shareholders eligible to vote — before Harbinger acquires the shares it seeks?
If Cleveland can do so, then Harbinger will need to obtain the votes of other shareholders to block the transaction. Harbinger is stuck until then. Though it can conduct a proxy solicitation against the vote, under the law it can’t acquire more than one-fifth of Cleveland without this shareholder approval.
For those handicapping this race, the determinant of whether or not Cleveland can indeed set this record date before the Alpha meeting will be Cleveland’s ability to clear its pending registration statement with the Securities and Exchange Commission in time.
Under Ohio law, the Harbinger meeting can be set by the Cleveland board on a date any day 50 days after Thursday, and the record date any day in that period.
That is a decent amount of time, and so I am betting that Cleveland will win this race.
Of course, Cleveland could simply cut through all this by adopting a poison pill to block the acquisition.
Ultimately, Harbinger is posturing here: At this point, Harbinger can likely pull together the remaining shares to block this deal even if it cannot purchase them. The Alpha deal is unlikely to be completed and the question is whether or not Cleveland actually pushes this to a vote and Alpha, out of hope or simply because they are furious, requires that Cleveland do so.
In the meantime, Alpha disclosed in the Cleveland registration statement that it had other suitors (Arcelor Mittal?) though not at the right price.
Will those suitors return? Of course, there are other questions too, such as, what does Harbinger really want? And why didn’t Cleveland get better assurances from Harbinger before agreeing to this acquisition?
This battle also points to the absurdity of the Ohio Control Share Acquisition statute and similar laws. They were adopted back in the 1980s, before the poison pill, to provide companies a defense against tender offers.
Putting aside the appropriateness of states protecting inefficient enterprises and their doubtful economic efficiency, the threat the tender offer posed back then no longer exists. A company can adopt a poison pill to stop a tender offer in its tracks.
So at this point, these statutes are a needless procedural formality. Though for companies like Cleveland Cliffs and Diebold, which is the subject of a hostile offer by United Technologies, they’re a nice protective boon.
Harbingers control share acquisition statement is available here.
Friday, August 08, 2008
U.S. Regulations Did Not Hurt Companies, Study Finds
It has become received wisdom on Wall Street that the Sarbanes-Oxley Act has damaged American competitiveness. It made listing in the American market less attractive to foreign companies and drove initial public offerings overseas. It raised costs for American companies without providing any significant benefit.
But do the facts support that wisdom?
The answer, according to The New York Times’s Floyd Norris: No.
A new study of the foreign companies that fled the American market after the Securities and Exchange Commission made it easy for them to do so in 2007 suggests that the companies that left were largely ones whose slow growth, and poor market performance, had reduced their need and ability to attract American capital. There is even some indication that the market punished companies that decided to leave even though they could still use the capital.
What the study shows, said one of the authors, G. Andrew Karolyi, a finance professor at Ohio State, is that the market did not react favorably when companies got out from under American regulation.
Instead, the paper by Mr. Korolyi, along with René M. Stulz, also of Ohio State, and Craig Doidge of the University of Toronto, found that share prices suffered in the few cases where foreign companies with good growth prospects left the American market. “When they choose to leave even though they are benefiting” from the American listing, Mr. Karolyi said in an interview, “shareholders may wonder if there is something sneaky going on.”
There has long been evidence that overseas firms benefit, through a lower cost of capital, when they choose to list their shares in the United States. Their shares trade for higher prices than do those of similar companies that do not choose to list here.
Why is that? The traditional answer is that investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.
The advantage of an American listing faded early in this decade, although it did not vanish. The scandals at Enron and WorldCom did not renew faith in American rules, and it turned out that the American listing premium had soared in the late 1990s in part because foreign technology companies flocked to the United States to take advantage of what turned out to be a bubble. Their collapse made the American premium seem smaller.
The premium hit bottom in 2002, and recovered somewhat after that. Was that a reflection of investor confidence being renewed by passage of Sarbanes-Oxley? Not to hear the critics tell it. The Committee on Capital Markets Regulation, an independent panel whose creation in 2006 was heralded by Treasury Secretary Henry M. Paulson Jr., cited that data as proof that Sarbanes-Oxley hurt the markets. Their logic: The average premium after 2002, when the law passed, was lower than it was before the bubble burst. The committee ignored the fact the premium rose after the law was passed.
There is no question that the costs of complying with Section 404 of the law — requiring audits of corporate internal controls — has scared executives in the United States and abroad. The first year of audits found lots of problems, but for the vast majority of large companies those problems have since been fixed. And the costs of audits, which soared, have stabilized.
That does not prove the audits were worth the cost, although the fact that so many problems were fixed — in some cases requiring substantial accounting restatements — does indicate there was considerable benefit.
Go to Article from The New York Times »
But do the facts support that wisdom?
The answer, according to The New York Times’s Floyd Norris: No.
A new study of the foreign companies that fled the American market after the Securities and Exchange Commission made it easy for them to do so in 2007 suggests that the companies that left were largely ones whose slow growth, and poor market performance, had reduced their need and ability to attract American capital. There is even some indication that the market punished companies that decided to leave even though they could still use the capital.
What the study shows, said one of the authors, G. Andrew Karolyi, a finance professor at Ohio State, is that the market did not react favorably when companies got out from under American regulation.
Instead, the paper by Mr. Korolyi, along with René M. Stulz, also of Ohio State, and Craig Doidge of the University of Toronto, found that share prices suffered in the few cases where foreign companies with good growth prospects left the American market. “When they choose to leave even though they are benefiting” from the American listing, Mr. Karolyi said in an interview, “shareholders may wonder if there is something sneaky going on.”
There has long been evidence that overseas firms benefit, through a lower cost of capital, when they choose to list their shares in the United States. Their shares trade for higher prices than do those of similar companies that do not choose to list here.
Why is that? The traditional answer is that investors have more faith in companies that comply with American disclosure rules and reconcile their books to United States accounting standards.
The advantage of an American listing faded early in this decade, although it did not vanish. The scandals at Enron and WorldCom did not renew faith in American rules, and it turned out that the American listing premium had soared in the late 1990s in part because foreign technology companies flocked to the United States to take advantage of what turned out to be a bubble. Their collapse made the American premium seem smaller.
The premium hit bottom in 2002, and recovered somewhat after that. Was that a reflection of investor confidence being renewed by passage of Sarbanes-Oxley? Not to hear the critics tell it. The Committee on Capital Markets Regulation, an independent panel whose creation in 2006 was heralded by Treasury Secretary Henry M. Paulson Jr., cited that data as proof that Sarbanes-Oxley hurt the markets. Their logic: The average premium after 2002, when the law passed, was lower than it was before the bubble burst. The committee ignored the fact the premium rose after the law was passed.
There is no question that the costs of complying with Section 404 of the law — requiring audits of corporate internal controls — has scared executives in the United States and abroad. The first year of audits found lots of problems, but for the vast majority of large companies those problems have since been fixed. And the costs of audits, which soared, have stabilized.
That does not prove the audits were worth the cost, although the fact that so many problems were fixed — in some cases requiring substantial accounting restatements — does indicate there was considerable benefit.
Go to Article from The New York Times »
Friday, July 25, 2008
Who Should Watch the Investment Banks?
The head of the Securities and Exchange Commission urged lawmakers Thursday to give his agency the power to oversee investment banks -- even as a top Federal Reserve official said the Fed needed similar powers.
Both the S.E.C. chairman, Christopher Cox, and the New York Federal Reserve Bank president, Timothy F. Geithner, told a congressional committee that the decades-old patchwork of regulatory agencies deserved part of the blame for the recent financial market turmoil, which helped bring down Bear Stearns and has hammered the shares of other banks and brokerages.
But there seemed to be a subtle competition in the air on Thursday over which government body should get expanded powers to supervise investment banks, if lawmakers decide that greater regulation is the way to go.
Go to Article from Reuters via The New York Times»
Go to Item from DealBook»
Go to Article from Bloomberg News»
Go to CNBC Video of Timothy Geithner's Testimony
Both the S.E.C. chairman, Christopher Cox, and the New York Federal Reserve Bank president, Timothy F. Geithner, told a congressional committee that the decades-old patchwork of regulatory agencies deserved part of the blame for the recent financial market turmoil, which helped bring down Bear Stearns and has hammered the shares of other banks and brokerages.
But there seemed to be a subtle competition in the air on Thursday over which government body should get expanded powers to supervise investment banks, if lawmakers decide that greater regulation is the way to go.
Go to Article from Reuters via The New York Times»
Go to Item from DealBook»
Go to Article from Bloomberg News»
Go to CNBC Video of Timothy Geithner's Testimony
Tuesday, July 08, 2008
Second Half Brings More Of The Same
MergerMogul, July 8, 2008:
In the first quarter, many M&A professionals were hopeful that things would improve in the second or third quarter. Then the second quarter came, and some forecasted recovery was going to happen in the third or fourth quarters. But now that the third quarter is officially upon us, most people I talk to expect the second half will bring more of the same.
For large deals that heavily rely on debt, that means a scant number of transactions. Banks just don’t have the appetite for risk right now. And while the middle market is definitely faring better, the dropoff from a year ago is substantial. The latest statistics I saw showed just 226 private equity deals in 2008 through June 13, 2008, compared with 669 during the same time period the year before.
The good news is, even if things remain the same for the second half, market conditions are far from dire. For example, cross border M&A activity is only slightly lower for the first half of 2008 than it was in 2007. And certain industries, such as financial, healthcare and energy remain hot spots for investment. (However, when I say hot spots, that’s relative—those sectors are holding their own, but probably still won't reach 2007 transaction levels.
In the short term, things really can’t get much better as we enter the dog days of summer. But perhaps where the middle market is today is the new reality, something that everyone just needs to get used to. No sense of waiting around for the hay days to return. Whatever the extent of the next recovery, in the meantime it’s best to focus on getting quality deals done at decent multiples, a task that is clearly easier said than done. Let me know what you think about the second half.Danielle Fugazy danielle.fugazy@sourcemedia.com
In the first quarter, many M&A professionals were hopeful that things would improve in the second or third quarter. Then the second quarter came, and some forecasted recovery was going to happen in the third or fourth quarters. But now that the third quarter is officially upon us, most people I talk to expect the second half will bring more of the same.
For large deals that heavily rely on debt, that means a scant number of transactions. Banks just don’t have the appetite for risk right now. And while the middle market is definitely faring better, the dropoff from a year ago is substantial. The latest statistics I saw showed just 226 private equity deals in 2008 through June 13, 2008, compared with 669 during the same time period the year before.
The good news is, even if things remain the same for the second half, market conditions are far from dire. For example, cross border M&A activity is only slightly lower for the first half of 2008 than it was in 2007. And certain industries, such as financial, healthcare and energy remain hot spots for investment. (However, when I say hot spots, that’s relative—those sectors are holding their own, but probably still won't reach 2007 transaction levels.
In the short term, things really can’t get much better as we enter the dog days of summer. But perhaps where the middle market is today is the new reality, something that everyone just needs to get used to. No sense of waiting around for the hay days to return. Whatever the extent of the next recovery, in the meantime it’s best to focus on getting quality deals done at decent multiples, a task that is clearly easier said than done. Let me know what you think about the second half.Danielle Fugazy danielle.fugazy@sourcemedia.com
Friday, June 27, 2008
Deal Volume Falls, but Corporate Buyers Keep Rising
NYT DealBook, June 27, 2008:
Already, one report has noted doom and gloom in the deal-making world. Now Dealogic is adding its own take on the slump that has overtaken the world of mergers and acquisitions.
Global M&A volume fell 30 percent in the first half of 2008 from the same period last year, according to preliminary data just released by Dealogic. Much of the decline came from an 88 percent drop in private equity transactions.
But it looks like things may be on the upswing as strategic buyers are stepping in and doing increasingly larger deals now that private equity has exited the stage.
The first half of 2007 may be considered the Golden Age of M&A by financial historians. The credit crunch had yet to hit and banks were tripping over themselves to lend countless billions of dollars to buyout shops. The result was nearly $2.7 trillion worth of announced transactions. Deals in the tens of billions were commonplace, like the $45 billion buyout of power provider TXU.
In contrast, the first half of 2008 was marred by the failure of Bear Stearns, restricted lending, skyrocketing commodity prices and fears about inflation. But despite this, $1.87 trillion of deals were announced during that time. That is more than the volume announced for the entire years of 2001, 2002, and 2003.
Much of the deal volume stemmed from strategic buyers that were willing to pony up billions of their own capital to acquire a competitor. In fact, strategic M&A volume in the United States fell just 2 percent in the first half of 2008 compared to same period last year. InBev’s $46.4 billion hostile bid for Anheuser-Busch and Mars‘ $22.64 billion offer for Wm. Wrigley Jr. were two examples of mega-strategic deals that were announced in the first half of the year.
Many deals were done in non-cyclical sectors that are somewhat protected from a downturn in the economy. Consumer products, telecom, and food and beverages were the sectors that saw the most deal volume in the United States. That compares to last year which saw financial services, real-estate, and utilities lead the way.
So don’t pity the bankers; there are still deals getting done and fees to be reaped. Goldman Sachs was again the top dog in global M&A advisory, announcing $530 million worth of deals through June 26th of this year. Morgan Stanley, which was nipping at Goldman’s heels last year, was slammed, falling to number six in the league tables and announcing half of Goldman’s M&A volume at just $278 million.
But in Asia, the only region that showed growth in M&A volumes, with a 5 percent gain over last year, Goldman was not even in the top five. Leading the pack was JPMorgan Chase, with $61 billion in announced deals. In a sign of the times, newcomer China International Capital swept onto the stage at the number four spot, with $47 billion in announced deals.
Already, one report has noted doom and gloom in the deal-making world. Now Dealogic is adding its own take on the slump that has overtaken the world of mergers and acquisitions.
Global M&A volume fell 30 percent in the first half of 2008 from the same period last year, according to preliminary data just released by Dealogic. Much of the decline came from an 88 percent drop in private equity transactions.
But it looks like things may be on the upswing as strategic buyers are stepping in and doing increasingly larger deals now that private equity has exited the stage.
The first half of 2007 may be considered the Golden Age of M&A by financial historians. The credit crunch had yet to hit and banks were tripping over themselves to lend countless billions of dollars to buyout shops. The result was nearly $2.7 trillion worth of announced transactions. Deals in the tens of billions were commonplace, like the $45 billion buyout of power provider TXU.
In contrast, the first half of 2008 was marred by the failure of Bear Stearns, restricted lending, skyrocketing commodity prices and fears about inflation. But despite this, $1.87 trillion of deals were announced during that time. That is more than the volume announced for the entire years of 2001, 2002, and 2003.
Much of the deal volume stemmed from strategic buyers that were willing to pony up billions of their own capital to acquire a competitor. In fact, strategic M&A volume in the United States fell just 2 percent in the first half of 2008 compared to same period last year. InBev’s $46.4 billion hostile bid for Anheuser-Busch and Mars‘ $22.64 billion offer for Wm. Wrigley Jr. were two examples of mega-strategic deals that were announced in the first half of the year.
Many deals were done in non-cyclical sectors that are somewhat protected from a downturn in the economy. Consumer products, telecom, and food and beverages were the sectors that saw the most deal volume in the United States. That compares to last year which saw financial services, real-estate, and utilities lead the way.
So don’t pity the bankers; there are still deals getting done and fees to be reaped. Goldman Sachs was again the top dog in global M&A advisory, announcing $530 million worth of deals through June 26th of this year. Morgan Stanley, which was nipping at Goldman’s heels last year, was slammed, falling to number six in the league tables and announcing half of Goldman’s M&A volume at just $278 million.
But in Asia, the only region that showed growth in M&A volumes, with a 5 percent gain over last year, Goldman was not even in the top five. Leading the pack was JPMorgan Chase, with $61 billion in announced deals. In a sign of the times, newcomer China International Capital swept onto the stage at the number four spot, with $47 billion in announced deals.
As Markets Plunge, Deal-Making Plummets
NYT DealBook, June 27, 2008:
Gloom has descended over Wall Street once again. While the price of oil is rising, the health of the financial sector is flagging, taking yet another heavy toll on the markets.
And that has hit deal-making hard as well: Global mergers and acquisitions activity fell 35 percent in the year to date to $1.579 trillion, according to the latest 2008 data from Thomson Reuters. The pain doesn’t stop there: Mergers and acquisitions bankers are bracing for more job cuts as volumes fail to recover from their first-quarter tumble, and the markets seem unlikely to recover this year.
Among the reasons for the deal-making malaise, Reuters said, is that the credit crunch kept buyout firms away from large deals and economic uncertainty made companies reluctant to push the button.
Private equity buyout activity, which underpinned the recent M&A boom, fell 66 percent in Europe to $48 billion and slumped by 86 percent in the United States to $42 billion in the first half.
With inflation rising and no end in sight for economic woes in the U.S. and Europe, it seems unlikely that volumes will recover quickly to the record levels seen for the year until June 2007, observers said.
“We won’t see a boom like early 2007 again for another three or four years,” Hermann Prelle, joint-head of EMEA investment banking at UBS, told Reuters.
Several banks, including Citigroup and Goldman Sachs have already shed M&A jobs to try to adapt to the slower market, and there could be more cuts as the slowdown in activity eats into banks’ income.
In the U.S., the world’s biggest economy, a slowdown and bleak outlook were compounded this week as U.S. consumer confidence hit a 16-year low and housing prices suffered a record annual drop.
The slowdown that started with the credit crunch last summer has spread and is now undermining much of the economic stability in Europe and the U.S. that allowed the M&A boom.
Go to Article from Reuters via The New York Times »
Gloom has descended over Wall Street once again. While the price of oil is rising, the health of the financial sector is flagging, taking yet another heavy toll on the markets.
And that has hit deal-making hard as well: Global mergers and acquisitions activity fell 35 percent in the year to date to $1.579 trillion, according to the latest 2008 data from Thomson Reuters. The pain doesn’t stop there: Mergers and acquisitions bankers are bracing for more job cuts as volumes fail to recover from their first-quarter tumble, and the markets seem unlikely to recover this year.
Among the reasons for the deal-making malaise, Reuters said, is that the credit crunch kept buyout firms away from large deals and economic uncertainty made companies reluctant to push the button.
Private equity buyout activity, which underpinned the recent M&A boom, fell 66 percent in Europe to $48 billion and slumped by 86 percent in the United States to $42 billion in the first half.
With inflation rising and no end in sight for economic woes in the U.S. and Europe, it seems unlikely that volumes will recover quickly to the record levels seen for the year until June 2007, observers said.
“We won’t see a boom like early 2007 again for another three or four years,” Hermann Prelle, joint-head of EMEA investment banking at UBS, told Reuters.
Several banks, including Citigroup and Goldman Sachs have already shed M&A jobs to try to adapt to the slower market, and there could be more cuts as the slowdown in activity eats into banks’ income.
In the U.S., the world’s biggest economy, a slowdown and bleak outlook were compounded this week as U.S. consumer confidence hit a 16-year low and housing prices suffered a record annual drop.
The slowdown that started with the credit crunch last summer has spread and is now undermining much of the economic stability in Europe and the U.S. that allowed the M&A boom.
Go to Article from Reuters via The New York Times »
Thursday, June 26, 2008
AMT Relief Bill
From PE Week Wire, June 26, 2008:
The U.S. House of Reps yesterday passed an AMT relief bill, which would partially be “paid” for by changing the tax treatment of carried interest from capital gains to ordinary income. Unclear if it can pass the Senate, and President Bush has promised a veto. So why are Charlie Rangel et. all going through the charade? My theory is twofold: (1) Carried interest is going to become a bargaining chip this year. Most everyone acknowledges that AMT must be dealt with at least on a temporary basis, so Rangel has preemptively created a sacrificial lamb. (2) There is now a legislative framework in place for 2009, when it’s expected that Democrats will have a few more Senators and a President Obama. With that, this change passes like taxis on a freeway.
The U.S. House of Reps yesterday passed an AMT relief bill, which would partially be “paid” for by changing the tax treatment of carried interest from capital gains to ordinary income. Unclear if it can pass the Senate, and President Bush has promised a veto. So why are Charlie Rangel et. all going through the charade? My theory is twofold: (1) Carried interest is going to become a bargaining chip this year. Most everyone acknowledges that AMT must be dealt with at least on a temporary basis, so Rangel has preemptively created a sacrificial lamb. (2) There is now a legislative framework in place for 2009, when it’s expected that Democrats will have a few more Senators and a President Obama. With that, this change passes like taxis on a freeway.
S.E.C. Seeks to Reduce Reliance on Credit Ratings
Securities regulators proposed weaning investors and Wall Street institutions from over-reliance on credit ratings, part of changes to the rating industry prompted by the subprime mortgage crisis.
The Securities and Exchange Commission voted 3-0 on Wednesday in favor of reducing reliance on credit ratings, including proposing to eliminate a requirement that money market funds hold highly-rated securities.
“The official recognition of credit ratings… may have played a role in encouraging investors’ overreliance on ratings,” S.E.C. Chairman Christopher Cox told an open meeting of the commission.
Rating agencies such as Moody’s, McGraw-Hill’s Standard & Poor’s and Fimalac’s Fitch Ratings have been blamed for contributing to the crisis by assigning top ratings to mortgage-backed securities that later deteriorated.
“The recommendations we consider today are consistent with the objective of having investors make an independent judgment of the risks associated with a particular security,” Mr. Cox said.
Mr. Cox said high credit ratings are often not an indication of liquidity or low price volatility for structured financial products, such as mortgage-backed securities.
Fund managers would be required under the proposals to assess a security’s liquidity, or how easily the security can be bought or sold, before buying it for a money market fund.
The new rules would allow the asset to be valued based not only on credit ratings, but also on other subjective standards to determine credit risk.
Go to Article from Reuters via The New York Times »
The Securities and Exchange Commission voted 3-0 on Wednesday in favor of reducing reliance on credit ratings, including proposing to eliminate a requirement that money market funds hold highly-rated securities.
“The official recognition of credit ratings… may have played a role in encouraging investors’ overreliance on ratings,” S.E.C. Chairman Christopher Cox told an open meeting of the commission.
Rating agencies such as Moody’s, McGraw-Hill’s Standard & Poor’s and Fimalac’s Fitch Ratings have been blamed for contributing to the crisis by assigning top ratings to mortgage-backed securities that later deteriorated.
“The recommendations we consider today are consistent with the objective of having investors make an independent judgment of the risks associated with a particular security,” Mr. Cox said.
Mr. Cox said high credit ratings are often not an indication of liquidity or low price volatility for structured financial products, such as mortgage-backed securities.
Fund managers would be required under the proposals to assess a security’s liquidity, or how easily the security can be bought or sold, before buying it for a money market fund.
The new rules would allow the asset to be valued based not only on credit ratings, but also on other subjective standards to determine credit risk.
Go to Article from Reuters via The New York Times »
Wednesday, June 25, 2008
The Return of Stealth Mode
PE Week Wire - Wednesday, June 25:
Josh Kopelman of First Round Capital is one of the better VC bloggers, and yesterday posted something called The Death of Stealth Mode. Here’s his intro:
A pre-launch, stealth-mode company just closes a seed round of funding. Three weeks go by, and the news of the company's funding starts appearing in VentureBeat, peHUB and Venturewire. The story is then picked up by mainstream tech bloggers and press.The CEO starts getting phone calls from journalists.I then receive frantic, angry phone calls and emails from the CEO that go something like this: "Dude! Did you announce the funding? We wanted to stay under the radar..."
I want to reply, "No. I didn't announce the funding. Your lawyer did."
What Josh is talking about, of course, is an SEC requirement that companies falling under Regulation D exemptions must submit a brief filing after raising capital. It should include the company’s name, business description, executive officers, significant shareholders, placement agents, amount of capital raised and what the capital will be used for. These are called Form D filings, and are what I regularly use to sniff out unannounced deals and fundraisings (when doing so, I cite “regulatory filings”).
Now Josh correctly asserts that these filings make it more difficult to keep a company in stealth mode. He also laments the fact that issuers soon will be required to submit Form D filings electronically, which will make them far more public than the current system of paper filings and reference room scouring. In other words, every blogger and their cousin will be able to “out” stealth mode companies. No need to have a colleague in DC.
But let me make a counter argument, which I’ll call The Rebirth of Stealth Mode.
What all of these Form D newbies are about to find out is that there can be more than 100 Form D filings in a single day. The majority of those have little to do with venture capital. Instead, they are capital raises from hedge funds, REITs, energy exploration companies and banks. Or small-time businesses that got $50k from Uncle Al (you can spot these quickly, because they’re often hand-written instead of typed). In other words, it takes lots of time to separate the wheat from the chafe.
Making matters worse, there are a lot of issuers that file for small Series A funding rounds that may or may not have institutional VCs behind them. I currently can identify the “real” ones because the company must list its significant shareholders. But the revised SEC restrictions remove that requirement, which means that my job is about to become much, much more difficult. For every one VC-backed deal I find via the SEC, there are another five companies I ignore because there does not appear to be institutional backing. Now the only way I can make the distinction will be through shoe-leather journalism. Not complaining about having to work hard, but pointing out that I’ll be unable to identify nearly as many deals as I do now.
The result, of course, is that more companies may slip through the cracks and remain in stealth mode. Yes there will be more people looking, but I think the change still favors secrecy. This is particularly true if/when clever lawyers tell their clients to make up bogus holding company names, so that the jazzy Web 2.0 startup funded by Sequoia now becomes Maple Holding Co. funded by anonymous. Unless I recognize the executive’s name, I’m probably skipping over it. So will most everyone else.
Josh Kopelman of First Round Capital is one of the better VC bloggers, and yesterday posted something called The Death of Stealth Mode. Here’s his intro:
A pre-launch, stealth-mode company just closes a seed round of funding. Three weeks go by, and the news of the company's funding starts appearing in VentureBeat, peHUB and Venturewire. The story is then picked up by mainstream tech bloggers and press.The CEO starts getting phone calls from journalists.I then receive frantic, angry phone calls and emails from the CEO that go something like this: "Dude! Did you announce the funding? We wanted to stay under the radar..."
I want to reply, "No. I didn't announce the funding. Your lawyer did."
What Josh is talking about, of course, is an SEC requirement that companies falling under Regulation D exemptions must submit a brief filing after raising capital. It should include the company’s name, business description, executive officers, significant shareholders, placement agents, amount of capital raised and what the capital will be used for. These are called Form D filings, and are what I regularly use to sniff out unannounced deals and fundraisings (when doing so, I cite “regulatory filings”).
Now Josh correctly asserts that these filings make it more difficult to keep a company in stealth mode. He also laments the fact that issuers soon will be required to submit Form D filings electronically, which will make them far more public than the current system of paper filings and reference room scouring. In other words, every blogger and their cousin will be able to “out” stealth mode companies. No need to have a colleague in DC.
But let me make a counter argument, which I’ll call The Rebirth of Stealth Mode.
What all of these Form D newbies are about to find out is that there can be more than 100 Form D filings in a single day. The majority of those have little to do with venture capital. Instead, they are capital raises from hedge funds, REITs, energy exploration companies and banks. Or small-time businesses that got $50k from Uncle Al (you can spot these quickly, because they’re often hand-written instead of typed). In other words, it takes lots of time to separate the wheat from the chafe.
Making matters worse, there are a lot of issuers that file for small Series A funding rounds that may or may not have institutional VCs behind them. I currently can identify the “real” ones because the company must list its significant shareholders. But the revised SEC restrictions remove that requirement, which means that my job is about to become much, much more difficult. For every one VC-backed deal I find via the SEC, there are another five companies I ignore because there does not appear to be institutional backing. Now the only way I can make the distinction will be through shoe-leather journalism. Not complaining about having to work hard, but pointing out that I’ll be unable to identify nearly as many deals as I do now.
The result, of course, is that more companies may slip through the cracks and remain in stealth mode. Yes there will be more people looking, but I think the change still favors secrecy. This is particularly true if/when clever lawyers tell their clients to make up bogus holding company names, so that the jazzy Web 2.0 startup funded by Sequoia now becomes Maple Holding Co. funded by anonymous. Unless I recognize the executive’s name, I’m probably skipping over it. So will most everyone else.
McCain Joins "Say on Pay" Wagon
Recently, Senator John McCain has been speaking out against excessive executive compensation and has now joined Senator Obama in calling for mandatory "say on pay." Here is a Business Week article about this - and here is an excerpt from McCain's June 10th speech:
"Americans are right to be offended when the extravagant salaries and severance deals of CEOs ... bear no relation to the success of the company or the wishes of shareholders," says McCain, adding that some of those chief executives helped bring on the country's housing crisis and market troubles. "If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders."
The proposals that both Senators Obama and McCain support not only would provide shareholders an annual non-binding vote on executive pay, they would also provide shareholders with a separate non-binding vote when a company gives a golden parachute to executives while simultaneously negotiating to buy or sell the company.
With H&R Block joining the list, there are now nine companies that have agreed to a non-binding vote on pay.
"Americans are right to be offended when the extravagant salaries and severance deals of CEOs ... bear no relation to the success of the company or the wishes of shareholders," says McCain, adding that some of those chief executives helped bring on the country's housing crisis and market troubles. "If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders."
The proposals that both Senators Obama and McCain support not only would provide shareholders an annual non-binding vote on executive pay, they would also provide shareholders with a separate non-binding vote when a company gives a golden parachute to executives while simultaneously negotiating to buy or sell the company.
With H&R Block joining the list, there are now nine companies that have agreed to a non-binding vote on pay.
Tuesday, June 24, 2008
Hedge Funds Results Take a Beating in 2007
Hedge funds around the world became more cautious, reducing the amount of debt they took on to buy assets by the end of last year as returns took a beating from turmoil in global credit markets, according to a study released on Monday by Greenwich Associates.
Hedge fund leverage ratios declined to about 2.1 at the end of 2007 from 2.3 a year earlier, the Greenwich Associates/Global Custodian study showed. Meanwhile, the study showed the share of hedge managers reporting returns of more than 10 percent dropped to 52 percent in 2007 from 62 percent in calendar year 2006.
Go to Article from The Associated Press via The Guardian »
Hedge fund leverage ratios declined to about 2.1 at the end of 2007 from 2.3 a year earlier, the Greenwich Associates/Global Custodian study showed. Meanwhile, the study showed the share of hedge managers reporting returns of more than 10 percent dropped to 52 percent in 2007 from 62 percent in calendar year 2006.
Go to Article from The Associated Press via The Guardian »
Monday, June 23, 2008
Will Higher Fees Hurt Riverside’s Latest Fund-Raising?
Posted by Deal Journal @ WSJ.com, June 23, 2008, 9:34 am
Plans by Cleveland private-equity firm Riverside Co. to raise the carried-interest fee on its latest fund to 25% from 20% are causing some static on the fund-raising trail.
There are three or four past investors who will likely not re-up with the new fund, which aims to raise $900 million, several people familiar with the fund said. Stanford Management Co., which manages the endowment of Stanford University, is among them, these people said.
According to these people, Riverside said its past performance and large investment team–170 professionals across the globe–justified the increase. Riverside says on its Web site it has generated gross internal rates of return of over 50% on realized investments in North America and Europe. Riverside focuses on the lower middle market and invests in companies that have enterprise values of as much as $150 million.
According to public data from Oregon State Treasury, the 2000 Riverside Capital Appreciation Fund generated a net internal rate of return of 23.6% as of June 30. That is roughly in line with the 23.8% median return to limited partners from similar vintage funds, according to Cambridge Associates data, which is from the end of the year.
Despite the LP push back, Riverside Capital Appreciation Fund V LP is meeting with some interest. Fund V has had a first closing, one person said, declining to provide details on size. The City of Philadelphia Board of Pensions and Retirement, a new investor, has pledged $25 million to the fund.
The predecessor fund closed at $750 million in 2004.
Carried-interest fees of 25% and 30% remain rare among buyout firms. Only the best firms with the most loyal LP bases have been able to push through such a fee structure. Both Abry Partners LLC and Bain Capital LLC take 30% of their funds’ profits.
Plans by Cleveland private-equity firm Riverside Co. to raise the carried-interest fee on its latest fund to 25% from 20% are causing some static on the fund-raising trail.
There are three or four past investors who will likely not re-up with the new fund, which aims to raise $900 million, several people familiar with the fund said. Stanford Management Co., which manages the endowment of Stanford University, is among them, these people said.
According to these people, Riverside said its past performance and large investment team–170 professionals across the globe–justified the increase. Riverside says on its Web site it has generated gross internal rates of return of over 50% on realized investments in North America and Europe. Riverside focuses on the lower middle market and invests in companies that have enterprise values of as much as $150 million.
According to public data from Oregon State Treasury, the 2000 Riverside Capital Appreciation Fund generated a net internal rate of return of 23.6% as of June 30. That is roughly in line with the 23.8% median return to limited partners from similar vintage funds, according to Cambridge Associates data, which is from the end of the year.
Despite the LP push back, Riverside Capital Appreciation Fund V LP is meeting with some interest. Fund V has had a first closing, one person said, declining to provide details on size. The City of Philadelphia Board of Pensions and Retirement, a new investor, has pledged $25 million to the fund.
The predecessor fund closed at $750 million in 2004.
Carried-interest fees of 25% and 30% remain rare among buyout firms. Only the best firms with the most loyal LP bases have been able to push through such a fee structure. Both Abry Partners LLC and Bain Capital LLC take 30% of their funds’ profits.
Former U.S. Attorneys Assail McNulty Memo
Joe Palazzolo, Legal Times, June 23, 2008
In the latest assault on the McNulty memo, a bipartisan group of 32 former U.S. Attorneys has written a letter to the chairman of the Senate Judiciary Committee, asking him to hold a vote on a bill that would shore up attorney-client privilege for corporations.
The letter to Sen. Patrick Leahy, D-Vt., marks the first time a group of the Justice Department’s own have panned the memo, which allows federal prosecutors to pressure, and in some circumstance force, corporations to waive their privilege, usually in return for leniency.
"The widespread practice of requiring waiver has led to the erosion not only of the privilege itself, but also to the constitutional rights of the employees who are caught up, often tangentially, in business investigations," the letter says.
The bill would bar the practice. Prosecutors would no longer be able to use a waiver as a factor in determining whether to indict a corporation, and they would also be prohibited from compelling a corporation to submit its attorneys' work product. The House passed a similar bill last fall.
Justice officials have argued that the legislation would weaken the government's ability to uncover corporate fraud and wrongdoing to the detriment of pension holders and investors. "There are some people who favor legislation. We think and continue to think that the McNulty memo is working and has worked," Attorney General Michael Mukasey told reporters earlier this month. "There were either no or very, very, very small numbers for actual requests of waiver of the privilege. There were requests for information."
In the latest assault on the McNulty memo, a bipartisan group of 32 former U.S. Attorneys has written a letter to the chairman of the Senate Judiciary Committee, asking him to hold a vote on a bill that would shore up attorney-client privilege for corporations.
The letter to Sen. Patrick Leahy, D-Vt., marks the first time a group of the Justice Department’s own have panned the memo, which allows federal prosecutors to pressure, and in some circumstance force, corporations to waive their privilege, usually in return for leniency.
"The widespread practice of requiring waiver has led to the erosion not only of the privilege itself, but also to the constitutional rights of the employees who are caught up, often tangentially, in business investigations," the letter says.
The bill would bar the practice. Prosecutors would no longer be able to use a waiver as a factor in determining whether to indict a corporation, and they would also be prohibited from compelling a corporation to submit its attorneys' work product. The House passed a similar bill last fall.
Justice officials have argued that the legislation would weaken the government's ability to uncover corporate fraud and wrongdoing to the detriment of pension holders and investors. "There are some people who favor legislation. We think and continue to think that the McNulty memo is working and has worked," Attorney General Michael Mukasey told reporters earlier this month. "There were either no or very, very, very small numbers for actual requests of waiver of the privilege. There were requests for information."
SEC Approves One-Year Delay for Smaller Companies' Auditor Attestations
As proposed back in February, the SEC has approved another one-year extension of the compliance date for smaller companies to meet the Section 404(b) auditor attestation requirement of Sarbanes-Oxley. Smaller companies will now be required to provide the attestation reports in their annual reports for fiscal years ending on or after December 15, 2009.
In addition, the Office of Management and Budget is allowing the SEC to proceed with data collection for a study of the costs/benefits of Section 404, focusing on the consequences for smaller companies and the effects of the auditor attestation requirements.
In addition, the Office of Management and Budget is allowing the SEC to proceed with data collection for a study of the costs/benefits of Section 404, focusing on the consequences for smaller companies and the effects of the auditor attestation requirements.
Thursday, June 12, 2008
Lieberman Seeks Limits to Reduce Speculation
A prominent Washington lawmaker said Wednesday that he would propose next week to ban large institutional investors, including index funds, from the nation’s booming commodity markets.
The idea is one of several outlined by Senator Joseph I. Lieberman, independent of Connecticut, who is chairman of the Senate Homeland Security and Governmental Affairs Committee. That committee will hold a hearing on June 24 to continue examining whether financial speculation is affecting the prices of crops and fuel.
Go to NYT article - http://www.nytimes.com/2008/06/12/washington/12trade.html?dlbk
The idea is one of several outlined by Senator Joseph I. Lieberman, independent of Connecticut, who is chairman of the Senate Homeland Security and Governmental Affairs Committee. That committee will hold a hearing on June 24 to continue examining whether financial speculation is affecting the prices of crops and fuel.
Go to NYT article - http://www.nytimes.com/2008/06/12/washington/12trade.html?dlbk
Wednesday, June 11, 2008
CFTC to discuss energy speculators with Fed, SEC
SAN FRANCISCO (MarketWatch) -- The Commodities Futures Trading Commission said Tuesday that it is establishing a task force to study the role of speculators and index traders in commodities that will include representatives of the Federal Reserve, the Securities Exchange Commission and other agencies.
The announcement comes as the futures regulator furthers its investigation into whether financial investors are driving up the price of oil and other commodities, and if so, by how much. The task force also will include staff representatives of the Treasury Department, the Agriculture Department and the Energy Department.
The CFTC's own analysis of commodities prices and index traders, or investors who invest in commodities via a benchmark, such as the Dow Jones-AIG Commodity Index, has found no significant correlation between these financial investors and recent price spikes.
Still, under pressure by big users and producers of commodities as well as Congress, the regulator has acknowledged that it needs to dig deeper into trading data. It's already said that it will require more data from certain types of traders, such as swaps dealers and overseas oil traders.
Go to Article from MarketWatch»
The announcement comes as the futures regulator furthers its investigation into whether financial investors are driving up the price of oil and other commodities, and if so, by how much. The task force also will include staff representatives of the Treasury Department, the Agriculture Department and the Energy Department.
The CFTC's own analysis of commodities prices and index traders, or investors who invest in commodities via a benchmark, such as the Dow Jones-AIG Commodity Index, has found no significant correlation between these financial investors and recent price spikes.
Still, under pressure by big users and producers of commodities as well as Congress, the regulator has acknowledged that it needs to dig deeper into trading data. It's already said that it will require more data from certain types of traders, such as swaps dealers and overseas oil traders.
Go to Article from MarketWatch»
Tuesday, June 10, 2008
CSX Grasps at Straws to Fight a Fund
CSX has scored a coup in its efforts to win a proxy fight against a pair of hedge funds, one of which is British: It has cast the battle as a matter of national security.
That has prompted howls of outrage from Congress and voluble CNN pundit Lou Dobbs. But, says Andrew Ross Sorkin in his latest DealBook column, it's an absurd situation, especially since Britain's The Children's Investment Fund isn't even seeking a majority of board seats.
Beyond that, however, CSX's fight is a case study of how a company's executives will go to defend themselves -- and how counterproductive those actions can be.
Go to Article from The New York Times»
That has prompted howls of outrage from Congress and voluble CNN pundit Lou Dobbs. But, says Andrew Ross Sorkin in his latest DealBook column, it's an absurd situation, especially since Britain's The Children's Investment Fund isn't even seeking a majority of board seats.
Beyond that, however, CSX's fight is a case study of how a company's executives will go to defend themselves -- and how counterproductive those actions can be.
Go to Article from The New York Times»
Monday, June 09, 2008
Geithner’s Plan to Save the Financial System
NYT DealBook, June 9, 2008
Timothy F. Geithner has lived through the rockiest moments of the credit squeeze that have battered the global financial system, leading to the collapse of Bear Stearns. Now he has some ideas to help prevent a future crisis.
In Monday’s Financial Times, the president of the New York Federal Reserve Bank outlines several steps to help shore up what he calls a “fragile” financial network. Among his proposals: greater capital and liquidity requirements for big financial institutions; more robust and exacting supervision of both financial institutions and complex, highly levered derivatives; and more secure and formalized connections among the largest central banks to better work in concert should another potential catastrophe loom on the horizon.
Go to Article from The Financial Times »
Timothy F. Geithner has lived through the rockiest moments of the credit squeeze that have battered the global financial system, leading to the collapse of Bear Stearns. Now he has some ideas to help prevent a future crisis.
In Monday’s Financial Times, the president of the New York Federal Reserve Bank outlines several steps to help shore up what he calls a “fragile” financial network. Among his proposals: greater capital and liquidity requirements for big financial institutions; more robust and exacting supervision of both financial institutions and complex, highly levered derivatives; and more secure and formalized connections among the largest central banks to better work in concert should another potential catastrophe loom on the horizon.
Go to Article from The Financial Times »
Thursday, May 29, 2008
Will M&A Die Under Obama or Clinton?
Posted by Heidi N. Moore, May 29, 2008, 2:48 pm
Deal Journal, WSJ.com
While Barack Obama predicts his own victory in the Democratic presidential primaries as of June 3, deal makers fret about whether a Democratic administration would mean never being able to do a big M&A deal again.
US Airways and United Airlines, for instance, said today that they are pedaling as fast as they can to get a deal done before the Bush administration leaves. Are their fears justified?
If you go by the rhetoric, yes.
Both Obama and Democratic rival Hillary Clinton have indicated they don’t see antitrust matters as loosely as they accuse the Bush administration of doing. Obama has been more outspoken, criticizing the Bush administration for what he sees as lax enforcement of the nation’s antitrust laws. Clinton has been less so.
Here is Obama’s first salvo: “We live in a globalized economy and we probably have to update how we approach antitrust to figure out what is truly uncompetitive behavior on the part of monopolies or oligopolies and what are just big successful companies that need to be big in order to compete internationally….Some of the consolidations that have been taking place, I think, may be anticompetitive….We’re going to have an antitrust division in the Justice Department that actually believes in antitrust law. We haven’t had that for the last seven, eight years.”
Of course, Obama is campaigning, and on a Democratic platform you would expect him to talk tough on mergers. The Clinton Administration gave Microsoft a heck of a time, for instance. But some believe that the important courts right now will still be staffed by Republican judges who may not be amenable to antitrust challenges.
Hillary Clinton is a little harder to read. Her only stance on antitrust has come in the form of comments against OPEC. She has promised to amend antitrust law to confront OPEC and has threatened repeatedly to confront the cartel through the World Trade Organization.
But as first lady in the ’90s, Clinton tried to encourage hospitals to communicate with each other as part her push for universal health care; she also promised to dial down any antitrust enforcement that would prevent hospitals from sharing information with each other.
Of course, the antitrust stances of these two candidates don’t extend to their own interests: there is, after all, rampant speculation about a merger of their two campaigns.
Deal Journal, WSJ.com
While Barack Obama predicts his own victory in the Democratic presidential primaries as of June 3, deal makers fret about whether a Democratic administration would mean never being able to do a big M&A deal again.
US Airways and United Airlines, for instance, said today that they are pedaling as fast as they can to get a deal done before the Bush administration leaves. Are their fears justified?
If you go by the rhetoric, yes.
Both Obama and Democratic rival Hillary Clinton have indicated they don’t see antitrust matters as loosely as they accuse the Bush administration of doing. Obama has been more outspoken, criticizing the Bush administration for what he sees as lax enforcement of the nation’s antitrust laws. Clinton has been less so.
Here is Obama’s first salvo: “We live in a globalized economy and we probably have to update how we approach antitrust to figure out what is truly uncompetitive behavior on the part of monopolies or oligopolies and what are just big successful companies that need to be big in order to compete internationally….Some of the consolidations that have been taking place, I think, may be anticompetitive….We’re going to have an antitrust division in the Justice Department that actually believes in antitrust law. We haven’t had that for the last seven, eight years.”
Of course, Obama is campaigning, and on a Democratic platform you would expect him to talk tough on mergers. The Clinton Administration gave Microsoft a heck of a time, for instance. But some believe that the important courts right now will still be staffed by Republican judges who may not be amenable to antitrust challenges.
Hillary Clinton is a little harder to read. Her only stance on antitrust has come in the form of comments against OPEC. She has promised to amend antitrust law to confront OPEC and has threatened repeatedly to confront the cartel through the World Trade Organization.
But as first lady in the ’90s, Clinton tried to encourage hospitals to communicate with each other as part her push for universal health care; she also promised to dial down any antitrust enforcement that would prevent hospitals from sharing information with each other.
Of course, the antitrust stances of these two candidates don’t extend to their own interests: there is, after all, rampant speculation about a merger of their two campaigns.
Wednesday, May 28, 2008
LBO Firms Must Return Cash to Change Plan
LBO Firms Must Return Cash to Change Plan, Hands Says
By Edward Evans
May 28 (Bloomberg) -- Leveraged buyout firms should hand back investors' money if they change strategy because of the credit crunch, British financier Guy Hands said.
Buyout firms that once focused on large investments have ``suddenly'' started investing in distressed debt, while other firms with little experience beyond their local markets are targeting Asia to profit from the region's economic growth, Hands wrote in his quarterly report to investors. He didn't identify the firms in the document, which was published on his Web site.
``This approach means using the capital entrusted to one strategy to pursue another,'' Hands said. Firms should return to investors' money they haven't already spent and ask investors' permission to invest it in other ways, he added. ``The firm one chooses to back to do mega-deals may well not be the firm one chooses to back in, for example, the mid-market. The limited partners should have the opportunity to decide.''
The world's largest leveraged buyout firms are struggling to get loans for deals after the collapse of the U.S. subprime- mortgage market spurred investors to flee all but the safest forms of debt. The firms have announced $118 billion of deals this year, about a third as much as in the same period in 2007, according to data compiled by Bloomberg.
Few Return Cash
Few, if any, buyout firms have ever returned cash to investors, apart from a number of venture capital firms that were unable to find investments after the bursting of the dot- com bubble, Hands added.
Hands, who runs London-based private equity firm Terra Firma Capital Partners Ltd., said his firm's only option is to invest in areas less affected by a slowdown in the economy, targeting asset-rich companies that require changes to their management and operations. He warned investors to expect short- term losses from this strategy.
``Whilst following this strategy early in a bear market may still lead to investors suffering mark to market losses in the short term, most private equity investors are more concerned about creating value over the whole economic cycle than they are with achieving performance in any particular part of that cycle,'' Hands added.
Hands, 48, built up Nomura Holdings Inc.'s buyout business in the 1990s before quitting to run his own firm with Nomura's backing in 2002. Terra Firma is investing a 5.4 billion-euro ($8.4 billion) fund that closed in May last year.
Terra Firma bought EMI Group Plc, the record label whose acts include the Beatles, for 2.4 billion pounds ($4.9 billion) last year. New York-based Citigroup, which financed Terra Firma's bid, postponed plans last month to sell the loans because of investor anxiety about EMI's turnaround under Hands.
``This is not ideal for EMI,'' Hands wrote. ``We have worked hard, and continue to work hard, to see if there are ways to help Citigroup syndicate or sell down this loan.''
By Edward Evans
May 28 (Bloomberg) -- Leveraged buyout firms should hand back investors' money if they change strategy because of the credit crunch, British financier Guy Hands said.
Buyout firms that once focused on large investments have ``suddenly'' started investing in distressed debt, while other firms with little experience beyond their local markets are targeting Asia to profit from the region's economic growth, Hands wrote in his quarterly report to investors. He didn't identify the firms in the document, which was published on his Web site.
``This approach means using the capital entrusted to one strategy to pursue another,'' Hands said. Firms should return to investors' money they haven't already spent and ask investors' permission to invest it in other ways, he added. ``The firm one chooses to back to do mega-deals may well not be the firm one chooses to back in, for example, the mid-market. The limited partners should have the opportunity to decide.''
The world's largest leveraged buyout firms are struggling to get loans for deals after the collapse of the U.S. subprime- mortgage market spurred investors to flee all but the safest forms of debt. The firms have announced $118 billion of deals this year, about a third as much as in the same period in 2007, according to data compiled by Bloomberg.
Few Return Cash
Few, if any, buyout firms have ever returned cash to investors, apart from a number of venture capital firms that were unable to find investments after the bursting of the dot- com bubble, Hands added.
Hands, who runs London-based private equity firm Terra Firma Capital Partners Ltd., said his firm's only option is to invest in areas less affected by a slowdown in the economy, targeting asset-rich companies that require changes to their management and operations. He warned investors to expect short- term losses from this strategy.
``Whilst following this strategy early in a bear market may still lead to investors suffering mark to market losses in the short term, most private equity investors are more concerned about creating value over the whole economic cycle than they are with achieving performance in any particular part of that cycle,'' Hands added.
Hands, 48, built up Nomura Holdings Inc.'s buyout business in the 1990s before quitting to run his own firm with Nomura's backing in 2002. Terra Firma is investing a 5.4 billion-euro ($8.4 billion) fund that closed in May last year.
Terra Firma bought EMI Group Plc, the record label whose acts include the Beatles, for 2.4 billion pounds ($4.9 billion) last year. New York-based Citigroup, which financed Terra Firma's bid, postponed plans last month to sell the loans because of investor anxiety about EMI's turnaround under Hands.
``This is not ideal for EMI,'' Hands wrote. ``We have worked hard, and continue to work hard, to see if there are ways to help Citigroup syndicate or sell down this loan.''
Study Claims Milberg Weiss Scheme Hurt Shareholders
Anthony Lin, New York Law Journal, May 28, 2008:
As former securities class action king Melvyn I. Weiss awaits sentencing for his role in the payment of kickbacks to named plaintiffs in shareholder suits, a conservative think tank is set to release a study purporting to show that the scheme injured shareholders.
The American Enterprise Institute Legal Center is releasing today an article by professor Michael Perino of St. John's University School of Law that takes on the argument that the Milberg Weiss kickbacks constituted a victimless crime because the payments came out of legal fees awarded to the firm and named plaintiffs had incentive to maximize class recoveries.
Examining a database of 730 Milberg Weiss class action settlements and legal fee awards, Perino compared those that were cited in the indictments against the firm and its partners and those that were not. He found the indictment cases on average actually settled for slightly less than the non-indictment cases, suggesting the kickback incentives did not improve recoveries.
On the other hand, Perino found that the legal fees requested and awarded in the indictment cases were significantly higher than those in the non-indictment cases, and also higher than those in cases handled by firms other than Milberg Weiss.
According to the report, the findings support the notion that class members were hurt by the kickbacks, as they "appear to have received a lower proportion of the settlement proceeds than class members in otherwise substantially similar non-indictment cases."
Federal prosecutors have requested a 33-month sentence for Weiss, who pleaded guilty in March. He is in turn arguing for 18 months. His sentencing is scheduled for June 2.
As former securities class action king Melvyn I. Weiss awaits sentencing for his role in the payment of kickbacks to named plaintiffs in shareholder suits, a conservative think tank is set to release a study purporting to show that the scheme injured shareholders.
The American Enterprise Institute Legal Center is releasing today an article by professor Michael Perino of St. John's University School of Law that takes on the argument that the Milberg Weiss kickbacks constituted a victimless crime because the payments came out of legal fees awarded to the firm and named plaintiffs had incentive to maximize class recoveries.
Examining a database of 730 Milberg Weiss class action settlements and legal fee awards, Perino compared those that were cited in the indictments against the firm and its partners and those that were not. He found the indictment cases on average actually settled for slightly less than the non-indictment cases, suggesting the kickback incentives did not improve recoveries.
On the other hand, Perino found that the legal fees requested and awarded in the indictment cases were significantly higher than those in the non-indictment cases, and also higher than those in cases handled by firms other than Milberg Weiss.
According to the report, the findings support the notion that class members were hurt by the kickbacks, as they "appear to have received a lower proportion of the settlement proceeds than class members in otherwise substantially similar non-indictment cases."
Federal prosecutors have requested a 33-month sentence for Weiss, who pleaded guilty in March. He is in turn arguing for 18 months. His sentencing is scheduled for June 2.
Thursday, May 15, 2008
M&A Optimism: It’s Spreading!
Posted by WSJ Deal Journal, May 15, 2008:
After months of paring back on loans, Wall Street’s banks are finally loosing their lending for private-equity deals, according to bankers speaking at a conference in New York on Wednesday.
Banks have committed $10 billion to $20 billion in new private-equity deals during 2008, meaning the total backlog now stands less than $80B, said John Eydenberg, head of Deutsche Bank’s leveraged finance group, speaking at The Deal’s Private Capital Symposium.
“Panic has been behind us,” said Eydenberg. “About three weeks ago, backlog didn’t matter any more. People started to think about fundamentals again.”
Optimism is budding on Wall Street and that’s primarily due to the speed banks with which banks like Citigroup have been able to sell down hung bridge loans. The backlog has decreased to its current level from around $250 billion a few months ago.
People are “less sanguine” than they were at earlier stages of the credit crunch, said Peter Schoenfeld, CEO of P. Schoenfeld Asset Management LLC. “The real horror stories are gone.”
But market participants say the recovery is still at an early stage.
“You will see us walk before we run,” said Alan Jones, co-head of Morgan Stanley’s private equity group. “We will be in a normal, more protected environment,” he said. But the recovery is “going to be gradual. We are in the crawling maybe walking phase.”
After months of paring back on loans, Wall Street’s banks are finally loosing their lending for private-equity deals, according to bankers speaking at a conference in New York on Wednesday.
Banks have committed $10 billion to $20 billion in new private-equity deals during 2008, meaning the total backlog now stands less than $80B, said John Eydenberg, head of Deutsche Bank’s leveraged finance group, speaking at The Deal’s Private Capital Symposium.
“Panic has been behind us,” said Eydenberg. “About three weeks ago, backlog didn’t matter any more. People started to think about fundamentals again.”
Optimism is budding on Wall Street and that’s primarily due to the speed banks with which banks like Citigroup have been able to sell down hung bridge loans. The backlog has decreased to its current level from around $250 billion a few months ago.
People are “less sanguine” than they were at earlier stages of the credit crunch, said Peter Schoenfeld, CEO of P. Schoenfeld Asset Management LLC. “The real horror stories are gone.”
But market participants say the recovery is still at an early stage.
“You will see us walk before we run,” said Alan Jones, co-head of Morgan Stanley’s private equity group. “We will be in a normal, more protected environment,” he said. But the recovery is “going to be gradual. We are in the crawling maybe walking phase.”
Thursday, May 08, 2008
SEC Scrutinizing Investment Bank Liquidity
By Rachelle Younglai and Karey Wutkowski
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission is scrutinizing the liquidity of investment banks it supervises and is planning to require the top Wall Street firms to publicly disclose their current liquidity and capital positions, SEC officials said on Wednesday.
Attention has been on funding at the biggest U.S. investment banks since March, when Bear Stearns Cos Inc nearly collapsed after a sharp decline in its liquidity.
Go to Article from The New York Times»
Go to Article from Reuters»
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission is scrutinizing the liquidity of investment banks it supervises and is planning to require the top Wall Street firms to publicly disclose their current liquidity and capital positions, SEC officials said on Wednesday.
Attention has been on funding at the biggest U.S. investment banks since March, when Bear Stearns Cos Inc nearly collapsed after a sharp decline in its liquidity.
Go to Article from The New York Times»
Go to Article from Reuters»
IPOs: Back from the Dead?
by Ben Steverman, BusinessWeek.com, May 8, 2008:
A nervous Wall Street scorned initial public offerings for months, but suddenly IPOs are popular again.
Recent stock market debuts have been successful, including the largest IPO ever—Visa's (V) $19.6 billion deal—and a herd of new offerings are hitting the market soon. The next couple weeks are expected to be the busiest time for IPOs so far this year.
Investors seem more and more willing to take chances on small, fast-growing startups. That sort of appetite for risk has been hard to find since last fall, as a bear market and a credit crisis took big bites out of many portfolios.
After a tough start to 2008, the broader stock market recovered a bit. The broad Standard & Poor's 500-stock index gained 3.5% in the month before May 6. But the IPO market is doing even better. Recent IPOs, measured by Renaissance Capital's IPO index, are up 12.2% in the past month.
Go to Article from BusinessWeek»
A nervous Wall Street scorned initial public offerings for months, but suddenly IPOs are popular again.
Recent stock market debuts have been successful, including the largest IPO ever—Visa's (V) $19.6 billion deal—and a herd of new offerings are hitting the market soon. The next couple weeks are expected to be the busiest time for IPOs so far this year.
Investors seem more and more willing to take chances on small, fast-growing startups. That sort of appetite for risk has been hard to find since last fall, as a bear market and a credit crisis took big bites out of many portfolios.
After a tough start to 2008, the broader stock market recovered a bit. The broad Standard & Poor's 500-stock index gained 3.5% in the month before May 6. But the IPO market is doing even better. Recent IPOs, measured by Renaissance Capital's IPO index, are up 12.2% in the past month.
Go to Article from BusinessWeek»
Thursday, May 01, 2008
Simply Appalling: Good judgment seems to have been short-circuited in the Circuit City boardroom
From Directors & Boards E-Briefing, May, 2008:
A perennial mystery to this longtime governance observer is how a board can seemingly sit silently by and watch a management trash a business. This seems to be what’s been happening at Circuit City Stores Inc. A year ago the company announced a turnaround plan. A centerpiece of the plan was laying off a slew of more experienced salespeople, to be replaced with lower-paid hires. But get this: Those who lost their jobs could reapply for their old jobs, at the lower pay, but had to wait 10 weeks to do so. That’s simply appalling.“That’s the most cynical thing I’ve heard about in a long time,” said Peter Cappelli, in a critique of the plan published by the Wharton School’s Knowledge@Wharton newsletter. Cappelli is a management professor and director of Wharton’s Center for Human Resources . Another Wharton professor, Daniel Levinthal, termed the layoff plan “a massive de-skilling” of the company. I’m all for companies doing what they feel they must do to survive. But let’s be mindful of what Peter Drucker said: “The purpose of a business is to create a customer.”When a company takes steps that are repellent in its treatment of its human resources — its work force and its customers — is it really a business anymore? Or a business that should stay in business?I didn’t write about this abhorrent policy at the time. My personal response was to vow never to set foot in a Circuit City store again, and to leave it at that.I did wait for the follow-on announcement that the current board members all submitted their resignations — so as, in the spirit of their approved turnaround plan, to allow management to replace them with a newer, younger board, which would be paid a lower retainer and fees than the old directors received. Less experienced? Who cares about that? And the current board, after a cool-down period, would be allowed to reapply for their old seats, at the lower scale, of course. Funny … I missed that announcement. Did you, too?Well, a year has gone by, and Circuit City is now much in the news. Perhaps my personal reaction was shared by similarly offended spirits. The turnaround seems to have run aground. Circuit City’s results are punk, the stock price has collapsed, and a hedge fund, which has called the turnaround effort “disastrous,” is at the board’s throat. Then, in a bizarre turn, in mid-April Blockbuster Inc. weighed in with a merger proposal. That’s being charitable to call it bizarre. It’s also being called “crazy,” “reckless,” and “looney” by deals analysts.All I can hope is that there were some dissenting voices in the boardroom — “What are they thinking?!” —when management unveiled the HR components of its turnaround plan. It must be a sad day in the life of a director when he or she sees the company’s business and reputation about to be trashed.
Jim Kristie is the editor and associate publisher of Directors & Boards.
A perennial mystery to this longtime governance observer is how a board can seemingly sit silently by and watch a management trash a business. This seems to be what’s been happening at Circuit City Stores Inc. A year ago the company announced a turnaround plan. A centerpiece of the plan was laying off a slew of more experienced salespeople, to be replaced with lower-paid hires. But get this: Those who lost their jobs could reapply for their old jobs, at the lower pay, but had to wait 10 weeks to do so. That’s simply appalling.“That’s the most cynical thing I’ve heard about in a long time,” said Peter Cappelli, in a critique of the plan published by the Wharton School’s Knowledge@Wharton newsletter. Cappelli is a management professor and director of Wharton’s Center for Human Resources . Another Wharton professor, Daniel Levinthal, termed the layoff plan “a massive de-skilling” of the company. I’m all for companies doing what they feel they must do to survive. But let’s be mindful of what Peter Drucker said: “The purpose of a business is to create a customer.”When a company takes steps that are repellent in its treatment of its human resources — its work force and its customers — is it really a business anymore? Or a business that should stay in business?I didn’t write about this abhorrent policy at the time. My personal response was to vow never to set foot in a Circuit City store again, and to leave it at that.I did wait for the follow-on announcement that the current board members all submitted their resignations — so as, in the spirit of their approved turnaround plan, to allow management to replace them with a newer, younger board, which would be paid a lower retainer and fees than the old directors received. Less experienced? Who cares about that? And the current board, after a cool-down period, would be allowed to reapply for their old seats, at the lower scale, of course. Funny … I missed that announcement. Did you, too?Well, a year has gone by, and Circuit City is now much in the news. Perhaps my personal reaction was shared by similarly offended spirits. The turnaround seems to have run aground. Circuit City’s results are punk, the stock price has collapsed, and a hedge fund, which has called the turnaround effort “disastrous,” is at the board’s throat. Then, in a bizarre turn, in mid-April Blockbuster Inc. weighed in with a merger proposal. That’s being charitable to call it bizarre. It’s also being called “crazy,” “reckless,” and “looney” by deals analysts.All I can hope is that there were some dissenting voices in the boardroom — “What are they thinking?!” —when management unveiled the HR components of its turnaround plan. It must be a sad day in the life of a director when he or she sees the company’s business and reputation about to be trashed.
Jim Kristie is the editor and associate publisher of Directors & Boards.
Monday, April 28, 2008
Wall Street, Run Amok?
How on earth did the credit crisis on Wall Street become such a catastrophe, Ben Stein wonders in his latest column for The New York Times? How, he asks, did all of the mechanisms operated by the mind-bogglingly well-paid men and women of the Street go so wrong that we saw a major investment bank, Bear Stearns, essentially disappear?
In an effort to answer those questions, Mr. Stein, a lawyer, writer, actor and economist, points to a speech on the matter that was given on April 8 by hedge fund manager David Einhorn at a Grant’s Interest Rate Observer event.
One of Mr. Einhorn’s more troubling observations, Mr. Stein says, is that the Securities and Exchange Commission allowed broker-dealers to set their own valuations on assets and liabilities that were hard to value. And broker-dealers could assign their own creditworthiness ratings to counterparties in complex derivatives transactions when those counterparties were otherwise unrated.
In a word, Mr. Einhorn says, the S.E.C. told Wall Street to police itself to save on regulatory costs, while not bothering to “discuss the cost to society of increasing the probability that a large broker-dealer could go bust.”
A result of all this, he says, was as follows:
“The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.”
In his response to Mr. Einhorn’s thesis, Mr. Stein writes:
It looks to me as if the inmates are running the asylum. One truth, that deregulation is sometimes a good thing, has been followed down so long and winding a road that it has led to an immense lie: that deregulation carried to an extreme will not lead to calamity.
To think that people of this mind-set are in charge of the finances of the nation that is the cornerstone of world freedom is terrifying.
Go to Article from The New York Times »
In an effort to answer those questions, Mr. Stein, a lawyer, writer, actor and economist, points to a speech on the matter that was given on April 8 by hedge fund manager David Einhorn at a Grant’s Interest Rate Observer event.
One of Mr. Einhorn’s more troubling observations, Mr. Stein says, is that the Securities and Exchange Commission allowed broker-dealers to set their own valuations on assets and liabilities that were hard to value. And broker-dealers could assign their own creditworthiness ratings to counterparties in complex derivatives transactions when those counterparties were otherwise unrated.
In a word, Mr. Einhorn says, the S.E.C. told Wall Street to police itself to save on regulatory costs, while not bothering to “discuss the cost to society of increasing the probability that a large broker-dealer could go bust.”
A result of all this, he says, was as follows:
“The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.”
In his response to Mr. Einhorn’s thesis, Mr. Stein writes:
It looks to me as if the inmates are running the asylum. One truth, that deregulation is sometimes a good thing, has been followed down so long and winding a road that it has led to an immense lie: that deregulation carried to an extreme will not lead to calamity.
To think that people of this mind-set are in charge of the finances of the nation that is the cornerstone of world freedom is terrifying.
Go to Article from The New York Times »
Thursday, April 24, 2008
A Tale of Two Public Offerings
New York Times DealBook, April 24, 2008:
With the credit market still in lockdown and the equity market on a downswing, taking a company public might seem a bit loopy. Two companies that actually took the plunge this week, American Waterworks and Intrepid Potash, exemplify how bipolar this market has become.
There has been much hand-wringing about the horrible environment for initial public offerings — but the reality is a bit more nuanced. At $24 billion, the volume of new issuances in the United States actually doubled in the first quarter from a year earlier. But if you exclude the gargantuan stock sale from Visa, the total value in the first quarter was about $5 billion, down 58 percent from last year, according to Dealogic.
Those that did brave the market have seen wildly different outcomes. Take American Waterworks, which hit the market Wednesday. The spinoff of German utility giant RWE might normally have attracted a lot of attention from risk-averse institutional investors — especially now that risk is out of fashion.
But it was far from popular, bankers working the deal said. RWE priced the stock at $21.50, 40 percent below what it originally thought it could grab last year. And investors were still not impressed — the shares fell as much as 6 percent Wednesday morning.
On the flipside, Intrepid Potash, which makes fertilizer, saw its stock pop as much as 60 percent in its debut Tuesday. Commodity-crazed investors fell over each other to buy a piece of the agricultural company, whose main product, potash, has seen a 131 percent increase in value in just seven months.
This wild market is scaring a lot of companies from going public. A total of 83 companies withdrew their initial public offerings this year and another 24 have delayed share sales, according to Ernst and Young. That is a record.
At this pace, the long-anticipated public offering from private equity giant Kohlberg Kravis Roberts might be sitting on the shelf for many more months to come.
With the credit market still in lockdown and the equity market on a downswing, taking a company public might seem a bit loopy. Two companies that actually took the plunge this week, American Waterworks and Intrepid Potash, exemplify how bipolar this market has become.
There has been much hand-wringing about the horrible environment for initial public offerings — but the reality is a bit more nuanced. At $24 billion, the volume of new issuances in the United States actually doubled in the first quarter from a year earlier. But if you exclude the gargantuan stock sale from Visa, the total value in the first quarter was about $5 billion, down 58 percent from last year, according to Dealogic.
Those that did brave the market have seen wildly different outcomes. Take American Waterworks, which hit the market Wednesday. The spinoff of German utility giant RWE might normally have attracted a lot of attention from risk-averse institutional investors — especially now that risk is out of fashion.
But it was far from popular, bankers working the deal said. RWE priced the stock at $21.50, 40 percent below what it originally thought it could grab last year. And investors were still not impressed — the shares fell as much as 6 percent Wednesday morning.
On the flipside, Intrepid Potash, which makes fertilizer, saw its stock pop as much as 60 percent in its debut Tuesday. Commodity-crazed investors fell over each other to buy a piece of the agricultural company, whose main product, potash, has seen a 131 percent increase in value in just seven months.
This wild market is scaring a lot of companies from going public. A total of 83 companies withdrew their initial public offerings this year and another 24 have delayed share sales, according to Ernst and Young. That is a record.
At this pace, the long-anticipated public offering from private equity giant Kohlberg Kravis Roberts might be sitting on the shelf for many more months to come.
Wednesday, April 23, 2008
Next Steps on the Credit Rating Fiasco
TheCorporateCounsel.net, April 23, 2008:
At yesterday's hearing of the Senate Committee on Banking, Housing and Urban Affairs entitled "Turmoil in U.S. Credit Markets: The Role of the Credit Rating Agencies," Chairman Cox defended the SEC's implementation of the Credit Rating Agency Reform Act of 2006 and spelled out some possible new rulemaking efforts on the credit rating front.
In his testimony, Chairman Cox outlined the SEC Staff's efforts in conducting ongoing examinations of the nationally recognized statistical rating organizations (NRSROs). Those efforts have included the review of thousands of pages of internal records and emails, public disclosures and rating histories by around 40 Staff members. While the examinations are not yet complete (a report is expected by early summer), Cox noted that the Staff has found so far that there was a substantial surge in ratings for structured finance deals from 2004 – 2006, with those deals involving increasingly complex products. The examination Staff's preliminary observations have been that the "ratings process used to rate these products may have been less quantitatively developed, particularly as the products became more complicated and involved different types of loans, than was generally believed." While the SEC is trying to avoid engaging in substantive regulation of the ratings process, it is interested in the adequacy of the NRSRO's disclosure about their procedures and methodologies, and whether such factors as a desire to maintain or increase market share may have caused the NRSROs to be "less conservative" than their disclosed methodologies.
Now that the SEC's NRSRO registration system is in place and other rules implementing the 2006 legislation are effective, the SEC is looking at other areas of rulemaking within its authority. Chairman Cox outlined the following possibilities:
1. Enhanced disclosure about ratings performance – this would include disclosures that allow market participants to better compare the ratings of one NRSRO with another.
2. Accountability for managing conflicts of interest – new rules might prohibit certain practices, as well as establish requirements that address potential conflicts that could impair the process for rating structured products (e.g., consulting services provided by NRSROs to issuers).
3. Annual reporting – new rules could required the NRSROs to furnish the SEC with annual reports describing internal reviews and how well the firms adhere to ratings procedures, manage conflicts of interest and comply with securities laws.
4. Enhanced disclosure of underlying assets – new rules may require disclosure of information about the assets underlying MBS, CDOs and other structured products so market participants could better analyze creditworthiness without the benefit of ratings (and to enhance the availability of data - and thus level the playing field - for subscriber-based NRSROs as compared to the "issuer pays" NRSROs).
5. Enhanced disclosure about ratings – new rules could also mandate enhanced disclosures about how the NRSROs determine their ratings for structured products, as well as ratings information that will make it possible for investors to distinguish between ratings for different types of securities.
6. Access to information – potential rules may seek to eliminate advantages (including access to information) that NRSROs following the "issuer pays" model may have over subscriber-based NRSROs.
7. SEC reliance on ratings – The SEC is revisiting its own reliance on ratings throughout its rules. This could be a big shift in the SEC's rules, including those related to corporation finance.
These new rules could substantially change the ratings landscape, and most likely for the better. It certainly can’t get much worse.
For a great breakdown of the history behind securities ratings and what went wrong with the ratings on mortgage backed securities, check out Roger Lowenstein's piece entitled "Triple-A Failure" which will be published in this Sunday's New York Times Magazine.
At yesterday's hearing of the Senate Committee on Banking, Housing and Urban Affairs entitled "Turmoil in U.S. Credit Markets: The Role of the Credit Rating Agencies," Chairman Cox defended the SEC's implementation of the Credit Rating Agency Reform Act of 2006 and spelled out some possible new rulemaking efforts on the credit rating front.
In his testimony, Chairman Cox outlined the SEC Staff's efforts in conducting ongoing examinations of the nationally recognized statistical rating organizations (NRSROs). Those efforts have included the review of thousands of pages of internal records and emails, public disclosures and rating histories by around 40 Staff members. While the examinations are not yet complete (a report is expected by early summer), Cox noted that the Staff has found so far that there was a substantial surge in ratings for structured finance deals from 2004 – 2006, with those deals involving increasingly complex products. The examination Staff's preliminary observations have been that the "ratings process used to rate these products may have been less quantitatively developed, particularly as the products became more complicated and involved different types of loans, than was generally believed." While the SEC is trying to avoid engaging in substantive regulation of the ratings process, it is interested in the adequacy of the NRSRO's disclosure about their procedures and methodologies, and whether such factors as a desire to maintain or increase market share may have caused the NRSROs to be "less conservative" than their disclosed methodologies.
Now that the SEC's NRSRO registration system is in place and other rules implementing the 2006 legislation are effective, the SEC is looking at other areas of rulemaking within its authority. Chairman Cox outlined the following possibilities:
1. Enhanced disclosure about ratings performance – this would include disclosures that allow market participants to better compare the ratings of one NRSRO with another.
2. Accountability for managing conflicts of interest – new rules might prohibit certain practices, as well as establish requirements that address potential conflicts that could impair the process for rating structured products (e.g., consulting services provided by NRSROs to issuers).
3. Annual reporting – new rules could required the NRSROs to furnish the SEC with annual reports describing internal reviews and how well the firms adhere to ratings procedures, manage conflicts of interest and comply with securities laws.
4. Enhanced disclosure of underlying assets – new rules may require disclosure of information about the assets underlying MBS, CDOs and other structured products so market participants could better analyze creditworthiness without the benefit of ratings (and to enhance the availability of data - and thus level the playing field - for subscriber-based NRSROs as compared to the "issuer pays" NRSROs).
5. Enhanced disclosure about ratings – new rules could also mandate enhanced disclosures about how the NRSROs determine their ratings for structured products, as well as ratings information that will make it possible for investors to distinguish between ratings for different types of securities.
6. Access to information – potential rules may seek to eliminate advantages (including access to information) that NRSROs following the "issuer pays" model may have over subscriber-based NRSROs.
7. SEC reliance on ratings – The SEC is revisiting its own reliance on ratings throughout its rules. This could be a big shift in the SEC's rules, including those related to corporation finance.
These new rules could substantially change the ratings landscape, and most likely for the better. It certainly can’t get much worse.
For a great breakdown of the history behind securities ratings and what went wrong with the ratings on mortgage backed securities, check out Roger Lowenstein's piece entitled "Triple-A Failure" which will be published in this Sunday's New York Times Magazine.
Thursday, April 17, 2008
Are Prosecutors Telling Warren Buffet How to Run His Company?
Posted by Dan Slater, LawBlog - WSJ.com
With Eliot Spitzer cast out of politics, do his prosecutorial tactics live on in U.S. Attorneys’ offices around the country?
According to the WSJ editorial board, the ousting of Gen Re CEO Joseph Brandon, whom prosecutors named as an unindicted co-conspirator in the fraudulent reinsurance transaction between Gen Re and AIG, is proof that they do.
Here’s the back-story: Last week, Law Blog colleagues Amir Efrati and Karen Richardson reported that federal prosecutors were pressuring the Oracle of Omaha, Warren Buffett, the chairman of Gen Re parent Berkshire Hathaway, to replace Brandon after four Gen Re executives were found guilty in February for allegedly using reinsurance deals to inflate the reserves of AIG, Gen Re’s biggest client. After the trial, the prosecutors said they would “work up the ladder” to ferret out wrongdoing.
On Monday, Brandon was forced to resign, despite, according to the WSJ editorial board, being “a superb manager.” In his annual letter to shareholders two months ago, Buffett wrote, “Now, thanks to Joe Brandon . . . the luster of the company has been restored.” Buffett added that Brandon and President Tad Montross “have been running the business for six years and have been doing first-class business in a first-class way, to use the words of J. P. Morgan.”
But, regardless of Brandon’s track-record, his resignation, reports the editorial board, was a foregone conclusion. Fiduciary duty to Berkshire shareholders required Buffet to avoid a criminal indictment of Gen Re at any cost. And U.S. Attorneys can pressure companies to fire executives as a show of cooperation. Georgetown Law prof John Hasnas says prosecutors rarely if ever tell corporations to fire their target. But all they have to do is to suggest that they are considering whether to indict the corporation, and that the extent of their cooperation will be considered in the decision, and “the message gets across.”
“We have come to a strange pass in this country,” writes the editorial board, “when prosecutors who can’t prove their case can nonetheless tell Warren Buffett who can run his companies.”
With Eliot Spitzer cast out of politics, do his prosecutorial tactics live on in U.S. Attorneys’ offices around the country?
According to the WSJ editorial board, the ousting of Gen Re CEO Joseph Brandon, whom prosecutors named as an unindicted co-conspirator in the fraudulent reinsurance transaction between Gen Re and AIG, is proof that they do.
Here’s the back-story: Last week, Law Blog colleagues Amir Efrati and Karen Richardson reported that federal prosecutors were pressuring the Oracle of Omaha, Warren Buffett, the chairman of Gen Re parent Berkshire Hathaway, to replace Brandon after four Gen Re executives were found guilty in February for allegedly using reinsurance deals to inflate the reserves of AIG, Gen Re’s biggest client. After the trial, the prosecutors said they would “work up the ladder” to ferret out wrongdoing.
On Monday, Brandon was forced to resign, despite, according to the WSJ editorial board, being “a superb manager.” In his annual letter to shareholders two months ago, Buffett wrote, “Now, thanks to Joe Brandon . . . the luster of the company has been restored.” Buffett added that Brandon and President Tad Montross “have been running the business for six years and have been doing first-class business in a first-class way, to use the words of J. P. Morgan.”
But, regardless of Brandon’s track-record, his resignation, reports the editorial board, was a foregone conclusion. Fiduciary duty to Berkshire shareholders required Buffet to avoid a criminal indictment of Gen Re at any cost. And U.S. Attorneys can pressure companies to fire executives as a show of cooperation. Georgetown Law prof John Hasnas says prosecutors rarely if ever tell corporations to fire their target. But all they have to do is to suggest that they are considering whether to indict the corporation, and that the extent of their cooperation will be considered in the decision, and “the message gets across.”
“We have come to a strange pass in this country,” writes the editorial board, “when prosecutors who can’t prove their case can nonetheless tell Warren Buffett who can run his companies.”
Monday, April 07, 2008
The Tulane Conference: See You in Court
April 7, 2008, 9:00 am
Posted by Heidi Moore, DealJournal, WSJ.com:
It is a widespread human trait that people who do something fast are prouder of the speed of the performance rather than its often imperfect quality. So it is with the merger boom of 2006 and 2007, which, it has become clear, has left a legacy of hastily drafted, inexactly worded merger agreements that are now in the hands of the inevitable cleanup crew — lawyers and judges who will puzzle out how to make these agreements more specific in the future.
That’s the lesson from the 20th Annual Tulane Corporate Law Institute Conference, where it became clear that merger battles have moved out of the hands of investment bankers who strike the deals and into those of lawyers who enforce them; out of the boardrooms and into courtrooms, where legal eagles will debate the finer points of merger contracts. Most attendees predicted a dropoff in the number of deals, leaving plenty of time to pore over the minutiae of old ones: in the words of Delaware Court of Chancery Vice Chancellor Leo E. Strine Jr., “Wouldn’t the solution be to scrape up one deal and spend the year getting the terms right?”
What was clear at the annual M&A confab is that the current spate of disputed mergers is beyond current laws and precedents, and calls for new court decisions that will set the stage for the future. One valuable lesson to all who were there is that being specific and exact can save you more time than writing an agreement that is broadly worded and will end you up in court. Here are a few issues you can expect to be hammered out this year.
Specific performance: “Specific performance” is just legalese that governs whether a court can force one party to a contract to follow through, or — it helps to think about it this way — perform on a specific aspect of its contract. In the pending $19.4 billion Clear Channel Communications buyout, specific performance is in dispute in a New York court as Thomas H. Lee Partners and Bain Capital try to force six lenders to fund the deal. The lenders argue that New York courts can’t enforce a lending agreement, but can only award money damages.
Forum selection: This is more legalese that just means where a case is heard. Traditionally, the Delaware courts have had a near-monopoly on merger law, because the small state houses the physical headquarters of so few businesses that it can act as an impartial referee. (Many major companies are incorporated in Delaware, however, to have the benefit of those impartial laws.)But there might be a trend towards merger partners seeking the home-court advantage in their home states. The Clear Channel deal also will provide a new testing ground for the Texas courts which historically haven’t been very active in determining the course of mergers. In a panel at Tulane, Strine quipped about “some interesting developments from the land of brisket,” a line which drew a laugh from lawyers uncomfortable with states other than Delaware calling the shots. In the Texas Clear Channel case the company and private-equity firms are suing the banks for tortious interference, or interfering with their contract.
Reverse breakup fees: Reverse breakup fees, in which a buyer pays a fee to the seller to get out of a deal, is another legacy of Clear Channel as well as other buyouts including that of SLM Inc., or Sallie Mae. Tulane professor Eileen Nowicki questioned whether these breakup fees are high enough to discourage buyers from walking away from deals.
Return of the MAC: Material adverse effect clauses, or MACs, were at play in the defunct buyout of Harman International industries. These provisions need to be more specific to allow for changes in the market or an industry, argued Cravath Swaine & Moore partner Faiza Saeed. Right now, they are so broadly written as to be nearly useless.
Financing agreements: Unsurprisingly, these will also come under close scrutiny, argued Cleary Gottlieb Steen & Hamilton partner Meme Peponis and Citigroup banker Christina Mohr, and sellers could start providing their own financing to attract buyers for a deal. In addition, more private-equity firms could follow the lead of Hellman & Friedman, which cut out the middlemen –investment banks — by approaching lenders and hedge funds itself to finance the acquisitions of Goodman Global Holdings and Getty Images.
The investment bankers who advise on mergers, for their part, will stay busy with smaller deals and less complicated ones, according to Mark Shafir, global co-head of M&A for Lehman Brothers Holdings. He predicted that merger activity would be much quieter as private-equity firms reduce their buying by up to 80%, and “strategic,” or corporate buyers, cut back 30% this year. Overall, Wall Street investment banks, private-equity firms and their lawyers will continue to be involved in a vast legal postmortem, seeking to make sense of the merger boom that just passed and setting the legal precedents for the booms inevitably to come.
Posted by Heidi Moore, DealJournal, WSJ.com:
It is a widespread human trait that people who do something fast are prouder of the speed of the performance rather than its often imperfect quality. So it is with the merger boom of 2006 and 2007, which, it has become clear, has left a legacy of hastily drafted, inexactly worded merger agreements that are now in the hands of the inevitable cleanup crew — lawyers and judges who will puzzle out how to make these agreements more specific in the future.
That’s the lesson from the 20th Annual Tulane Corporate Law Institute Conference, where it became clear that merger battles have moved out of the hands of investment bankers who strike the deals and into those of lawyers who enforce them; out of the boardrooms and into courtrooms, where legal eagles will debate the finer points of merger contracts. Most attendees predicted a dropoff in the number of deals, leaving plenty of time to pore over the minutiae of old ones: in the words of Delaware Court of Chancery Vice Chancellor Leo E. Strine Jr., “Wouldn’t the solution be to scrape up one deal and spend the year getting the terms right?”
What was clear at the annual M&A confab is that the current spate of disputed mergers is beyond current laws and precedents, and calls for new court decisions that will set the stage for the future. One valuable lesson to all who were there is that being specific and exact can save you more time than writing an agreement that is broadly worded and will end you up in court. Here are a few issues you can expect to be hammered out this year.
Specific performance: “Specific performance” is just legalese that governs whether a court can force one party to a contract to follow through, or — it helps to think about it this way — perform on a specific aspect of its contract. In the pending $19.4 billion Clear Channel Communications buyout, specific performance is in dispute in a New York court as Thomas H. Lee Partners and Bain Capital try to force six lenders to fund the deal. The lenders argue that New York courts can’t enforce a lending agreement, but can only award money damages.
Forum selection: This is more legalese that just means where a case is heard. Traditionally, the Delaware courts have had a near-monopoly on merger law, because the small state houses the physical headquarters of so few businesses that it can act as an impartial referee. (Many major companies are incorporated in Delaware, however, to have the benefit of those impartial laws.)But there might be a trend towards merger partners seeking the home-court advantage in their home states. The Clear Channel deal also will provide a new testing ground for the Texas courts which historically haven’t been very active in determining the course of mergers. In a panel at Tulane, Strine quipped about “some interesting developments from the land of brisket,” a line which drew a laugh from lawyers uncomfortable with states other than Delaware calling the shots. In the Texas Clear Channel case the company and private-equity firms are suing the banks for tortious interference, or interfering with their contract.
Reverse breakup fees: Reverse breakup fees, in which a buyer pays a fee to the seller to get out of a deal, is another legacy of Clear Channel as well as other buyouts including that of SLM Inc., or Sallie Mae. Tulane professor Eileen Nowicki questioned whether these breakup fees are high enough to discourage buyers from walking away from deals.
Return of the MAC: Material adverse effect clauses, or MACs, were at play in the defunct buyout of Harman International industries. These provisions need to be more specific to allow for changes in the market or an industry, argued Cravath Swaine & Moore partner Faiza Saeed. Right now, they are so broadly written as to be nearly useless.
Financing agreements: Unsurprisingly, these will also come under close scrutiny, argued Cleary Gottlieb Steen & Hamilton partner Meme Peponis and Citigroup banker Christina Mohr, and sellers could start providing their own financing to attract buyers for a deal. In addition, more private-equity firms could follow the lead of Hellman & Friedman, which cut out the middlemen –investment banks — by approaching lenders and hedge funds itself to finance the acquisitions of Goodman Global Holdings and Getty Images.
The investment bankers who advise on mergers, for their part, will stay busy with smaller deals and less complicated ones, according to Mark Shafir, global co-head of M&A for Lehman Brothers Holdings. He predicted that merger activity would be much quieter as private-equity firms reduce their buying by up to 80%, and “strategic,” or corporate buyers, cut back 30% this year. Overall, Wall Street investment banks, private-equity firms and their lawyers will continue to be involved in a vast legal postmortem, seeking to make sense of the merger boom that just passed and setting the legal precedents for the booms inevitably to come.
Friday, March 21, 2008
Did The Fed Push Bear Into a Bad Deal?
DealJournal - WJS.com, March 21, 2008:
There are a lot of things that look right in the heat of the moment, and highly problematic in hindsight. Is J.P. Morgan’s proposed takeover of Bear Stearns one of those things?
The Fed did not learn how bad Bear’s condition was until Bear and the SEC told the Fed late Thursday March 13, and at that point, the firm said it saw little option other than to file for bankruptcy by Friday morning. The Fed pushed Bear to find a private sector buyer before markets opened Friday, but Bear couldn’t. At 7 a.m. Friday the Fed, for the first time in its 95 year history, approved a direct loan to Bear, a step so extraordinary it required the use of two special loopholes in the Federal Reserve Act. The Fed’s priority wasn’t to minimize losses for Bear shareholders but to prevent uncertainty over Bear’s fate from causing the derivative and repo markets to dry up, which meant finding a buyer if at all possible before Monday. That you knew already; and if you didn’t, you can find the whole timeline here.
See all of Deal Journal’s posts on the fall of Bear Stearns. Plus, click here for continuing coverage from the Wall Street Journal.
Still, that’s cold comfort for shareholders. “We thought they gave us 28 days. Then they gave us 24 hours,” one person familiar with Bear told the Journal. J.P. Morgan’s deal for Bear Stearns has several unusual features that make the deal particularly favorable to J.P. Morgan and comes at the expense of Bear Stearns’s shareholders, who are losing billions on the $2.40 a share offer. It’s nearly impossible for any rival bidder to break it up, J.P. Morgan already has management oversight of Bear, J.P. Morgan can buy the building even if Bear’s board rejects the deal, and J.P. Morgan can buy up to 20% of Bear’s shares if any other buyer does the same. So in essence, the Fed didn’t just support a deal, it supported this deal, with this buyer, and anyone who doesn’t like the terms of the deal is naturally going to start dusting the Fed and Treasury for fingerprints. What might have looked like a bailout and rescue last week to many now looks like highway robbery to some.
There’s a big element of Monday-morning quarterbacking in the complaints about the deal. Remember where the regulator stood before the sale: As late as the morning of Wednesday, March 12, Bear CEO Alan Schwartz was on CNBC saying the firm’s liquidity was fine. Bear didn’t tell the Fed and the SEC that the firm was in trouble until 7:30 p.m on Thursday March 13, and at that point, the firm was threatening to file for bankruptcy by Friday morning. The Fed tried to find a private sector buyer Thursday night, but couldn’t. If Bear filed for bankruptcy, its counterparties could potentially panic and destroy the $4.5 trillion repo securities market, and potentially touch off massacres in the credit-default swaps market, too.
There are a lot of things that look right in the heat of the moment, and highly problematic in hindsight. Is J.P. Morgan’s proposed takeover of Bear Stearns one of those things?
The Fed did not learn how bad Bear’s condition was until Bear and the SEC told the Fed late Thursday March 13, and at that point, the firm said it saw little option other than to file for bankruptcy by Friday morning. The Fed pushed Bear to find a private sector buyer before markets opened Friday, but Bear couldn’t. At 7 a.m. Friday the Fed, for the first time in its 95 year history, approved a direct loan to Bear, a step so extraordinary it required the use of two special loopholes in the Federal Reserve Act. The Fed’s priority wasn’t to minimize losses for Bear shareholders but to prevent uncertainty over Bear’s fate from causing the derivative and repo markets to dry up, which meant finding a buyer if at all possible before Monday. That you knew already; and if you didn’t, you can find the whole timeline here.
See all of Deal Journal’s posts on the fall of Bear Stearns. Plus, click here for continuing coverage from the Wall Street Journal.
Still, that’s cold comfort for shareholders. “We thought they gave us 28 days. Then they gave us 24 hours,” one person familiar with Bear told the Journal. J.P. Morgan’s deal for Bear Stearns has several unusual features that make the deal particularly favorable to J.P. Morgan and comes at the expense of Bear Stearns’s shareholders, who are losing billions on the $2.40 a share offer. It’s nearly impossible for any rival bidder to break it up, J.P. Morgan already has management oversight of Bear, J.P. Morgan can buy the building even if Bear’s board rejects the deal, and J.P. Morgan can buy up to 20% of Bear’s shares if any other buyer does the same. So in essence, the Fed didn’t just support a deal, it supported this deal, with this buyer, and anyone who doesn’t like the terms of the deal is naturally going to start dusting the Fed and Treasury for fingerprints. What might have looked like a bailout and rescue last week to many now looks like highway robbery to some.
There’s a big element of Monday-morning quarterbacking in the complaints about the deal. Remember where the regulator stood before the sale: As late as the morning of Wednesday, March 12, Bear CEO Alan Schwartz was on CNBC saying the firm’s liquidity was fine. Bear didn’t tell the Fed and the SEC that the firm was in trouble until 7:30 p.m on Thursday March 13, and at that point, the firm was threatening to file for bankruptcy by Friday morning. The Fed tried to find a private sector buyer Thursday night, but couldn’t. If Bear filed for bankruptcy, its counterparties could potentially panic and destroy the $4.5 trillion repo securities market, and potentially touch off massacres in the credit-default swaps market, too.
Wednesday, March 19, 2008
Financial crisis and the real economy
Corporate DealMaker, March 19, 2008:
At times of financial turmoil there's something reassuring about the term "the real economy." It would be even more reassuring if it didn't usually denote a realm threatened by forces emanating from a scary parallel universe. But when the headlines describe large, familiar financial institutions gravely damaged by securities so complex that nobody can put a price on them, it's nice to recall that there's a world out there where people are still making tractors. Let's just hope it can be kept safe from the reckless and greedy denizens of Wall Street.Lots of us think this way. Isn't the ongoing surge in commodity prices partly a revolt against weird abstractions? Forget those freaky collateralized loan obligations and, while you're at it, the U.S. dollar they rode in on. Give us some gold and oil and steel and coffee. In fact, I would be betting really big on commodities right now, except for one thing. I'm actually a little worried that commodities are forming a bubble of their own. You see, the wizards down the hall from the ones who designed those CLOs have continued to improve on the futures and options originally created so producers and users of commodities could manage price volatility. Now exchange-traded notes and other nifty new instruments may be facilitating investment flows way out of proportion to the actual demand for commodities. Well. As the great soul singer Tyrone Davis said of a situation like the one poor Mrs. Spitzer recently faced, there it is. The tensions in the often stormy, centuries-old marriage between finance and industry, between Wall Street and Main Street, have flared up once again, and there seems little doubt about who deserves the blame. Until we start the couples therapy.That's when things get messy. The conversation can't ignore people who are needlessly losing their homes and good businesses that can't get capital. Our patchwork system of regulating financial institutions obviously needs updating, and it's not just securities but also reputations that are being marked to market. It's already happening to former Fed chairman Alan Greenspan, and also to Robert Rubin. The former Clinton treasury secretary received more than $100 million as chairman of the executive committee at Citigroup over the last eight years, even as the nation's biggest financial institution helped to dig the hole we're now in. But we will do well to remember there's a relationship worth salvaging here. On one hand, Rubin arrived at Citigroup after he and Greenspan helped to remove the regulatory barriers to the merger that created it. Now it's falling to their successors to improvise some new guardrails. Another hallmark of the Greenspan-Rubin 1990s, though, was the financial diplomacy that helped turn developing economies into emerging markets for tractor-makers and then, when that project devolved into another great financial crisis, got it back on track. If either of these men wish, like Tyrone Davis, that they could turn back the hands of time on a few decisions, they haven't said so. Certainly other people in the financial world would like to. But they can't, and neither can those of us who identify more closely with the so-called real economy. We'll just have to try and make sure we get more of what we need out of the relationship in the future.--Kenneth Klee
Link to Professor's Klee's Biography: http://www.law.ucla.edu/home/index.asp?page=564
At times of financial turmoil there's something reassuring about the term "the real economy." It would be even more reassuring if it didn't usually denote a realm threatened by forces emanating from a scary parallel universe. But when the headlines describe large, familiar financial institutions gravely damaged by securities so complex that nobody can put a price on them, it's nice to recall that there's a world out there where people are still making tractors. Let's just hope it can be kept safe from the reckless and greedy denizens of Wall Street.Lots of us think this way. Isn't the ongoing surge in commodity prices partly a revolt against weird abstractions? Forget those freaky collateralized loan obligations and, while you're at it, the U.S. dollar they rode in on. Give us some gold and oil and steel and coffee. In fact, I would be betting really big on commodities right now, except for one thing. I'm actually a little worried that commodities are forming a bubble of their own. You see, the wizards down the hall from the ones who designed those CLOs have continued to improve on the futures and options originally created so producers and users of commodities could manage price volatility. Now exchange-traded notes and other nifty new instruments may be facilitating investment flows way out of proportion to the actual demand for commodities. Well. As the great soul singer Tyrone Davis said of a situation like the one poor Mrs. Spitzer recently faced, there it is. The tensions in the often stormy, centuries-old marriage between finance and industry, between Wall Street and Main Street, have flared up once again, and there seems little doubt about who deserves the blame. Until we start the couples therapy.That's when things get messy. The conversation can't ignore people who are needlessly losing their homes and good businesses that can't get capital. Our patchwork system of regulating financial institutions obviously needs updating, and it's not just securities but also reputations that are being marked to market. It's already happening to former Fed chairman Alan Greenspan, and also to Robert Rubin. The former Clinton treasury secretary received more than $100 million as chairman of the executive committee at Citigroup over the last eight years, even as the nation's biggest financial institution helped to dig the hole we're now in. But we will do well to remember there's a relationship worth salvaging here. On one hand, Rubin arrived at Citigroup after he and Greenspan helped to remove the regulatory barriers to the merger that created it. Now it's falling to their successors to improvise some new guardrails. Another hallmark of the Greenspan-Rubin 1990s, though, was the financial diplomacy that helped turn developing economies into emerging markets for tractor-makers and then, when that project devolved into another great financial crisis, got it back on track. If either of these men wish, like Tyrone Davis, that they could turn back the hands of time on a few decisions, they haven't said so. Certainly other people in the financial world would like to. But they can't, and neither can those of us who identify more closely with the so-called real economy. We'll just have to try and make sure we get more of what we need out of the relationship in the future.--Kenneth Klee
Link to Professor's Klee's Biography: http://www.law.ucla.edu/home/index.asp?page=564
Monday, March 17, 2008
Subprime Crisis: The PWG Weighs In
TheCorporateCounsel.net Blog, Broc Romanek and Dave Lynn, March 17, 2008:
Subprime Crisis: The PWG Weighs In
Last week, the President's Working Group on Financial Markets issued a Policy Statement on Financial Market Developments, reflecting the collective views of the Treasury, the Federal Reserve, the SEC and the CFTC on how to deal with the current market turmoil.
The report does not appear to break any new ground in describing the underlying causes of the problems: sloppy mortgage underwriting; the "erosion of discipline" in the securitization process, including failures to provide adequate risk disclosure; flaws in the credit rating process; and weaknesses in risk management and failures in banking policies to mitigate those weaknesses. The recommendations in the report might best be characterized as a suggestive – and perhaps soft – in terms of getting at these identified issues. Much of what is suggested could take years to implement – such as getting all states to implement nationwide licensing standards for mortgage brokers (if all states need to do it might not a federal licensing standard be a better idea?), compelling institutional investors to seek better risk information and better ways to evaluate risk other than through credit ratings, reforming the credit rating process, and enhancing risk management practices and prudential regulatory policies for financial institutions.
The one issue that the report actively sidesteps is what sort of concrete steps must taken with respect to the enormous OTC derivatives market that remains the 800-pound (or maybe $500 trillion) gorilla in the room. It has been the common wisdom that regulators need to continue to steer clear of the OTC derivatives market, lest they snuff out the flames of financial innovation that everyone loves until someone (or everyone) gets burned. Now we have a north of $500 trillion in notional amount market that has virtually no oversight – other than industry "oversight" – and no way to get a handle on the systemic risks posed to the worldwide financial system. Instead of suggesting any radical reforms, the PWG says that financial institution regulators should insist that the industry promptly "set ambitious standards for accuracy and timeliness of trade data submissions and the timeliness of resolutions of trade matching errors for OTC derivatives," urge the industry to amend credit derivative documentation to provide for cash settlement in the event of a credit event and ask the industry for a long terms plan for developing an integrated operational infrastructure. Whoa, some tough words on derivatives from the PWG!
The Bear Stearns Bailout: Is this the Big One?
Almost as if to underscore that the suggested fixes in the PWG report aren't going to do anything to alleviate the current state of locked-up credit markets and rapidly deteriorating asset values, news began to break early Friday about the need for a Federal Reserve lifeline to the venerable Bear Stearns. The SEC put out this press release on Friday, noting that it was monitoring Bear's capital adequacy in the light of the firm's rapidly eroding liquidity. In a conference call on Friday – memorialized in this real time blog of the call – Bear Stearns executives said that the ability to borrow against the firm's collateral from the Fed through JP Morgan was going to give them a chance to look at strategic alternatives – although they apparently weren't thinking at the time that filing for bankruptcy or selling the firm at a fire sale price within 48 hours were among those alternatives.
As noted in this article from today's WSJ, JP Morgan has agreed to purchase Bear Stearns for $236 million or $2 a share – quite a delta from the firm's market value of $3.5 billion on Friday. The Bear Stearns board was apparently cajoled by government officials, who indicated that they might not be able to bail the firm out if it did not do a deal before markets opened again this week. Shareholders interests were of little concern, it seems, as the firm's insolvency became imminent when counterparties continued to refuse to do business with Bear and prime brokerage customers ran for the exits. Apparently the Fed's credit line on Friday was not enough to stave off the "run on the bank."
The WSJ article notes that financial regulators are "scrambling to come up with new tools because the old ones aren't suited for this 21st-century crisis, in which financial innovation has rendered many institutions not 'too big too fail,' but 'too interconnected to be allowed to fail suddenly.'" Not too comforting by any stretch of the imagination.
Subprime Crisis: The PWG Weighs In
Last week, the President's Working Group on Financial Markets issued a Policy Statement on Financial Market Developments, reflecting the collective views of the Treasury, the Federal Reserve, the SEC and the CFTC on how to deal with the current market turmoil.
The report does not appear to break any new ground in describing the underlying causes of the problems: sloppy mortgage underwriting; the "erosion of discipline" in the securitization process, including failures to provide adequate risk disclosure; flaws in the credit rating process; and weaknesses in risk management and failures in banking policies to mitigate those weaknesses. The recommendations in the report might best be characterized as a suggestive – and perhaps soft – in terms of getting at these identified issues. Much of what is suggested could take years to implement – such as getting all states to implement nationwide licensing standards for mortgage brokers (if all states need to do it might not a federal licensing standard be a better idea?), compelling institutional investors to seek better risk information and better ways to evaluate risk other than through credit ratings, reforming the credit rating process, and enhancing risk management practices and prudential regulatory policies for financial institutions.
The one issue that the report actively sidesteps is what sort of concrete steps must taken with respect to the enormous OTC derivatives market that remains the 800-pound (or maybe $500 trillion) gorilla in the room. It has been the common wisdom that regulators need to continue to steer clear of the OTC derivatives market, lest they snuff out the flames of financial innovation that everyone loves until someone (or everyone) gets burned. Now we have a north of $500 trillion in notional amount market that has virtually no oversight – other than industry "oversight" – and no way to get a handle on the systemic risks posed to the worldwide financial system. Instead of suggesting any radical reforms, the PWG says that financial institution regulators should insist that the industry promptly "set ambitious standards for accuracy and timeliness of trade data submissions and the timeliness of resolutions of trade matching errors for OTC derivatives," urge the industry to amend credit derivative documentation to provide for cash settlement in the event of a credit event and ask the industry for a long terms plan for developing an integrated operational infrastructure. Whoa, some tough words on derivatives from the PWG!
The Bear Stearns Bailout: Is this the Big One?
Almost as if to underscore that the suggested fixes in the PWG report aren't going to do anything to alleviate the current state of locked-up credit markets and rapidly deteriorating asset values, news began to break early Friday about the need for a Federal Reserve lifeline to the venerable Bear Stearns. The SEC put out this press release on Friday, noting that it was monitoring Bear's capital adequacy in the light of the firm's rapidly eroding liquidity. In a conference call on Friday – memorialized in this real time blog of the call – Bear Stearns executives said that the ability to borrow against the firm's collateral from the Fed through JP Morgan was going to give them a chance to look at strategic alternatives – although they apparently weren't thinking at the time that filing for bankruptcy or selling the firm at a fire sale price within 48 hours were among those alternatives.
As noted in this article from today's WSJ, JP Morgan has agreed to purchase Bear Stearns for $236 million or $2 a share – quite a delta from the firm's market value of $3.5 billion on Friday. The Bear Stearns board was apparently cajoled by government officials, who indicated that they might not be able to bail the firm out if it did not do a deal before markets opened again this week. Shareholders interests were of little concern, it seems, as the firm's insolvency became imminent when counterparties continued to refuse to do business with Bear and prime brokerage customers ran for the exits. Apparently the Fed's credit line on Friday was not enough to stave off the "run on the bank."
The WSJ article notes that financial regulators are "scrambling to come up with new tools because the old ones aren't suited for this 21st-century crisis, in which financial innovation has rendered many institutions not 'too big too fail,' but 'too interconnected to be allowed to fail suddenly.'" Not too comforting by any stretch of the imagination.
Thursday, March 06, 2008
Hedge Funds Frozen Shut
Business Week Online, March 5, 2008:
To buy time and stave off losses, more funds are blocking withdrawals. Are they just postponing the inevitable?
by Matthew Goldstein
There's a chill spreading across the hedge fund industry. With more portfolios falling victim to the credit crunch, managers by the dozen are freezing investor redemptions, preventing a mad rush to the exits that would force funds to sell beaten-down assets to raise cash. But is this unprecedented move just postponing the day of reckoning for funds and the market?
Since November at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period.
It's understandable why hedge funds would want to keep investors from pulling out their money en masse. In this market, any sales would almost certainly be at cut-rate prices, guaranteeing big losses in portfolios. And once managers start dumping assets, there's also the danger that big banks, which provided the funds with credit lines to amp up returns through what's known as leverage, will demand their money back as collateral shrinks. Those margin calls would prompt further sales, setting off a vicious cycle that could ensure a fund's demise.
Read article at: http://www.businessweek.com/magazine/content/08_11/b4075000870869.htm?dlbk
To buy time and stave off losses, more funds are blocking withdrawals. Are they just postponing the inevitable?
by Matthew Goldstein
There's a chill spreading across the hedge fund industry. With more portfolios falling victim to the credit crunch, managers by the dozen are freezing investor redemptions, preventing a mad rush to the exits that would force funds to sell beaten-down assets to raise cash. But is this unprecedented move just postponing the day of reckoning for funds and the market?
Since November at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period.
It's understandable why hedge funds would want to keep investors from pulling out their money en masse. In this market, any sales would almost certainly be at cut-rate prices, guaranteeing big losses in portfolios. And once managers start dumping assets, there's also the danger that big banks, which provided the funds with credit lines to amp up returns through what's known as leverage, will demand their money back as collateral shrinks. Those margin calls would prompt further sales, setting off a vicious cycle that could ensure a fund's demise.
Read article at: http://www.businessweek.com/magazine/content/08_11/b4075000870869.htm?dlbk
Wednesday, February 27, 2008
Study: Midmarket M&A to keep pace in '08
Corporate DealMaker, Posted on February 26, 2008 at 5:13 PM
Dealmakers at middle-market companies are generally optimistic about the current and future deal climate, according to the results of a recent survey. CFO Research Services and CIT Group Inc. surveyed 529 senior-level finance decision makers at middle-market U.S. and Canadian companies for their report "M&A in Challenging Times." According to the survey:
Although a substantial number of respondents said that M&A activity would decrease over the next year (23 percent), many respondents predicted an increase in M&A activity (47 percent), while nearly a third said they believed M&A activity would stay the same. Not surprisingly, respondents said strategic players with strong balance sheets would not be deterred by uncertainty in the credit market. The results also indicated that fundamental business factors such as the need to enter new markets and responding to competitive threats would be the main deal drivers. The survey results generally support the conclusions reported in this Dealscape, which predicts midmarket players may find good deals in the months to come as companies hurt by the sluggish IPO market, low liquidity among smaller companies and a tough economy go looking for buyers.
For more on the CIT study, including a chart, see this item on Dealscape. - Baz Hiralal
Dealmakers at middle-market companies are generally optimistic about the current and future deal climate, according to the results of a recent survey. CFO Research Services and CIT Group Inc. surveyed 529 senior-level finance decision makers at middle-market U.S. and Canadian companies for their report "M&A in Challenging Times." According to the survey:
Although a substantial number of respondents said that M&A activity would decrease over the next year (23 percent), many respondents predicted an increase in M&A activity (47 percent), while nearly a third said they believed M&A activity would stay the same. Not surprisingly, respondents said strategic players with strong balance sheets would not be deterred by uncertainty in the credit market. The results also indicated that fundamental business factors such as the need to enter new markets and responding to competitive threats would be the main deal drivers. The survey results generally support the conclusions reported in this Dealscape, which predicts midmarket players may find good deals in the months to come as companies hurt by the sluggish IPO market, low liquidity among smaller companies and a tough economy go looking for buyers.
For more on the CIT study, including a chart, see this item on Dealscape. - Baz Hiralal
Tuesday, February 26, 2008
Hedge Funds Still Pose Risk to Financial System, Report Says
Despite closer monitoring by regulators, hedge funds still pose significant risks to the financial system, a government report said Monday.
The loosely regulated capital pools favored by the rich and by large financial institutions “require continued monitoring by regulators and counterparties,” according to a report released by the Government Accountability Office, the investigative arm of Congress.
The study found that hedge funds’ inclination to take substantial risks with increasingly large sums of money — and to leverage those bets — means losses can spread and be magnified throughout the financial system.
The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.
The G.A.O. study comes at a tough time for hedge funds, which last month reported heavy average losses in a slumping stock market. In December, new money invested in hedge funds hit its lowest level in two years as investors cooled to the sector.
As it has grown in size and gained public attention, the hedge fund industry has fought a series of battles over regulation and taxation on Capitol Hill and with the U.S. Securities and Exchange Commission, with mixed results
Go to Article from BusinessWeek »
Go to Article from Reuters »
The loosely regulated capital pools favored by the rich and by large financial institutions “require continued monitoring by regulators and counterparties,” according to a report released by the Government Accountability Office, the investigative arm of Congress.
The study found that hedge funds’ inclination to take substantial risks with increasingly large sums of money — and to leverage those bets — means losses can spread and be magnified throughout the financial system.
The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.
The G.A.O. study comes at a tough time for hedge funds, which last month reported heavy average losses in a slumping stock market. In December, new money invested in hedge funds hit its lowest level in two years as investors cooled to the sector.
As it has grown in size and gained public attention, the hedge fund industry has fought a series of battles over regulation and taxation on Capitol Hill and with the U.S. Securities and Exchange Commission, with mixed results
Go to Article from BusinessWeek »
Go to Article from Reuters »
Friday, February 22, 2008
Supreme Court Continues Pro-Business Stance
In three key business rulings handed down Wednesday, the Supreme Court continued its trend toward freeing companies from the conflicting regulation of 50 different states in favor of one federal regime.
The Court favored federal pre-emption over state laws and state court remedies in the areas of medical device regulation, interstate shipping of tobacco and arbitration of contract disputes.
In announcing one of the cases from the bench, Justice Antonin Scalia said the day's decisions made it clear that "we consider it part of our business" to sort out the balance between federal and state law.
But it was not a clean sweep for business Wednesday. In LaRue v. DeWolff, Boberg & Associates, the Court ruled that employees can sue employers under the Employee Retirement Income Security Act for mismanaging their 401(k) retirement plans.
Of Wednesday's pre-emption cases, Riegel v. Medtronic may have the broadest impact. The Court ruled against the estate of Charles Riegel, who died after a catheter made by Medtronic malfunctioned during heart surgery.
Riegel sued in federal court, invoking New York state common law to argue for liability and damages. Like lower courts, the Supreme Court ruled that the federal Medical Device Amendments of 1976 specifically preclude states from imposing their own requirements on the makers of federally regulated medical devices.
Justice Ruth Bader Ginsburg dissented from the opinion authored by Scalia. Ginsburg called the ruling a "radical curtailment" of state law remedies that Congress did not intend when it passed the law.
Jon Haber, head of the American Association for Justice, the organization for trial lawyers, criticized the ruling and said it "should be narrowly viewed as applying only to certain medical device cases and should not serve as precedent for cases involving drugs and other consumer products."
The Court favored federal pre-emption over state laws and state court remedies in the areas of medical device regulation, interstate shipping of tobacco and arbitration of contract disputes.
In announcing one of the cases from the bench, Justice Antonin Scalia said the day's decisions made it clear that "we consider it part of our business" to sort out the balance between federal and state law.
But it was not a clean sweep for business Wednesday. In LaRue v. DeWolff, Boberg & Associates, the Court ruled that employees can sue employers under the Employee Retirement Income Security Act for mismanaging their 401(k) retirement plans.
Of Wednesday's pre-emption cases, Riegel v. Medtronic may have the broadest impact. The Court ruled against the estate of Charles Riegel, who died after a catheter made by Medtronic malfunctioned during heart surgery.
Riegel sued in federal court, invoking New York state common law to argue for liability and damages. Like lower courts, the Supreme Court ruled that the federal Medical Device Amendments of 1976 specifically preclude states from imposing their own requirements on the makers of federally regulated medical devices.
Justice Ruth Bader Ginsburg dissented from the opinion authored by Scalia. Ginsburg called the ruling a "radical curtailment" of state law remedies that Congress did not intend when it passed the law.
Jon Haber, head of the American Association for Justice, the organization for trial lawyers, criticized the ruling and said it "should be narrowly viewed as applying only to certain medical device cases and should not serve as precedent for cases involving drugs and other consumer products."
Tuesday, February 19, 2008
Investor Activism Tops Last Year's Record Pace
Kaja Whitehouse of the WSJ wrote this article on Saturday: "Efforts by activist investors to fight for board seats, oppose mergers and otherwise shake up companies are on track to beat last year's record levels, contrary to expectations that activity would dry up because of unstable market conditions.
There have been 72 campaigns waged by activists so far this year, as of Feb. 11, with targeted companies ranging from Countrywide Financial Corp. to New York Times Co. Last year, when shareholder activism hit record levels, there were just 54 campaigns waged over the same time period, according to FactSet SharkWatch, which tracks proxy contests and corporate-takeover defenses.
Hedge funds continue to be big participants. More than half, or 38, of the campaigns so far this year were initiated by hedge funds, compared with 21 during last year's period, according to FactSet SharkWatch."
There have been 72 campaigns waged by activists so far this year, as of Feb. 11, with targeted companies ranging from Countrywide Financial Corp. to New York Times Co. Last year, when shareholder activism hit record levels, there were just 54 campaigns waged over the same time period, according to FactSet SharkWatch, which tracks proxy contests and corporate-takeover defenses.
Hedge funds continue to be big participants. More than half, or 38, of the campaigns so far this year were initiated by hedge funds, compared with 21 during last year's period, according to FactSet SharkWatch."
Tuesday, February 12, 2008
How acquirers can ride the restructuring wave
Steve Zuckerman, director of the Special Situations Group at Farlie Turner & Co., writes exclusively for Corporate Dealmaker on how strategic buyers can muscle through tough economic conditions. The Corporate Dealmaker, February 12, 2008.
With less liquidity in the market and tighter credit standards now in place, it is likely that credit defaults will dramatically rise and companies will no longer be able to refinance themselves out of their financial challenges. This economic climate will create opportunities to acquire companies with overleveraged capital structures -- but sound business models -- for a significant discount.
The opportunities will develop in multiple sectors -- not just among real estate developers and mortgage lenders, but also in any industry tied to the housing market such as the myriad of building product and equipment rental companies. We also expect other industries to suffer considerable challenges, including retail, casual dining, manufacturers and distributors of durable goods. Within these industries, it is smaller and midsize companies that will feel the pressure first as they typically have fewer resources and are less likely to raise institutional capital.
Strategic buyers with strong balance sheets will benefit because they will be able to capture market share by acquiring undercapitalized competitors. Private equity firms, flush with capital, are also likely to find many favorably priced deals, although they will be unable to use as much debt to finance their purchases as in the past. Still, buyers will need to be vigilant, since different rules and strategies apply in distressed M&A.
When acquiring a company that is insolvent (generally defined as a company whose liabilities exceed its assets or one that is unable to pay its debts as they come due), one of the greatest risks is being sued for a fraudulent transfer. The term "fraudulent" is somewhat of a misnomer, since neither fraud nor misconduct needs to be proved. Instead, federal and state (constructive) fraudulent transfer law permits a transfer to be unwound if the transfer was not for fair consideration and the seller was not solvent at the time of transfer or become insolvent as a result of the transfer. A failed leveraged buyout, for example, is often attacked by creditors as a fraudulent transfer. As the buyer utilizes the target's assets to finance the transaction, the target arguably received less than "reasonably equivalent" value.
There are several ways for a buyer to limit its exposure to a fraudulent transfer claim, such as obtaining a fairness opinion, a solvency opinion or consummating the transaction in the context of a bankruptcy proceeding -- which is the most foolproof approach. Another interesting wrinkle in negotiating with a distressed company is that when the company enters into the "zone of insolvency," the fiduciary responsibility of directors and officers shifts from shareholders to creditors. Buyers can gain leverage by making this point painfully clear to directors and officers.
Whether the buyer is strategic or financially oriented, an important part of the acquisition strategy should be focused on whether the assets should be acquired in or outside of bankruptcy. Acquiring distressed companies and assets through a bankruptcy proceeding provides considerable benefits, such as cleansing the assets of liens, the ability to reject unfavorable contracts and the virtual elimination of various types of liabilities. However, these benefits must be weighed against the transparency of a bankruptcy proceeding, which is designed to fully vet an asset, foster competition and garner the highest and best price. Strategic buyers also need to consider the reputational impact of a bankruptcy and the effect it could have on trade vendors. If a company has critical and irreplaceable vendors, a buyer should consider contacting such vendors to determine whether they would discontinue doing business with the company if it files bankruptcy. In the end, each distressed situation presents unique facts and buyers should rely on experienced restructuring advisers to assist them in their quest to take advantage of the challenging times that lie ahead.
Steve Zuckerman. The author is director of the Special Situations Group at Farlie Turner & Co., a Fort Lauderdale, Fla.-based investment bank serving growth-oriented middle-market companies. Recently launched, the group provides investment banking, capital raising and financial advisory services to middle-market companies experiencing financial difficulties, ranging from underperforming to significantly distressed businesses.
With less liquidity in the market and tighter credit standards now in place, it is likely that credit defaults will dramatically rise and companies will no longer be able to refinance themselves out of their financial challenges. This economic climate will create opportunities to acquire companies with overleveraged capital structures -- but sound business models -- for a significant discount.
The opportunities will develop in multiple sectors -- not just among real estate developers and mortgage lenders, but also in any industry tied to the housing market such as the myriad of building product and equipment rental companies. We also expect other industries to suffer considerable challenges, including retail, casual dining, manufacturers and distributors of durable goods. Within these industries, it is smaller and midsize companies that will feel the pressure first as they typically have fewer resources and are less likely to raise institutional capital.
Strategic buyers with strong balance sheets will benefit because they will be able to capture market share by acquiring undercapitalized competitors. Private equity firms, flush with capital, are also likely to find many favorably priced deals, although they will be unable to use as much debt to finance their purchases as in the past. Still, buyers will need to be vigilant, since different rules and strategies apply in distressed M&A.
When acquiring a company that is insolvent (generally defined as a company whose liabilities exceed its assets or one that is unable to pay its debts as they come due), one of the greatest risks is being sued for a fraudulent transfer. The term "fraudulent" is somewhat of a misnomer, since neither fraud nor misconduct needs to be proved. Instead, federal and state (constructive) fraudulent transfer law permits a transfer to be unwound if the transfer was not for fair consideration and the seller was not solvent at the time of transfer or become insolvent as a result of the transfer. A failed leveraged buyout, for example, is often attacked by creditors as a fraudulent transfer. As the buyer utilizes the target's assets to finance the transaction, the target arguably received less than "reasonably equivalent" value.
There are several ways for a buyer to limit its exposure to a fraudulent transfer claim, such as obtaining a fairness opinion, a solvency opinion or consummating the transaction in the context of a bankruptcy proceeding -- which is the most foolproof approach. Another interesting wrinkle in negotiating with a distressed company is that when the company enters into the "zone of insolvency," the fiduciary responsibility of directors and officers shifts from shareholders to creditors. Buyers can gain leverage by making this point painfully clear to directors and officers.
Whether the buyer is strategic or financially oriented, an important part of the acquisition strategy should be focused on whether the assets should be acquired in or outside of bankruptcy. Acquiring distressed companies and assets through a bankruptcy proceeding provides considerable benefits, such as cleansing the assets of liens, the ability to reject unfavorable contracts and the virtual elimination of various types of liabilities. However, these benefits must be weighed against the transparency of a bankruptcy proceeding, which is designed to fully vet an asset, foster competition and garner the highest and best price. Strategic buyers also need to consider the reputational impact of a bankruptcy and the effect it could have on trade vendors. If a company has critical and irreplaceable vendors, a buyer should consider contacting such vendors to determine whether they would discontinue doing business with the company if it files bankruptcy. In the end, each distressed situation presents unique facts and buyers should rely on experienced restructuring advisers to assist them in their quest to take advantage of the challenging times that lie ahead.
Steve Zuckerman. The author is director of the Special Situations Group at Farlie Turner & Co., a Fort Lauderdale, Fla.-based investment bank serving growth-oriented middle-market companies. Recently launched, the group provides investment banking, capital raising and financial advisory services to middle-market companies experiencing financial difficulties, ranging from underperforming to significantly distressed businesses.
Tuesday, February 05, 2008
SEC Proposes Further Section 404 Delay
TheCorporateCounsel.net Blog:
The SEC has proposed yet another one-year delay in implementation of an independent auditor’s attestation report on the internal controls for the smallest public companies. As noted in the blog at the end of last year, Chairman Cox had promised this delay in his testimony before the House Committee on Small Business.
Under the proposal, non-accelerated filers would be required to provide auditor’s attestation reports beginning with their annual reports filed for fiscal years ending on or after December 15, 2009. The proposal does not affect the requirement that management complete its own assessment of internal control over financial reporting – which is now required for all filers, regardless of size. The proposing release is out for a 30-day comment period.
The proposed delay in fully implementing Section 404(b) – to over seven years after Sarbanes-Oxley was enacted – coincides with an announcement that the Staff has commenced its previously discussed study of the costs and benefits associated with the auditor attestation requirement for smaller companies. This is supposed to be an analysis of “real world” data in order to measure experience with the recent SEC and PCAOB guidance for management and auditors. The final results of the study are not expected for several months.
The SEC has proposed yet another one-year delay in implementation of an independent auditor’s attestation report on the internal controls for the smallest public companies. As noted in the blog at the end of last year, Chairman Cox had promised this delay in his testimony before the House Committee on Small Business.
Under the proposal, non-accelerated filers would be required to provide auditor’s attestation reports beginning with their annual reports filed for fiscal years ending on or after December 15, 2009. The proposal does not affect the requirement that management complete its own assessment of internal control over financial reporting – which is now required for all filers, regardless of size. The proposing release is out for a 30-day comment period.
The proposed delay in fully implementing Section 404(b) – to over seven years after Sarbanes-Oxley was enacted – coincides with an announcement that the Staff has commenced its previously discussed study of the costs and benefits associated with the auditor attestation requirement for smaller companies. This is supposed to be an analysis of “real world” data in order to measure experience with the recent SEC and PCAOB guidance for management and auditors. The final results of the study are not expected for several months.
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