Top of the Class in Deal-Making

Let’s see the Deal makers of 2011. Here are the highlights: 

Attachmate Group/Novell: The $2.2 billion deal involved the innovative sale of certain Novell’s intellectual property assets to CPTN Holdings, a company organized by Microsoft and a number of other technology companies. The deal, along with Google’s $12.5 billion acquisition of Motorola Mobility, showed that technology companies were willing to pay dearly to acquire intellectual property assets. Deal makers were more than willing to leverage this desire.

Berkshire Hathaway/Lubrizol: Warren E. Buffett yet again shows that not only does he do deals fast, but that they usually fall into his lap like manna from heaven. Like Buffett targets of years past, Lubrizol seemed to be quite captivated by Mr. Buffett and willing to sell quickly. Mr. Buffett receives an A for showing not only his skill at capturing bargains, but navigating this deal through a scandal involving a former Berkshire executive, David Sokol.

Carlyle/Diversified Machine/Platinum Equity: The Carlyle Group bought this automotive supply manufacturer out of bankruptcy in 2005. During a six-year period, Carlyle increased the company’s revenue 4.5 times, and the company’s employee headcount went to more than 2,200 employees from about 525. Carlyle sold Diversified to Platinum for an undisclosed purchase price but was reportedly seeking about $400 million for the asset. Carlyle wins the inaugural Teddy Forstmann memorial private equity value creation award.

Caterpillar/Bucyrus International: Caterpillar wins a significant asset and just as important wins Chinese antitrust approval — after 143 days, almost two months after obtaining clearances from European Union and United States regulators. The deal underscores the increasing importance of Chinese antitrust clearance in global mergers and acquisitions.

ChemChina/Koors/Makhteshim: China National Chemical, or ChemChina, in partnership with Koor Industries of Israel buys 60 percent of an Israeli agricultural chemical company, Makhteshim. The deal valued at $2.4 billion was one of the largest outbound investments by China ever, and showed that the country was on the prowl internationally for crucial suppliers. In light of American efforts to block many Chinese deals on national security grounds, Chinese money is being directed elsewhere.

China Fire and Security/Bain; China Security and Surveillance/GuoshenTu; Funtalk China Holdings/Insider-Led Consortium; Harbin Electric/Tianfu Yang and Abax Global: Many a Chinese deal was hit by short-sellers who sought to bet on uncertainty over China and the accounting of its companies. None of these deals were pretty, but they all managed to get completed despite this turbulence, beginning a mini-wave of Chinese companies reversing United States market listings to go private.

Exco/Management Buyout: The independent directors of Exco Resources get an A for standing up to the chief executive, Doug Miller, who proposed a management buyout at $20.50 a share, later lowering it to an $18.50 offer consisting of $13.50 in cash and $5 in “minority interests” equity. Mr. Miller had previously taken the company private once before, and the board decided in July to reject his second effort. The Exco independent directors stand in marked contrast to boards like J.Crew’s, which failed to stand up to a chief executive’s effort to buy the company. Mr. Miller gets an F for trying the same old trick twice.

Frontier Oil/Holly: If you terminate your deal in 2003 and each side ends up suing each other, try again in 2011, this time reversing buyer and seller. This one gets the Elizabeth Taylor/Richard Burton optimism award.

Fundtech/S-1/GTCR/ACI: S1 and Fundtech had agreed to combine in a stock-for-stock merger valued at about $318 million. Each soon received its own unsolicited offer to be acquired. S1 and Fundtech terminated their deal, with S1 being acquired by ACI and Fundtech going to GTCR. The deals showed the rare ability of a bidder to top a stock-for-stock deal and not only disrupt it but end up on the winning end.

Scott Eells/Bloomberg NewsJames Gorman, chief of Morgan Stanley.

Groupon IPO :  It is all about perspective. The investment bankers, led by Morgan Stanley, get an A for pushing through an initial public offering at a high price despite all the turbulence. But F’s abound here also, including to Groupon itself for its iffy accounting and to its chief executive, Andrew Mason, for nearly torpedoing the I.P.O. by appearing to violate Securities and Exchange Commission rules requiring a company to be quiet just before its initial public offering.

Hertz/Avis/Dollar Thrifty: In a deal hung over from 2010, Dollar Thrifty shareholders reaped the benefit of saying no to Hertz even after a second broken auction. Dollar Thrifty shares are now trading at about $69.86 after Hertz’s offer in the low $50s was voted down. Along with Airgas, whose shares are $79.65, well above the $70 a share offered by Air Products, these companies made the right decision compared with, say, Yahoo which spurned Microsoft’s advances in 2008. Avis, meanwhile, was able to scoop up Avis Europe at an attractive price by leveraging Avis Europe’s fears that if Avis completed a Dollar Thrifty deal, it would not have capacity or desire to do Avis Europe deal for a long time.

International Paper/Temple-Inland: International Paper shows that after Airgas, a hostile bid against a company with a staggered board and poison pill can succeed. You just need to act fast and pay a high price. It is just that easy.

iGate/Patni Computer Systems: iGate, an Indian-based outsourcing company, partnered with Apax Partners to acquire another Indian company, Patni, in a $1.2 billion deal. The acquisition was one of the largest leveraged buyouts in India ever, and one of the first to tap the high yield debt market in the United States.

Microsoft/Silver Lake Partners/Skype: Silver Lake Partners turned an amazing profit by buying a 70 percent interest in Skype for $1.9 billion from eBay. Silver Lake flipped eBay’s orphan 18 months later to Microsoft for $8.5 billion. It remains to be seen if Microsoft will similarly profit, but the deal also allowed Microsoft to put its $42 billion foreign cash pile to work buying Skype, which is based in Luxembourg.

Oracle/Art Technology Group: Oracle wins the speed award for finishing this cash merger deal announced in 2010 in 63 days, a month earlier than usual. The deal would have closed even earlier but the Delaware Chancery Court enjoined the ART Technology special meeting for 14 days in order for ART Technologies to make additional disclosures. The deal shows that in some cases a merger can almost be as quick as a tender offer structure.

Ramius/Royalty Pharma/Cypress Bioscience: An activist hedge fund puts its money where its mouth is. Ramius Value & Opportunity Advisors ends up teaming with Royal Pharma to buy Cypress for $255 million. The acquisition came after almost six months of back and forth started by Ramius making an offer to buy the entire company. The buyout group paid a 160 percent premium to Cyprus’s share price the day before Ramius first announced its offer.

Renaissance Learning/Permira: A private equity bidding war broke out between Permira and Plato Learning, a portfolio company of Thoma Bravo and HarbourVest, over Renaissance. But Renaissance’s co-founders, Terrance and Judith Paul, who owned 69 percent of Renaissance, refused to countenance a Plato bid. The result: Renaissance public shareholders lost out when Plato offered $18 a share to the public holders against a bid of $16.60 a share from Permira. The Pauls, in a rare case of charity by a controlling shareholders, took only $15 a share. The Pauls receive an A for their generosity in wanting to preserve Renaissance’s headquarters in Wisconsin. The lawyers on the deal (Godfrey & Kahn and Sidley Austin for Renaissance and Skadden, Arps, Slate, Meagher & Flom for Permira) also deserve an A for forcing through a clever structure intended to take advantage of Renaissance’s incorporation in Wisconsin and the unique laws there. For public shareholders however, this deal is an F.

Teva Pharmaceutical Industries/Cephalon: Teva made a quick strike to buy Cephalon for $6.8 billion after a hostile bidder, Valeant Pharmaceuticals, opened up the opportunity. Teva showed the value of opportunistic and quick action in deal-making, winning the Bruce Wasserstein “Dare to Be Great” award.

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The Dawn of the Social Networking Era

Investor enthusiasm for Internet-based businesses has fueled not only rapid growth in the market for IPOS but also has created millionaires. Morgan Stanley has become the “Big Daddy” of Wall Street for these internet IPOs with JP Morgan and Goldman rapidy closing in.

The daily news flashes of the internet stocks reminds me of the dot-com bubble of the late 1990s that marked an era of rapidly increasing stock prices, market confidence that highly speculated the company profits, individual speculation in stocks and widely available venture capital that created an environment in which many investors were willing to overlook traditional metrics such as P/E ratio in favor of feigned confidence in technological advancements.

Speculation is said to be the mother of all Evils and as consequence the bubble had to burst and many internet companies could not weather the financial burden and many were forced to file for bankruptcy. So, booming IPOs of companies such as LinkedIn and likely Groupon, Facebook and Zynga are creating another tech bubble??...We have to wait and see what the future has in it.

The point is that investors are hungry for growth and so perhaps are chasing the fast-growing tech names. Hence, it’s almost hard to blame them. Investors are paying very full prices for tech stock debutantes. The market analyst point out that public-market investors “are paying for what they think companies are worth in 2015, not in 2011”. So, are they become too greedy and shortsighted to make short term profits? No. It’s the dawn of the social networking era and as far as greed is concerned, I can recollect what the Legendary Gordon Gecko of the famous Wall Street movie (1987) said at the Annual Shareholders meeting of Teldar paper:  “Greed is good. Greed clarifies, cuts through and captures the essence of the evolutionary spirits. Greed in all forms: greed for life, greed for money, greed for love and greed for knowledge has marked the upwards surge of the mankind”

Linkedin had its extravagant debut in May and the investor response was far beyond the market expectation. It reached a share price of $122 on the first trading day itself. I have been continuously monitoring Linkedin for the past two weeks and its share price has changed 56% when compared Monday July 11^th close (101.30) to that of June 23^rd ($65.8). The Market Cap has peaked to $9.63 billion as of Monday July 11^th, 2011. In another recent development Linkedin has surpassed slumping Myspace as the second-most popular online social network in the US in terms of Web traffic behind Facebook . Although Myspace still has an estimated 130 million active users, compared with roughly 115 million for LinkedIn. Linkedin seems to be crushing other professional networking sites just as Facebook is doing the same for the more social of the social networking sites. However, not even Linkedin and Facebook seem to have nailed down a solid business or revenue model just yet. With the lining of IPOs of Zynga, Groupon and Nexon, I think the market is set for huge IPO of Facebook,  the dominant social-networking company expected to go public next year at a valuation of over $100 billion. These valuation may seemed a little skewed with Google+ entering the space with new features and new strategies….So, investors are betting high on the social networking sites…..

Check out the space for more on internet IPOs and the debut of Zynga, Groupon and Nexon…….

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Forward P/E or trailing P/E?

The forward P/E is based on what the company is expected to earn a year in the future. And the trailing P/E is based on what the company earned in the previous year. The difference between a trailing and forward P/E can be dramatic.

Which P/E should you pay attention to? The answer is, both. It's especially important now to consider both because future earnings are so unpredictable.

Rather than trying to pick which P/E ratio to use, compare them with each other. If you see a big difference between the two, you might learn more about the company's valuation if you find out why the forward and trailing P/E are so different.

For instance, if you notice that a stock has a high double-digit trailing P/E and a low forward P/E, you know that analysts are predicting earnings to recover sharply, but investors aren't believing the estimates yet. In that situation, if the company delivers as analysts hope, there could be a nice upside for the stock.

Similarly, if a stock's trailing P/E is low but the forward P/E is high, it might be a clue that analysts are being extremely bearish about the company's future, which might be a warning to you. On the other hand, this situation might mean investors are being overly optimistic about a stock's future, and they could be in for a rude awakening.

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Barclays Plannig to Relocate??

An analyst report has renewed speculation among some investors that the British bank Barclays might leave London for New York.

The report, published by two UBS analysts titled “The first to leave?”, gives a list of reasons why there apparently is “little option for Barclays but to reconsider domicile.”

Executives of large British banks, including HSBC, Standard Chartered and Barclays, had been threatening to move their headquarters abroad ever since a government-appointed banking commission here hinted it would consider splitting investment and retail banking to make Britain’s financial sector more stable.

The warnings were widely seen as a tactic by the banks to scare the government into abandoning plans for stricter financial regulation. The chief executive of Barclays, Robert E. Diamond Jr., was among banking executives who recently declared their firms’ commitment to Britain.

“Concern over ‘too big to fail’ dominates the U.K. regulatory agenda but rather than Barclays being too big, it may well be that the U.K. is too small”

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Warner Music Plans to be Bought: Hires Goldman for the Task

Warner Music Group, one of the four major record companies, has hired the investment bank Goldman Sachs to seek out potential buyers for the company, a process that will play out while Warner continues to explore buying the beleaguered British music giant EMI.

The decision to hire Goldman Sachs came after several suitors, including the buyout firm Kohlberg Kravis Roberts, approached Warner Music’s management in recent months about buying the company. Instead of negotiating solely with K.K.R., the company’s management decided to begin a formal sale process by hiring Goldman, which has recently begun making pitches to financial investors and media companies about buying Warner.

One possible outcome of the auction is for Warner to sell not the entire company but only Warner/Chappell, its prized publishing arm. Meanwhile, a separate set of bankers within Goldman has been working on a potential acquisition of EMI by Warner. Goldman has reached out to Citigroup, which owns a large amount of EMI’s debt and could soon control the company if it fails to meet its payments.

 The unusual two-track process of Warner seeking to buy while also exploring selling out to new investors underscores the desire of Warner’s private equity owners to either make a big strategic move and double down on the music business by buying EMI, or cash out. They acquired the company from Time Warner more than seven years ago — a long time frame for private equity investors, who normally prefer to own a company for three to five years before selling.

K.K.R’s interest in Warner is related to expanding a joint venture it owns with Bertelsmann to license music rights. K.K.R. had been in talks with Warner Music about engineering a joint bid for EMI, but those discussions then turned toward K.K.R. buying Warner outright.

Warner Music, whose artist roster includes Kid Rock, Green Day and Bruno Mars, is the only pure music company that is publicly traded. Others, such as Universal Music and Sony Music, are part of much larger conglomerates.

According to the International Federation of the Phonographic Industry, which measures music sales globally, sales of music declined nearly 23 percent between 2005 and 2009. Over that time, Warner’s revenue declined much less — around 9 percent.

With the rise of the file-sharing Web site Napster in the late 1990s, the music industry was the first slice of the media business to see its economics disrupted by the digital age, and by the time Mr. Bronfman and his group bought Warner, that trend was clear. The decline of newspapers followed the diminishment of the music industry, and more recently the economics of television and film have also come under pressure from the Internet.

But unlike, say, newspapers and magazines, the music industry has embraced a durable model to get paid for selling music online through services such as Apple’s iTunes Store — even if revenue has declined and piracy remains rampant.

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Sanofi-Genzyme Update: Deal Talks Progress

Sanofi-Aventis and Genzyme are continuing to hold talks about a potential merger that would eventually value Genzyme at more than Sanofi’s current $69-a-share offer. Representatives for the two drug makers are continuing to center on the potential use of a contingent value right, in which a buyer agrees to make additional payments if its target reaches certain milestones.

In Genzyme’s case, the C.V.R. would be tied to Campath, a drug meant to treat leukemia but also being tested for its uses against multiple sclerosis. It isn’t clear how much the C.V.R. would ultimately be worth, though one person said that any deal’s initial value would be well below the $80-a-share.

Still, the two sides have continued talks, months after Sanofi took its $69-a-share offer public after being rebuffed by Genzyme’s board. Sanofi’s current tender offer for Genzyme shares, already renewed once, expires on Jan. 21, though it may be extended yet again.

At the least, the talks could give the two companies’ chief executives something to talk about next week: Both Chris Viehbacher of Sanofi and Henri Termeer of Genzyme are scheduled to speak at a JPMorgan Chase health care conference in San Francisco.

Read the previous article on Sanofi-Genzyme Deal..

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The Facebook-Microsoft Parallels

A computer prodigy drops out of Harvard and builds one of America’s hottest companies. He brings on an M.B.A. to help him think about things other than programming. He wants to keep his very profitable company private. But as his company grows, he begins distributing shares to his ever-increasing employee base. This gives his company more than 499 shareholders and forces him to consider an initial public offering. The investment bank Goldman Sachs plays a major role in the I.P.O.

This isn’t Mark Zuckerberg in 2011. It’s Bill Gates in 1986.

Twenty-five years ago, Mr. Gates was dealing with uncannily similar issues to the ones facing Mr. Zuckerberg today. And Goldman was wooing Mr. Gates and his decade-old Seattle software company, Microsoft, in much the same way that it has romanced Mr. Zuckerberg and his fellow Facebook executives.  Goldman has invested $450 million in Facebook at a $50 billion valuation and is raising a pool of capital from its clients to invest alongside the firm. All this likely makes Goldman the lead candidate to handle Facebook’s I.P.O., now expected sometime next year.

To attract managers and virtuoso programmers, Gates had been selling them shares and granting stock options. By 1987, Microsoft estimated, over 500 people would own shares, enough to force the company to register with the SEC . Once registered, the stock in effect would have a public market, but one so narrow that trading would be difficult. Since it would have to register anyway, Microsoft might as well sell enough shares to enough investors to create a liquid market, and Gates had said that 1986 might be the year.

Mr. Gates’s chief financial officer, Frank Gaudette, held a beauty contest to choose an investment bank to handle its debut. A few years earlier, Mr. Gates had recruited another business-minded executive, Steve Ballmer, to join the company.

Among the major houses, Gaudette had been most impressed by Goldman Sachs, which tightly links its underwriting group with its stock traders and keeps close tabs on the identity of big institutional buyers. For those reasons, Gaudette thought Goldman would be especially good at maintaining an orderly market as Microsoft employees gradually cashed in their shares.

Mr. Gaudette called Eff W. Martin, a young Goldman banker in San Francisco who had been calling on Microsoft for two years, reported Fortune. He invited Martin and his Goldman colleagues to a dinner in Seattle to meet Mr. Gates. The dinner was awkward and it was not until talk turned to pricing the company’s stock that Gates folded his arms across his chest and started rocking to and fro, a sure sign of interest. At the end of dinner, Martin, striving to conclude on a high note, gushed that Microsoft could have the ‘most visible initial public offering of 1986 — or ever. Well, they didn’t spill their food and they seemed like nice guys.  Mr. Gates drawled to his colleagues afterward in the parking lot and said  “‘I guess we should go with them.’”

On March 13, 1986, Microsoft had a hugely successful I.P.O. Priced at $21 a share, the stock spiked to $35.50 before closing at $27.75. The Microsoft chief financial officer called Seattle from the Goldman trading floor: “It’s wild! I’ve never seen anything like it — every last person here is trading Microsoft and nothing else.”  The I.P.O. put a $350 million value on Mr. Gates’s 45 percent stake, making him one of the wealthiest men in America at 30 years old.

About a year from now, if all goes as Facebook and Goldman plan, expect a similar scene at 200 West — the investment bank’s new state-of-the-art headquarters in Lower Manhattan.  We can see it now. The firm’s chief executive, Lloyd C. Blankfein, and his team of traders will be wearing hoodies in Mr. Zuckerberg’s honor. Mr. Zuckerberg, already jaded at 27, might not be there, but his No. 2, Sheryl Sandberg, a Harvard M.B.A., surely will.

Everyone will be happy, and very, very rich.

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