The Smartest Thing Yang Has Done So Far

As excited as I was about the potential buyout of Yahoo! by someone, even I became a little bored of all the back and forth between Yahoo! and Microsoft. In injection of Google into the mix certainly added some spice to the story, but I honestly thought that Carl Icahn's battle to replace the board at Yahoo! would be the critical next milestone to move the story forward. With Steve Ballmer's outright statement that he would speak with Yahoo!, but only after a new board was installed, that seemed to be the obvious conclusions. Today's announcement, however, that Carl Icahn, himself, will join Jerry Yang on the existing board leaves me scratching my head again.

I'm not along in my head-scratching, of course. In the morning batter on CNBC, everyone seems to be wondering how this ultimately works to the advantage of Yahoo! All can agree, however, that this is the smartest thing that Yang has done thus far and I would have to concur. If you can't beat 'em, join 'em ...or in this case, invite them to join you.

Over the weekend I spotted an article that announced that Legg Mason, a major shareholder in Yahoo!, would support the existing board along with Jerry Yang. There were previous reports that there were meetings between Yahoo and Legg Mason at the Sun Valley lodge and that's likely where the seeds were planted for the announcements made over the past few days. While I'm certainly a little more confident it Jerry Yang's ability to strategize, I'm still wondering where this leaves Yahoo!'s independence or lack thereof.

Lehman's Fuld Director of New York Fed?

This little known fact was stated only in passing in this article, but it's really hard to believe - especially in the way it's used in this particular article. How can and investment bank's chief serve as a director of the New York Fed? Isn't that a conflict of interest?

Yes, I can appreciate that the Fed should seek insights from industry leaders, but the way Mr. Fuld's position with the NY Fed is used in this particular article, suggests that that position would help support Lehman Brothers and keep it from a Bears-like demise. That, I have to say, is very much an indication that such a position could be abused. My point is that Mr. Fuld's position should not have any materially different affect on Lehman than Mr. Alan Schwartz's lack of such a role hurt Bears Stearn. Wouldn't you agree?

Dow buys Rohm & Haas with Berkshire & Kuwait Investors

It's the breaking news on CNBC this morning: Dow Chemical is buying Rohm & Haas with the aid of Berkshire Hathaway and the Kuwaity Investment Authority (KIA) for a whopping $18.8 billion. What's most amazing about this deal are some of the ancillary statistics. Mr. Warren Buffett has only been in Sun Valley for one day and already helps close a multi-billion dollar deal. Moreover, the deal places an incredible 60% premium on Rohm & Haas, which only goes to support Mr. Buffett's age-old-saying that when he has the opportunity to make a good investment, he does it ...apparently, at any price.

The Lodge at Sun Valley 2008 has become the focus of all the world's financial media and there are more deals cooking, to be sure. While no one would be surprised if Mr. Buffett surfaces with an involvement in yet another deal, another hot topic is the discussions on-going between Larry Page of Google, Sue Ducker of Yahoo!, Bill Miller of Legg Mason (one of the largest investors in Yahoo! via various investment funds) and even Terry Semel, the ousted former chief of Yahoo!.  To be a fly on that wall!

Barriers to Entry for Hedge Funds

While the top five hedge funds were able to raise $13.7 billion in new capital in the first half of 2008, the number of new funds introduced fell by a whopping 50% over the same period. Personally, I think that this may be a good thing.

Yes, of course more competition is usually better, but the current state of the capital markets may suggest that experience may be needed more than anything else at this particular moment. While I certainly agree that the big boys on Wall Street haven't exactly proven that they're able to leverage their years of experience over the past year, newcomers to this ultra-risky segment may spell even greater doom for investors unprepared for what this economy may still hold for us all.

Goldman Sachs appears to be the market favourite, having raised an incredible 40% of the total among raised. Given that Goldman is among the few firms that has been able to keep its brand out of the headlines lately, it might be interesting to see a correlation between a firms ability to raise capital and its lack of press these days!

Private Equity Not Showing Signs of Weakness

In raising only 3% short of its figure for the first half of 2007, private equity firms are proving that there is still plenty of liquidity available for the right deals. Savvy investors, no doubt, are preparing to take advantage of the down-cycle with a spate of buyouts, mergers and IPOs in time for when the economy rebounds.

$132.7 billion; that's the figure American private equity firms raised in the first half of this year - just 3% shy of the figure for last year, which, by the way, was a record year. The news gets even better when you focus in on venture capital specifically. VC firms raised $11.5 billion in the first half of '08 - a full 15% improvement over the $10 billion they raised last year. All this points to a great deal of future deals. While IPO numbers are down to historic lows, the money being raised among the alternative financing segment of the capital markets suggests that that slowdown will be short-lived, which, of course, points to a stronger outlook for the economy as a whole. Timing, of course, is anyone's guess.

Anheuser-Busch, InBev and the Credit Crunch

I haven't written yet on the Anheuser-Busch buyout, but with its apparent readiness to fight for its life (or, more accurately, the life of its board), I can't resist any longer. Anheuser has filed a lawsuit against InBev, its unwanted suitor, alleging almost anything and everything to undermine its attempted ousting of its board. What I find most interesting, however, about its arguments against InBev's offer is the use of the credit crunch/crisis in its favour.

Specifically, Anheuser-Bush is arguing that InBev's claimed committment from a group of international banks on the $40 billion needed to finance the deal is questionable at the least. With the current state of the economy and weariness among financial institutions to commit to anything without significant caveats, Anheuser is suggesting that InBev couldn't possibly have a fully-committed issue without a variety of holes through which any number of the so-called committed banks could slip through and away from the deal. All this, of course, to play on the fears of shareholders that walking down the isle with InBev is by no means a worry-free walk towards the marital alter.

It's almost funny how Anheuser has gone so far as to allege links between InBev and Cuba in an attempt to really hit home among Americans resisting any foreign ownership in an icon as notable as the company behind Bud, but it goes to show how completely irrelevant matters can potentially affect the success of a proposed deal. The reality is, of course, if Anheuser appears attractive to InBev, then it's more than likely that it will appear attractive to others as well ...eventually. If Anheuser wants to really protect itself, it's got to look at its business, and not the courts, to strengthen its position and independence.

Rumours & Wall Street

It's not exactly a news flash to say that rumours can affect markets, but the latest spate of rumours have had such a dramatic and immediate affect on a couple of stocks that it really makes you think twice about being in the market at all. Two such stocks are Yahoo! and Lehman Brothers.

As some of you may know, Yahoo! stock has been on a roller-coaster ever since talks began with Microsoft over its buyout and subsequent possible advertising deal. The on-again-off-again deal has left many investors speculating and that eagerness to stay ahead of the pack has meant that many are possibly more willing than usual to put their ear to the ground - listening for any hint of what may be coming. Early last week, a mention by a blogger about the resumption of talks between  Yahoo and MS sent the stock skyrocketing almost 8% in a matter of minutes. Almost as quickly as it hit the wires, CNBC killed the rumour by speaking to Microsoft directly and stating that no such talks were taking place or had been planned. Before the CNBC report was through, Yahoo! stock had dived to +2% on the day; that's a loss of 5% in less than a minute.

Lehman Brothers, of course, has been in very much a similar situation. Ever since the collapse of Bears Stearn, the market has appeared to be looking for the next possible victim and the work of short seller David Einhorn sealed the deal - placing Lehman at the top of this particular watch list. Just as with Yahoo!, the market was hungry for any news - regardless, almost, of how credible that news was. On rumours of a possible Bears-like collapse and later on rumours of a buyout by Merrill Lynch, Lehman's stock has been sent reeling - down more than 10% on the day after each rumour surfaced. Mr. Einhorn, of course, would argue that the declines are warranted given the uncertainty in the company's financial reports, but these sorts of stock price moves on rumour alone are scary - pure and simple.

Conclusions? I'm not sure that I have any to offer. I suppose that one lesson that I've taken to heart is to be weary of any stock that is given a disproportionate amount of attention relative to its industry. In today's technological age, communication is instantaneous and rumours spread in seconds worldwide. Before anyone has a chance to affirm or deny a particular rumour, its affects on a stock's price are already fully felt by investors. I do believe that the markets do, eventually, work, but if you're tempted to take advantage of such swings in a particular stock, be prepared to take significant losses as often as you may benefit.

Japanese Banks Use Their Recessionary Experience

Anyone who's taken a few economics classes has at least read a little about the Japanese economy and the pain that its felt over the past couple of decades. What makes this interesting in light of today's economic woes is that Japan may be in an excellent position to take advantage of the opportunities in troubled Western economies while its own market begins to show signs of life.

Home of the rising sun may be home to many more investors than there are in domestic western markets. With relatively little growth potential at home, Japanese banks are looking elsewhere to place their bets. The Japanese, long known for their high savings rates, make their big banking institutions flush with cash and with the domestic economy now appearing to require less of their attention, these banks are preparing for a return to their buying spree of the 1980s with a $1.2 billion investment in Merrill earlier this year and another $1 billion investment in Barclays.

According to the author of this article, the housing troubles and credit crunch in the U.S pales in comparison to what the Japanese have had to deal with over the last 20-years. Consequently, there's some support to the notion that they are now better prepared than anyone to spot the opportunities in such down-markets and now also have the cash and investing flexibility to reap those opportunities as others wait for a rebound that may still be years away.

How Lehman lost its way

I recommend this article to anyone interested in the mounting woes of Lehman Brothers. The article covers everything from the company's history to its current troubles and where they came from. As I write this, Lehman is closing down another 10% on the day and it seems as though this is just more of what we'll continue to see as the financial sector, as a whole, continues to slip off its highs.

Probably the most interesting differentiating characteristic of Lehman Brothers compared to its investment banking cohorts, is its willingness to place significant bets (it's own capital) in real estate. The success that Lehman's CEO, Fuld, had with investments in real estate earlier this decade gave the firm a sense of proprietary knowledge in the sector and, consequently, gave it the confidence to make investments in new property developments that other banks would never have made. Of course, as we all know, the real estate market has been hit hard and this has only worked to worsen Lehman's struggles with the on-going credit crunch.

The author of the article seems fairly adamant that Lehman will remain independent and will manage to survive this latest episode in its history as it has in the past, but there's no doubt that every last dollar of its market value is at-risk. Investors in the firm are on shaky ground with value at risk far greater than what the entire firm is worth. Lehman has been issuing capital like made over the last few months and I'm sure that this will continue. Adding the fact that the Fed has promised both Lehman and its investment banking neighbors that it would stand by them in times of trouble, the likelihood of a Bears-like collapse is slim; that said, you've really got to be risk-loving to invest your own money in the firm with all the uncertainty that still exists.

Does Anyone Understand The MS-Y! Saga Anymore?

I've been following this continuing saga since it began in February, but even I'm a little confused as to where this will ultimately go. In today's news it appears that Microsoft is, once again, expressing an interest in acquiring Yahoo!'s search business. It's no longer interested in bidding for the whole company and is in talks with others about acquiring the non-search parts of their business. Personally, this just comes across as indecisiveness on the part of Steve Ballmer and Microsoft, doesn't it?

When Microsoft walked away from the table last month, it seemed as though it was a classic M&A move - letting Yahoo! swing in the wind. It worked too, with Carl Icahn and other shareholders storming the doors at Yahoo! and challenging Yang and the rest of the Board on their decision not to sell. As you know, Yahoo! has been back-peddling ever since to appease those same shareholders, but Microsoft seemed adamant that it was no longer interested in an outright acquisition, but may be interested in a cooperative search-based relationship.

The next chapter, of course, brought Google into the story-line with Yahoo! announcing that they would work with Google on Search. That, honestly, seemed to be the final nail in the proverbial coffin since the deal with Google involved substantial penalties should Yahoo! walk away from the deal thereafter. Today's talk of Microsoft's renewed interest is just weird; what is it that they want? They have the cash to buy them; if they want them, why not just buy them?

Slowest IPO Quarter In Recorded History

First, I'll be clear that recorded history, as far as VC-backed IPOs are concerned, goes back only about 30-years. That said, June 2008 will go down as the slowest month with zero, that right, zero, IPOs backed by private equity firms. Compared to the same quarter last year, there were 101 IPOs; this quarter that number is 49 in the U.S. Of course, Wall Street is trying to read between the lines and come to some sort of conclusion about the viability of the private equity industry as a whole, which I feel is simply unjustified.

Of course, I shouldn't be too surprised. The media is only doing what it always does: take a story and sensationalize it to grab viewers' attention and sell a few more ads. The reality is that the private equity business is a business like any another and responds to market conditions like any other. The slow-down in IPOs does not necessarily mean that there are fewer firms prepared to go public, but rather that there are few firms that VC firms are prepared to sell in this particular market. The folks behind these firms are pretty smart; they'll exit their investments when they believe they can get the greatest return on their buck. This market, not surprisingly, does not appear to offer the kind of deals that they're looking for. End of story.

No Choice But To Issue Stock

I found this article interesting due to what it suggests about the capital markets in the persisting credit crunch. Nucor, one of the largest steel producers in the U.S. was looking to raise $3 billion to finance its future acquisitions and expansions, but it couldn't; why?

Nucor currently has an investment-grade rating from both Moody's and S&P; a downgrade by either agency would cost Nucor hundreds of millions of dollars in additional financing costs, which is exactly what would happen if it issued $3 billion in debt. As an alternate course of action, the management at Nucor issued only $1 billion and will seek the balance via its first equity issue in a century.

We're talking, here, about a company that is both profitable and stable. A company in an industry with a growing demand for its product. A company that has survived the great depression for goodness sake! Do the rating agencies really believe that the extra debt will result in a default or worse? The truth is more likely that they are reeling from their comedy of errors over the past year and are now more cautious than ever in issuing their credit ratings. Is that fair to the companies that have had no role in the credit crisis and, moreover, have absolutely no exposure to its consequences? ...well, I suppose we just proved that they do have 'some' exposure.

Berkshire Will Not Grow At Rates Previously Seen

According to the man himself, Warren Buffett, you should sell your stock in Berkshire Hathaway if your expectation is to see the kinds of rates of growth that the stock has seen in the past. It's not that he believes it's a bad investment, of course, but rather that it is just so big that it's difficult to make acquisitions that would result in "needle moving" events for the holding company.

Buffett has been circling the globe of late with $35.6 billion in cash looking for deals. When you have that kind of money to spend, only truly sizable deals even show-up on the radar. Moreover, imagine how large a deal would have to be to result in significant move in the stock of Berkshire; these two forces 1) looking for large companies to buy, and 2) the fact that large companies are unlikely to offer significant growth rates, lead to Mr. Buffett's statement and it makes a lot of sense (as do most things that Mr. Buffett says).

If Bear, Then GMAC?

Citigroup, General Motors, Cerberus, JP Morgan Chase... what do they all have in common? GMAC, the lending arm of GM that's suffering from the combination of a credit crisis and spiraling home values. GMAC has come home looking for fresh cash injections twice already this year and nothing seems to help its solvency and, consequently, the faith of the markets in its long-term viability.

The yields on GMAC bonds are currently at about 19%; with the U.S. Treasury rate in the low single-digits, that speaks volumes about the risk investors associate with a stake in the firm. With 27,000 employees and $250 billion in assets, GMAC dwarfs Bear Stearns and that's even bigger than the largest mortgage lender, Countrywide Financial Corp. For the most part, however, we've heard relatively little about the firm or its troubles. With JP Morgan predicting a 100% chance of default on its bonds within the next 5-years, you really do have to have a strong will to invest your nest egg with the management at GMAC. More importantly, however, what sorts of risks does this represent for the financial markets if the Fed was concerned enough to step-in to support JP Morgan's buyout of Bear Stearns?

GM and Cerberus have been doing everything within their power to support the lender, but at some point you have to begin to question when it becomes throwing good money after bad. Then the question becomes what is the potential hazard for the broader economy. Mr. Bernanke and the Fed made it clear that the financial markets could not withstand the collapse of an institution as large as Bear Stearns; what does that suggest about the degrading status of GMAC?

Battle Between Hexion & Huntsman

I've been trying to get my head around the on-going battle between Hexion Specialty Chemicals, owned by Apollo Global Management, and Huntsman Corporation over the apparent failure of the proposed merger between the two. Not surprisingly, a legal battle has emerged from the remains of the deal that was once considered a match made in heaven.

It comes down to financing - there is none. The banks that were signed-on to provide the money for the deal have backed-out as a result of Hexion's inability to meet the solvency requirements stipulated in the deal. While Huntsman has waived those requirements as part of the merger agreement, the banks still require them and are not willing to put-up the money that's needed for the deal to go through. As a result, Huntsman is now suing Hexion for damages. What makes this interesting, however, is that Hexion is claiming (and I have to admit that I'm tempted to agree) that they have not breached the agreement and are therefore not liable for any damages.

The story isn't that simple, of course. The agreement further stipulates that Hexion has to make a best effort to find alternative financing, but how can it realistically do so if it can't meet solvency requirements as defined here:

... (a) the combined entity’s assets will be less than its liabilities; (b) the combined entity will not have the ability to pay its total debts as they become due; and (c) the combined entity will have an unreasonably small amount of capital with which to conduct its business.

Put yourself in the shoes of the banks considering this deal; would you invest? Yeah, me neither. If that's the case, then, how can Hutsman persist with its claims for damages?

Guy Hands on EMI and Leveraged Buyouts

Guy Hands, the British financier and founder of the private equity firm Terra Firma, admits to having his hands full with the turnaround of EMI (the music giant). Having made his fortune in real estate deals across the UK and German and coming from a polished Oxford-educated background, his ideals tend to clash with those in the music business, but business is business and Mr. Hands appears to be resolute in his mission to make his leveraged buyout of EMI, in cooperation with Citigroup, a success.

What I found interesting about this article was Mr. Hands' description of the relationship with Citigroup and how that plays into the future of EMI. "...it's a partnership..." he says; Citigroup has not been able to syndicate the debt used to buy EMI and consequently has to ride-out the rough times experienced by EMI all by its lonesome. Mr Hands adds that he has been working closely with the bank to try and syndicate the loan both to reduce the risk to Citigroup as well as loosen its leverage over EMI.

EMI's business has suffered a great deal over the past decade and Mr. Hands' purchase only helped to reveal how bad it had actually been. From reporting old music (like that of the Beatles) as new music sales, it was successful in hiding its mounting losses in new music business and this is weighing heavily on the shoulders of Terra Firma investors. Mr. Hands purchased the business for its cash flows from old music and those, apparently, are fabulous; unfortunately, its new music business is pulling everything else down.

The music business as a whole is in a tough position with digital music sales from Apple's music store surpassing all others and online music exchanges through illegal file-sharing sites continuing to growth (albeit at slower rates). Mr. Hand, and Terra Firma, has proven his ability to make profits for his investors in the past, but he certainly has his hands full with this project and it will be interesting to see how he pulls this rabbit out of his hat.

Lehman in trouble - $2.8 Billion Loss... and it's UP!

Well it happened, Lehman Brothers released their quarterly earnings report and it did report the big loss that Wall Street was expecting: $2.8 Billion to be exact. What's funny, however, is that it's up by as much as 2% in early trading after the announcement.

Yes, I know that it's all about expectations and not about the absolute numbers, but Lehman didn't announce lower losses than what were expected, it announced exactly what it had suggested earlier and exactly what the Street was expecting. How can its stock price rise so much on news that it did what it said it would do and did what everyone expected it would do?

Lehman in trouble - to post first quarterly loss?

Wall Street is now brimming with rumours about Lehman Brothers' possible issue of new common stock to help it meet its obligations following what many believe will be its first quarterly loss since going public. 

It won't be a small loss either; those in the know are suggesting that it may top as much as $4 billion; with a market capitalization of $18.7 billion, that's a staggering sum of money. Already down about 50% this year, the stock fell another 8% in trading yesterday as these rumours swirled the Street.

From the perspective of an investor on the side lines, I have to say that this is great news - my apologies to the current shareholders. I'm waiting for the opportunity to pounce on the financials, yes - along with millions of others, and news like this along with the downgrades issued by credit ratings agencies this week, things are looking rosy. The question is, of course, when is the right time to buy?

M&As and the Perceived Requirement to Integrate Swiftly

As a MBA you more than likely take one or more strategy classes that address the various aspects of mergers and acquisitions and the logic behind such deals. More than likely, you learn to recite synergy, synergy, synergy. I know I did and that's why I found this article especially interesting.

Of course, we did hear about the many failed M&A deals in the past, but their failure was always accounted for by the lack of synergies, or more generally, other incompatibilities between the two joining companies. This brief case study of the success of Disney's acquisition of Pixar never uses the term synergy - not even once. Instead, it actually goes-on to speak of the importance of communication between company management teams as well as throughout the ranks of employees on both sides of the deal.

Bob Iger, the successor to Michael Eisner, was credited for the success of the deal along with Steve Jobs and summarizes his point of view on M&A deals as follows:

“There is an assumption in the corporate world that you need to integrate swiftly,” Mr. Iger told The Times. “My philosophy is exactly the opposite. You need to be respectful and patient.”

Respectful and patient is exactly what both Disney and Pixar teams were. The letterheads didn't change, nor did the signs on the front of Pixar's buildings. The employee benefit plans didn't change at Pixar and neither were the two companies' email systems integrated. Such tactics, usually taken within weeks, if not days, of the signing of a deal were never done. Instead, the management teams at both companies looked to learn from each other and strengthen each others' businesses.

Pixar has benefited from Disney's marketing and distribution strength while Disney has most notably benefited from the technological strength of Pixar in using computer-generated animation techniques in the latest blockbuster films released since the deal. So much so that while most such deal see the combined value of the companies fall, Disney's stock has grown by as much as 28% in the past year alone. This result is not only interesting for as an exemplar of what a successful deal looks like, but also how it challenges the popular consensus still taught in business schools. I, for one, will be looking closely at the relationship between management teams of a possible deal when making a decision whether or not to invest in the combined entity.

Mergers & Acquisitions Are Up! Really!

The media is quoting a decline in mergers & acquisitions of about 35% in the past year, but the numbers can be deceiving. The total value of the deals is down, but the number of deals is actually up - up by 11% in fact. Does this represent a sign of life in the markets?

What makes this even more interesting is the size of the premiums - they're not only higher than the same period a year ago, but they're at the highest levels in nearly 6-years. With premiums of as much as 25% above the market price four-weeks prior to the deal. The question is, what does this information mean? In 1999, the number of deals, and deal premiums, were at all-time highs as well and we all know what followed.

Financials are down; when will they tick up?

Everyone and their brother has been talking about the declining stock prices of the major financial firms following the credit 'crisis' and continuing write-downs. One has to ask themselves, then, as an investor, when do you bet on the up-tick in the sector? TPG (The Financial Group) Financial Partners is apparently indicating that that time is now with, what it hopes will be, a $7 billion bet.

With $100 million already raised, TPG says that it will seek both minority and controlling stakes in financial firms that have been hurt by the latest woes in the financials sector. With many still expecting things to get a lot worse, their timing may be flawed, but the strategy does make sense on the whole.

Another interesting tidbit in this story is where the money is coming from. One of its investors is the Government of Singapore Investment Corp.'s private equity arm - it's a little concerning to see foreign dollars flowing into such deals; is foreign ownership of America's banks a good long term prospect for Americans. Unfortunately, with Americans' debt levels at all-time peaks and savings rates and all-time lows, it doesn't seem as though the money is going to come from home. America's appetite for consumption may result in a very expensive bill at the end of the day with the rest of the world cashing-in.

Yahoo to MS: Buy us or we'll go with Google

That's right, it seems as though Mr. Carl Icahn's pressure-play on Yang-and-Board has worked; Yahoo! now seems to be willing to hear all offers. Moreover, it appears as though that Yahoo! will make one deal or another and, funny enough, the pressure now seems to be on Microsoft to close the deal or risk losing-out on any possible relationship with its target.

Microsoft's initial bid at $31 was quickly sweetened to $33 per share before being withdrawn in spectacular fashion a few weeks ago. The media, including lowly bloggers such as yours truly, have been talking about it (and scratching their heads) ever since. The deal seemed to be a smart move for everyone involved and the price seemed to be good enough to have all the major shareholders nodding up-and-down like mad. Much of the reason for the failure of the deal the first time around has been credited to the egos of the co-founders at Yahoo including Jerry Yang, it's current CEO. With pressure building from the likes of Carl Icahn, the activist investor, have shed such a big spot light on the deal that it seems as though Yahoo!'s Board has been left with no other option that look for any deal that will get them off their backs.

Microsoft re-approached Yahoo! shortly after the failure of the buyout offer with a complex partnership proposal that would see them working together on advertising - this came quickly after news surfaced that Google was working with Yahoo! on a very similar deal. It now seems that Yahoo! prefers the partnership proposal offered by Google, but would ultimately seek a satisfactory buyout offer from Microsoft. At the end of the day, Microsoft may get what it always wanted in the form of an acquisition, but it seems to be that if their next attempt doesn't work, they won't have another bite at the apple.

Ok, Deal. But which one of us will be the boss?

What would have been the biggest M&A deal in the emerging markets, the union between Bharti Airtel of India and MTN Group of South Africa, has fallen apart. The deal that was worth approximately $50 billion deteriorated after the management of both companies had already agreed to a MTN-led entity; Airtel surprised everyone by changing their minds and suggesting that they would purchase MTN instead - making MTN Group the subsidiary of the new-to-be company rather than vice versa.

One can't help but look at this and think of the continuing saga between Microsoft and Yahoo! Don't see the similarity? Think about it this way: are the decisions being made with the interests of shareholders in mind or with egos and personal ambitions as the priority? Exactly. As with the MS-Yahoo! deal, the stocks of both companies will be punished following this decision and the chairmen of both companies, like Mr. Yang, are likely to have a blow to their egos far greater than that that they were attempting to avoid.

Google Isn't Done with Yahoo! Just Yet.

As much as Microsoft would like this saga to end, I don't think that there's anyone who believes that we're anywhere near the last chapter in this story. While Microsoft has re initiated discussions with Yahoo! in hopes of forming some kind of partnership after the failure of its initial buyout bid, Google is holding strong on its own deal with Yahoo!. With as much as $1 billion on the table for Yahoo!, it may be difficult to exclude Google's proposed advertising collaboration from the picture.

Not surprisingly, of course, antitrust concerns have surfaced with talk of the possibility that the two largest online advertising giants could unite, but Google is adamant that it can work out a model that would not threaten the competitive landscape. To their credit, there is a fair bit of precedent on which to lean on. Canon, for example, supplies 80% of the laser printer market ...including its #1 competitor Hewlett-Packard or Toyota selling its hybrid technology to its competition. Similarly, Google foresees a partnership that would leave Yahoo! independent, but allow it to leverage its superior advertising technology and broader advertiser base to help its bottom line.

With Yahoo!'s board announcing that it has postponed its annual meeting once again, there's no doubt that Jerry Yang, its CEO, have a lot to consider. The likes of Carl Icahn and Boone Pickens, with 10 million shares each and calling for a new board, aren't making things any easier for them either. From an outsider's (and investor's) perspective, however, it's hard to see how Yahoo! will not win in the end regardless of the outcome. Is this not the time to buy?

BCE Buyout Dead; Is Telus its Only Hope?

The biggest proposed buyout is dead after a ruling by the Canadian courts. Bond holders in Bell Canada Enterprises (BCE) appear to have won against the syndicate of private equity firms that were looking to buy the monolith for a total of $51.8 billion dollars - making it the largest LBO ever - at least it would have been. With the 5% decline in it's stock price following the request of financing banks to renegotiate the terms of the loans, the market appeared to have seen what lay ahead, but now what?

The fact that BCE is in dire straights has not changed. Almost as soon as the PE deal collapsed, talk of Telus, the largest telecommunications provider in Western Canada, may step-in to save the day. Telus had considered BCE about a year-back, but walked away when it wasn't granted access to internal financial records. Even if it does choose to give this deal a second look, there's no doubt that there would be competition concerns with the entire Canadian market being essentially divided between only these two firms and Rogers Communications.

Bell has said that it will appeal the decision to the nation's Supreme Court, but there's no way of knowing whether the court will even hear the case - the decision, at least according to the appeals court - is consistent with previous decisions. Bond holders, for the time being, appear to have won their case and have kept the company from assuming even greater debt and increasing its financial risk, but will their interests be ultimately served if the company can't meet those existing obligations?

VC Firms Fighting Over Twitter? Really?

Twitter, the so-called micro-blogging service, is the subject of quite a lot of venture capital interest these days. The bidding war that is apparently developing over the financing of its next round will leave it with a valuation of about $70 million. Really? $70 million?

Ok, I realize that it's managed to attract quite a following and eyeballs do mean advertising revenue bucks, but I just don't get the appeal. Are there really that many people interested in following every move their friends make?

If you're not already aware of it, or god-forbid a user, Twitter allows you to track the minute-by-minute moves your friends make. Their website explains it as follows:

Twitter is a service for friends, family, and co–workers to communicate and stay connected through the exchange of quick, frequent answers to one simple question: What are you doing?

I'll admit that it's an original, if not interesting, idea. But a business? It really makes you wonder sometimes about how many better business ideas lost-out on financing because the money went to ventures such as Twitter. Am I being too harsh? Do I just not get it?

Disney Seeks Another $200 million for its Third Steamboat Fund

Just as the headline says, Disney is sourcing $200 million to fill-up its third fund as part of its Steamboat Ventures venture capital arm. Focused on the European market with specific interest in digital media companies, it's a fun VC firm to watch. Ranging from social networking start-ups to mobile services, Steamboat concentrates its investments on those, not surprisingly, that leverage its parent company's empire. C'mon; admit it. You love their logo too.

Pickens follows Icahn into Yahoo!; What does it mean?

I happened to be watching CNBC when it happened: Boone Pickens, the many best known for his winning bets in oil and gas (and more recently wind power) has follows Mr. Carl Icahn into Yahoo! with a similarly 10 million-share bet (about $275 million). Of course, with investors on the sidelines waiting to see what happens next, many have read into Mr. Pickens purchase in the hopes of gaining an insight into what insiders might know.

When asked, during his interview, how he felt about the Microsoft-Yahoo! saga, unfortunately, Mr. Pickens revealed that his only reason for investing was Mr. Icahn's interest in it and "that's enough" for him. So, should that be enough for the rest of us as well?

Carl Icahn does have approximately 50 million options on Yahoo! in addition to his shares so there's no question about his commitment to this deal and his expectations of how it will ultimately conclude. Are we indecisive investors waiting for some additional confirmation going to regret not following Mr. Pickens' trust in Mr. Icahn's ability to get the deal done?

Energy Fund's Public Offering Less Than Well Received

Eric Sprott's Sprott Inc. went public late last week at a price of $10 per share on an issue of about 16% of the total equity in the firm and proceeded to dip by as much as $0.50 and ended the week (before the Canadian long weekend) down $0.23. Having raised $200 million, this gives Mr. Sprott's firm a valuation of approximately $1.5 billion, which is great, but also leaves Mr. Sprott scratching his head as to the cause of the dip.

Mr. Sprott said, in an interview with the Globe and Mail newspaper, that he believed the less-than-stellar result in the companies first public showing to be the result of short-sellers betting against his company. What's surprising about this, however, is that even a freshman finance student knows that that's quite unlikely to be the case with any IPO. Short-selling requires a stock to be borrowed and then sold in order to profit from any decline in the stock's price. However, an IPO means that the stock is just entering the market and is unlikely to be available in brokerage accounts for any borrowing to take place. Consequently, many believe that the true cause of the fall in Sprott Inc.'s stock price is due to its fundamentals.

As a hedge fund betting on metals and energy, Sprott Inc. is certainly in the industries making the news these days. That said, they're making the news because their prices are constantly breaking record highs and many are questioning for how much longer this trend can continue. Ask Mr. Sprott and you're sure to get the answer that you'd expect, but apparently the market sees things differently and are valuing the fund at less than what Mr. Sprott had anticipated. Beyond the impact to Sprott Inc., this result has interesting implications for the economy as a whole; what is happening with the energy industry and how much longer can this go on. Is it, in fact, time to go short or do you believe some reports that gasoline may soon see double-digit prices per gallon at the pumps?

When Debt is In Doubt

Aquiline Capital Partners, the private equity firm run by former Marsh & McClennan chief, Jeffrey Greenbert, has spun off a new commercial financing arm to put some of its capital to use. Tygris Commercial Finance Group, will launch with two deals already on its books in the form of to all-equity-financed buyouts of a leasing company and a healthcare equipment manufacturer.

This is a great example of why everyone looks at PE firms with awe; they're motivated to come-up with deals no matter what the economy is doing. With reports of the largest leveraged buyout deal (BCE here in Canada) put on hold with banks wanting to renegotiate their lending rates, you have firms like Aquiline refusing to squabble over spare change and putting $1.75 billion of capital raised via equity commitments to work.

BCE Shares Tumble 5% Even on a Holiday

A holiday hasn't protected BCE shares in Canada. It's Victoria's Day today, but BCE shares fell 5% on the New York Stock Exchange on news that the financing parters in the deal are looking to renegotiate the rates to which they previously committed. With $51.8 Billion at stake, this represents the biggest proposed leveraged buyout (LBO) deal ever and it's no wonder that these second-thoughts have investors running.

The risk in such a deal is obvious in even optimistic market conditions; with the current state of the economy in a less than optimal position, banks are working to take-on only the best loans, which has worked to keep most Venture Capitalists scrambling for alternative deals. News of the BCE LBO was news in an of itself and news of its possible insecurity even more so.

The Ontario Teachers' Pension Plan, Toronto-Dominon (TD) Bank, Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch are all in on the deal and working with Citigroup, Deutsche Bank and the Royal Bank of Scotland for financing the deal. With the price now almost $10 per share (at $32.94 today) lower than the original offer price for the company, the general market consensus seems to be that the deal will be reevaluated lower rather than collapse entirely. No matter what, with numbers this big, it's a deal to watch.

Tesla Motors IPO expected later this year

Mr. Elon Musk, Chairman of Tesla Motors, says that he believes that the company will be able to raise as much as $100 million in an IPO later this year; this, in an economy that has others cancelling their public offerings in light of declining growth and expectations.

Tesla, backed by some big names, has had some great publicity that many analysts believe will help them with a successful offering irrespective of the economy. Mr. Musk, himself, a co-founder of Paypal (now owned by eBay) has rounded up investor support from others such as Sergey Brin and Larry Page who have already placed orders for their own Tesla cars - all of which has helped attract attention to the company's all-electric sports cars.

Mr. Musk suggested that the company will seek one more round of funding to help bridge its plans for developing its whispered-about luxury model before pushing for the IPO. With its current, standard, model fetching about $100,000, the price of its luxury model will not be cheap. Of course, with the public's ongoing penchant for all-things-green, there's little doubt that it's Lotus Elan-inspired model will continue to turn heads and empty wallets.

Search Engine with No Website Gets ANOTHER $3 Million

No website (or logo, as a matter of fact), but that hasn't stopped all the original investors in Blekko from putting-up yet another $3 million dollars for the would-be challeger to Google. By all accounts, Rich Skrenta, is very media savvy and isn't giving-up any details about their technology beyond criticizing Google's invention of Page Rank and confirmation that they aren't following suit.

With backing from the likes of former Google executives, Netscape's Marc Andreesen as well as Venture Capital firms of the like of Baseline Ventures, SoftTech VC and Western Technology Investments, they must have something pretty good up their sleeves. Except for SoftTech and Western Technology Investments, everyone investing in this round also invested in their seed round that raised $2 million for the 6-person team working out of their garage in true-start-up style!

They aren't alone, of course, with many other challengers to Google waiting in the wings to reveal their secret sauce. The only notable thing about this story, really, is Skrenta's ability to apparently convince sophisticated investors that he's got something worthwhile. Maybe more than that, his ability to get folks like me to write about it without having anything to actually look at until their expected launch sometime in 2009. Any who said an idea, unto itself, isn't worth anything?

Apollo's Ego Hurt with IPO down 23% in Debut

It's not often that you hear about a losing IPO so I though that I would highlight Apollo's experience with Verso Paper that fell 23% in its market debut today. It was originally priced at between $16 and $18 and ultimately hit the market at $12 and proceeded to fall to a market close of less than $10 per share. That hurts.

Verso Paper, formed by Apollo Global Management in August of last year as part of a spin off from International Paper Co. Producing the thin, but glossy, paper products that are used in magazines, there's not doubt that it's been struggling in recent years. That said, Verso has reported profits for its most recent quarter following significant losses prior. The spin-off, then, seems to have been a prudent move - allowing the new management team to streamline its operations and refocus its business.

Don't worry, Apollo is still making a good buck on the deal. The original price of about $17 per share would have represented a doubling of its investment, so even a valuation at $10 is profitable if not just a little ego-busting. If you'd like to track it going forward, it's on the NYSE under ticker symbol: VRS

Carlyle Group Goes Back to its Roots in D.C.

The Carlyle Group, one of the largest private equity firms and probably one of the most criticized, is purchasing the government consulting arm of Booz Allen Hamilton in a deal worth $2.5 billion. With its history as a Washington insider, this may represent a move back to what it knows in light of tighter credit and fewer LBO deals available for its managers to stay occupied.

Known for placing politicians on the boards of its companies and having the likes of former President George Bush on its payroll have made The Carlyle Group a favorite target for many who undercut its financial prowess to make good deals favoring, instead, to use its influence to be in the right place at the right time. Whether admitting to this or not, it certainly seemed as though they took note of their image and made strides to polish-it-up.

In the past few years it has asked the Bin-Laden family to divest from its firm (yes, those Bin-Ladens), has removed both former President Bush and former Prime Minister John Major of the UK from its payroll as well as reduced its stake in military and aerospace projects from a high of 20% to a current 6% of its total portfolio. So what does its purchase of a government consulting firm mean for its future?

Based on its spokesperson, the deal just makes business sense - pure and simple - and has nothing to do with its prior or current corporate image. On a more down-to-earth note, however, it's likely going back to its roots in light of a drought in the capital markets making new leveraged buyout deals more difficult to come by - at least the 'leveraged' part, anyway.

Public Private Equity?

When does a company go public? The simple answer is whenever its private owners feel that they can get the most for their shares. Elaborating a little further, you might also time it such that it precedes a decline in the value of those shares. Well, private equity firms are no different.

Coming off of a great run starting shortly after the dot-com bubble burst earlier this decade, private equity firms are lining-up at the SEC to file their registrations for public offering. The Blackstone Group already went public and now KKR and Apollo are set to go next. There is no doubt that the partners behind these firms know exactly what they're doing, but there is a something to be said for the dilution of those firms' mission statements that follows their IPOs.

Harvard Business School professor Josh Lerner said it well in a Fortune magazine article this month. Going public necessarily means that the firm's management must now begin to focus on what it never had to consider in the past: the quarterly reports. While benign unto themselves, the implications are profound.

Quarterly reports, as we all know, are scrutinzed to no end. Markets rise and fall with the slightest deviation from expectations. Consequently, management does all that it can to meet or exceed those expecations. However, it must do so in consideration of the fact that it must repeat that same feat only 3-months later all over again. The result, as you might expect, is a steadying of the earnings to ensure consistent returns and profits. While this is, of course, a sound business practice, this does seem to go against the general reasons for which people seek venture capital as part of their investment portfolios in the first place. If we wanted steady returns and lower-risk, then wouldn't we go elsewhere?

In the end, this is likely just an example of the life cycle of any company. While it may leave us private equity fans just a little saddened, it's probably only fair to not suggest that these firms should behave any differently than any other. It's just that private equity firms are our heroes. They do the deals that make headlines and form the basis of great books, magazine articles and sometimes movies. When is the last time you watched a movie about a bank lending some money? Exactly.

Never a Bad Time to Invest

When the stock market is hot, everyone seems to be making money. When it's down, on the other hand, it seems everyone is telling you that now is the time to invest so as to make a bundle as soon as things pick-up again. Is it ever a bad time to invest?

According to buyout firms, the answer appears to be no. Moreover, history seems to back-up their claims showing that returns on these private equity funds return far superior rates beginning from the year of the bubble and over the following two-years. Remember the popping bubble in 2000? Well, would you be surprised to hear that 2001 through 2002 resulted in returns of 33%, 29% and 31% in each year respectively?

I read a great little two-liner about how private equity firms view the market - regardless of its position in the business cycle. If a company is worth more in private hands than it is in public hands, then there's money to be made in performing a buyout. If the reverse is true and a company is worth more as a public entity, then there's money to be made in going-public. No matter what, you see, there's always money to be made.

Double Cropping - A Second Bite At The Apple

It will come as no surprise to many people that banks make money in every market - regardless of whether its up or down. Venture capitalists are no different, but they may very well be more innovative.

Let's assume that you're a venture capitalist that has plenty of money floating around, but you can't seem to find anything worthwhile in which to invest. You still need to satisfy all those investors with the same, or similarly, high returns, so what options do you have? The answer, at least today, is double cropping.

Double cropping is the practice of lending back the money you just borrowed, at higher rates of course, backed by the same underlying assets. Remember that bank that lent you all that cash for your last buyout? Those banks had planned to sell your loan to other financial institutions, but when the credit crunch arrived, they found themselves holding the bag. Still wanting to unload the loans, they're now offering them at below face value. That's right, you can send the money that the banks just gave you right back into their pockets, but at less than it originally cost you in the first place. There is a catch, but it's a good one - if you're the VC, that is.

To avoid all the complications resulting from legal paperwork and taxes, you don't actually buy the debt, but rather engage in a swap; a Total Return Swap to be more precise. This is the act of paying a small portion of the total face value now and agreeing to pay some rate of return on the balance of the below-face-value asset (our own loan). In exchange, we'll get back the interest and principle promised on the original loan - yes, that's the interest and principle that we're paying them... until now! The end result is cheaper money as well as less risk.

Why less risk? The asset, the loan in our case, is backed by the venture for which the bank originally made the deal. If those loans turn out to be worthless, then it's still the bank that's on the hook for the full amount. The only thing to which we've committed is the payments on the balance of the below-face-value loan.

A great example of just such a case is Citibanks 'sale' of $12 billion of buyout loans back to Apollo, TPG and Blackstone. The firms put-up $3 billion cash and then agreed to pay a ridiculously low rate of 1% on the balance of $7.8 billion - yes, that's only a total of $10.8 billion for something with a face value of $12 billion. Can you say easy money?