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?