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Daily Briefing: Trading Probe

As if the acrimony surrounding M&A after the spectacular fall of private equity in the second half of last year wasn’t enough to swallow heading into 2008, the Wall Street Journal now reports regulators are investigating investment banks’ trading of shares in companies for which they were setting up deals. They report is based on an academic study that found curious trading patterns it associated with M&A activity, the Wall Street Journal reports. The study says some banks likely are trading on their inside information about deals, according to the Journal, which says it is not clear what deals regulators are looking at. The Journal did its own analysis and said it identified dozens of instances in which investment banks appeared to be buying shares in target companies around the same time the banks were advising the acquirers. 'The transactions involved most of the major investment banks, including Citigroup Inc., Credit Suisse Group, Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley. The firms either declined to comment or said they found no problems with the trading,” it said.The Journal also reports that Chinese government opposition may scupper Citigroup Inc’s plans to raise capital by selling a $2 billion stake to China Development Bank. The report, quoting a person familiar with the situation, said the problems surfaced over the weekend, but said it was not clear whether the deal had been scuttled. A source at China Development Bank who is familiar with the situation but not directly involved told Reuters that Citigroup and China Development Bank had been in talks towards a possible capital injection from the Beijing-run policy bank but that no deal had yet been agreed. The structure of a potential deal could include an equity investment as well as the purchase of debt.Reuters and Thomson Corp say they expect Thomson’s proposed acquisition of the British group to close early in the second quarter of 2008 after US authorities delayed their decision to synchronize US and European review periods. The US Department of Justice had been expected to give its decision on deal by Tuesday. The European Commission is set to give its ruling by March 10, and it could then take four to six weeks to secure shareholder approval.

Tech banking turns arid in 2008

Looks like dealmaking in the tech sector, which has remained relatively unscathed during the subprime and credit crises, might finally capitulate to the limping markets in 2008.Tech banking could become a bit more 'desert-like” this year as dealmaking slows down and the IPO pipeline dries up, tech analysts The 451 Group said in a report that surveyed more than 110 bankers.The LBO market, which collapsed due to last summer’s credit market upheaval after a five-year bull run, is mostly to blame for bankers’ dour outlook. About 90 percent of the $172 billion in tech buyout spending last year came in the first half of 2007. After the nightmarish summer, private equity deal flow fell to 2004 levels, with total deal value dropping to $5 billion in the fourth quarter of 2007.What’s worse, tech bankers don’t expect a return of the LBO market in 2008 - two out of five bankers think tech buyout spending will shrink even more this year.Tech bankers didn’t even seem excited by the bullishness of corporate acquirers, many of whom have made no secret of their robust appetite for deals in 2008. One would assume all this potential dealmaking from tech giants like Microsoft and Cisco Systems would require all flavors of banking services, but expectations of core merger-and-acquisition advisory services have tailed off, the report said.Neither will public debuts of tech companies provide succor to bankers. Despite an upswing in tech IPOs, many of them venture-backed, since 2004, current market conditions are a wet blanket to any new and hot tech stocks, bankers said. The median pick stood at just 25 tech IPOs for 2008, compared to a median of 60 last year.The result of all this doom and gloom? Investment firms are planning to hire less this year and cut headcount, and they’re already seeing a dip in banking fee rates. And with less money to go around, those surveyed expect bulge-bracket firms to pull out of tech banking and boutiques to go under.(Photo: Reuters/Ali Jarekji)

Percentage of 'in play” poison pills up

In case you weren’t watching Business Wire on Friday night at 11 p.m., CNET put out a release saying they adopted a shareholder rights plan, otherwise known as a poison pill. Hedge fund Jana Partnersis pushingfor a major shake up at the company, amassing an 8 percent stake in its voting shares.One view is is that poison pills can come off as shareholder unfriendly. In theory, a rights plan is designed to fend off an undesired acquirerâ€“especially one the targetfeels is trying to buy it on the cheap. But that doesn’t necessarily gel with shareholders’ feelings about whether they want the company sold.With private equity and corporate buyers paying top dollar to shareholders over the last few years (prior to the credit crunch), poison pills fell out of favor somewhat. What hasn’t fallen out of favor is the percentage of companies resorting to them when they’re in play. Bear with us.There were 100 first time poison pill adoptions in 2003, according to research firmFactSet SharkRepellent. In 2007, that number fell to 42.Renewal rates for such plans have also plunged. In 2001, 84 percent of companies with poison pills renewed them. Last year, it was 30 percent, FactSet SharkRepellent says.But there is one element of the poison pill strategy that’s on the upswing: Implementing it when the company is 'in play.”Of the 100 pills swallowed in 2003, 11 percent of them were adopted when an unwanted suitor came knocking.But of the 42 pills adopted last year, 24 percent of them came when a company was in play, according to FactSet SharkRepellent.That’s could be a reflectionon the wave of activist hedge funds -formerly known as corporate raiders-that barrelled into the M&A scene in the last few years. Names like Icahn, Ackman, Peltz, Ubben, Loeb may make some companies realize that a pill couldbe the only defense mechanism against a forced sale.If activists have proven anything, however, in their rise to prominence, it’sthat it is tough to kill off an auction. Activist investors, the successful ones anyway, are relentless, rarely letting go of a target until the fund has forced a change.Will CNET’s pill ward off Jana? It seems that shareholders don’t think so. The stock rose 4 percent on Monday.(Michael Flaherty and Megan Davies)(Image. www.hauntedportraits.com)

Daily Briefing: Back to the foreign well

Citi and Merrill Lynch announced more plans to sell chunks of themselves to sovereign funds. Citi said it would raise at least $14.5 billion and announced a widely anticipated cut in its dividend of 41 percent, as it posted its first quarterly loss since its creation in 1998. Nearly half of the money is coming from Singapore. Other investors include the Kuwait Investment Authority, Saudi Prince Alwaleed bin Talal (pictured), the asset management firm Capital Research & Management, the state of New Jersey, and former Citigroup Chief Executive Sanford 'Sandy” Weill. Alwaleed previously came to Citi’s rescue in 1991, when he invested $590 million its predecessor Citicorp. 'I am surprised about the dividend cut. I had thought with the money they are bringing in from a lot of sovereign wealth funds they’ll be able to keep the dividend,” said Matt McCall, president of Penn Financial Group.Merrill said it would issue $6.6 billion in preferred mandatory convertible shares to the Kuwait Investment Authority, The Korean Investment Corp and a unit of Japan’s number two bank, Mizuho Financial Group. The deal amounts to about a 14 percent stake in the bank.Sun Capital Securities Group has launched a tender offer for Kellwood Co. Through its affiliate Cardinal Integrated, Sun is offering $21 a share, and said it would cut the offer to 19.50 if Kellwood goes through with a suggested debt offering. Kellwood, which owns clothing brands Baby Phat and Hollywould, rejected a $21-per-share offer from Sun last year.

Kushner doubles down in NYC; can Macklowe do same?

Lenders backing the $1.8 billion sale of a Manhattan skyscraper to Kushner Cos can breathe easy this week.That’s because the real estate giant just paid down a $200 million loan - in cash. But all those Benjamins may leave others in commercial real estate a bit queasy.After all, Kushner didn’t refinance the debt - and how many landlords can pay down borrowings in cash?Commercial property investors see repayment of the loan, used to finance Kushner’s nearly $2 billion acquisition of 666 Fifth Avenue last year, as a bellwether for markets hit by a downturn and tightening credit - which have made it tough for landlords to refinance deals or generate cash flows for debt payments. That doesn’t bode well.'The refinancing market is a little disturbing, to say the least,” Kushner President Kevin Swill told Reuters on Monday.Kushner, which also owns New York’s Puck Building, has made headlines before - like when a 25-year old family scion bought the New York Observer for $10 million in 2003.But all eyes are now on New York developer Harry Macklowe, who paid $7 billion to Blackstone for several New York office buildings - and reportedly owes $5 billion in short-term financing next month.It may be tougher coming up with that much in cash.(Image: 666 Fifth Avenue in New York. Reuters file)

Daily Briefing: Rescue Race

Bailing out Western banks is becoming something of a hot investment in Asia. British newspaper The Times reports Japan’s three biggest banks are set to invest as much as $10 billion in US and European banks hit by the deepening subprime housing turmoil. Mitsubishi UJF, Mitsui Sumitomo Financial Group and Mizuho Financial, told the newspaper they had readied a combined $10 billion and were open to talks with any bank that approached them for a cash infusion. Mizuho had already said it would invest $1.2 billion in Merrill Lynch as part of a $6.6 billion cash injection. One MUJF insider told the paper that his firm would compete directly with Asian sovereign wealth funds as a long-term investor in troubled US banks.US financial firms have approached China’s biggest insurer. 'There have been many who have approached us in recent days, but we’ll select the most suitable,” said Wan Feng, president of China Life Insurance. China Investment Corp, the country’s sovereign wealth fund, China Development Bank, the State Administration of Foreign Exchange and CITIC Securities Co have all invested in US, British and Australian financial institutions in recent months. Things are getting a bit tighter for liquidity-soaked Chinese banks, so looking further afield makes sense. China raised banks’ reserve requirements for the eleventh time since the start of 2007 on Wednesday. The reserve requirement for big banks is now at a record 15 percent.British hedge fund TCI says it wants to boost its stake in Japanese utility J-Power to up to 20 percent, challenging Japanese attempts to control foreign investment in defense-related sectors. The government could take up to five months to examine TCI’s request. If it rejects the move, it would be the first case of the government using takeover rules to block a foreign entity raising its stake in a Japanese firm on national security grounds.Miner Rio Tinto, which has rejected a bid approach from BHP Billiton, said it had not had further contact with its larger rival and it was confident about prospects as an independent company. BHP, the world’s biggest miner, has said it is prepared to offer three of its own shares for each Rio share, valuing Rio at about $108 billion at current prices. Britain’s takeover regulator has set BHP a deadline of Feb. 6 to either make a firm offer for Rio or walk away.SGS, the world’s largest inspection services firm, said it saw better prospects for acquisitions in 2008. The Swiss company said in a statement, 'Market conditions in 2007 prevented SGS from carrying out significant acquisitions due to the exorbitant prices being asked. Better conditions are expected in 2008.” SGS’ abstention from major takeovers in the inspection, testing and certification sector last year raised doubts about its ability to keep growing amid increasing competition from rivals Intertek and Bureau Veritas.

Activists see gold in jewelry retailers

Activist investors Nelson Peltz and Richard Breeden continue to mine greater stakes in jewelry retailers despite weak consumer spending and soaring gold prices.Peltz’s fund on Wednesday hiked its stake in Tiffany & Co. to 7.9 percent, while Breeden on Tuesday raised his stake in Zale Corp. to 17.66 percent. Peltz has spent 11 months trying to goad Tiffany to improve its margins and address operational and strategic issues.Breeden, meanwhile, signaled in September that he believed Zale’s shares were undervalued and that he may try to initiate a major transaction at the company. Last year, Zale sold its higher-end jewelry chain Bailey Banks & Biddle and has been working to streamline its business to increase shopping-mall based sales.Despite a slowdown in consumer spending, Tiffany executives said on Tuesday the company had no plans to slow its store-expansion rate. Tiffany, whose products range from under $100 to over $50,000 a piece, said it would be just fine even if the United States slid into a recession.Tiffany’s confidence comes as Goldman Sachs on Wednesday raised its 2008 gold price forecast, factoring in an expected US recession in the second and third quarters of the year that could lead to a weaker US dollar. Goldman predicted that gold would reach $915 per ounce in 2008. Gold topped $900 an ounce for the first time ever last week.Plus, last week, Tiffany cut its outlook for the year ending on January 31. Yet, Peltz and Breeden obviously see potential in these jewelers.Shares of Tiffany jumped $1.60, or 4.5 percent, to $37.26 on Wednesday amid news that Peltz’s fund raised its stake. Peltz declined to comment. Shares of Tiffany have fallen about 5.5 percent over the past year.Shares of Zale jumped $1.65, or 12.9 percent, on Wednesday. Zale’s stock, however, has plunged 48 percent over the past year.Tiffany and Zale could not be immediately reached for comment.(Photo: Reuters/Mike Segar)

Div Recap users, abusers

Dividend recaps got anugly name during the private equity boom, as the public became more and more aware that buyout firms were quickly adding extra debt and pulling cash from companies they were supposed to be fixing. Less than a year after CD&R, Carlyle and Merrill bought Hertz, for example, they paid themselves a whopping $1 billion dividend.As to which firms employed this device more than others, Moody’s has a report on the matter.Moody’s reviewed220 transactions rated by its Corporate Finance Group since 2002, and found that large private equity firms took dividends in over 45 percent of the deals rated before September 2006, with nearly 30 percent taking dividends big enough to remove all or almost all the equity contributed to the initial deal. In 10 percent of the deals, Moody’s says sponsors drew a big dividend within the first year of the initial rating. The study excluded deals where ratings were reversed within 2 years.Sowho were the avidrecappers during the buyout boom? According to Moody’s,six firms were particularly aggressive, taking dividends in 50 percentor more of their deals: Welsh Carson, Cerberus, Providence Equity Partners, Carlyle, Madison Dearborn and TH Lee. KKR, Goldman Sachs and Bain Capital, took dividends in one-third of their deals.The basic function of a dividend recap, or leveraged recap as they’re also known, is to borrow more money after a leveraged buyout to pay cash to the investors. As PEHub’s Dan Primack puts it here, 'critics (like me) assailed the practice as short-term greed, and claimed it was rampant. Industry insiders called us ignorant alarmists, adding that it was rare, safe and legal.”In more than one-third of their deals, TH Lee and Apollo took dividends within the first year, Moody’s said.Goldman Sachs, TPG Capital, Cerberus, and Warburg Pincus did soonce.But fear not, recap critics. The credit crunch has made recaps tough, and quick ones nearly impossible.

JPMorgan 'Prince” of Citi, for now

'We’re Number Two. We’re Number Two!”Right now (maybe), as we speak, JPMorgan Chase chief Jamie Dimon is celebrating (we think). That’s because Dimon’s JPMorgan Chase & Co.’s market value, $145 billion, for the first timesurpassed that of his former employer Citigroup, which now weighs in at a mere $139 billion.Both New York City banks, which historically loomed over the nation’s financial markets, are well behind Bank of America and its industry-leading $174 billion market cap.Morgan’s grasp on the silver medal may be short lived, since Citi is still about 30 percent bigger by total assets. Assuming Citi stops hemorrhaging some day, returns on those assets will likely recover and so will the stock price.But over the past year, Citi’s shares have been pummeled, plunging more than 50 percent thanks to the credit crunch and its own missteps. JPMorgan shares are down 18 percent.JPMorgan declined to comment on the momentous occasion. Still, it’s a key moment in the history of these archrivals.Back in 1998, Citi’s feuding co-CEOs John Reed and Sandy Weill found they could agree on at least one thing when they jettisoned Dimon. It was a bitter departure for the Wall Street darling, who had played an important supporting role in Weill’s rise up the corporate ladder.Dimon re-emerged in 2000, when he took the top job at Midwest retail banking giant Bank One. Dimon lured a platoon of Citi executives to the bank, which he turned around and then merged into JPMorgan Chase in 2004.He took over as CEO of the bank in January 2006, from which time its stock has advanced just 5 percent, positively ebullient compared with Citi’s 45 percent drop.Dimon won over investors for focusing on costs and sticking to the bank’s strengths. Citi under Weill’s chosen successor, Chuck Prince, flopped as expenses soared, businesses underperformed and critics called for a break-up.In the second half, Citi’s fortunes tumbled further as it absorbed more than $30 billion of losses on mortgage securities, CDOs and consumer loans. JP Morgan’s losses were far more modest: about $3 billion in the same period.Of course JPMorgan could pad its lead over Citi, and even overtake BofA, if Dimon finally makes abig long awaited acquisition.Dimon hinted that 2008 is the year JPMorgan would get back on offenseand expand. There’s recurring speculationDimon will snap upAtlanta-based banking and trust company SunTrust, PNC Financial’s retail banking and fund services business, or evenWashington Mutual, a struggling thrift and mortgage giant.In that case, Dimon will be taking a play that helped Weill build America’s biggest bank.(Photo credit. (L) Charles Schwab, (R) Jamie Dimon)

Daily Briefing: Merrill’s Falling Knife

Merrill Lynch said it took a $14.1 billion write-down in the fourth quarter on bad subprime mortgage bets, plus other charges. That wasn’t out of the ballpark, but was more than double the amount of capital the world’s biggest brokerage raised from foreign investors earlier this week. Merrill’s fourth-quarter net loss of $9.8 billion, or $12.01 a share, was the largest in the company’s history. Interestingly, compensation and benefits expenses rose 32 percent to $4.3 billion as it put on more staff.Korea Investment Corporation said it had first approached Merrill Lynch to propose investment in the US bank, adding the agreed $2 billion share purchase would be financed by Finance Ministry funds. 'Because we had made portfolio investments until then, markets hardly expected KIC would make such a strategic investment,” said Park Jong-in, a director of the sovereign fund’s corporate planning & affairs team. 'We thought Merrill was able to recover earnings power, once its mortgage-related bonds were cleared up,” Park told Reuters. 'We also made a positive judgment on Merrill because of its new, aggressive CEO.” That would be John Thain, pictured above. Will be interesting to see whether the continuing trend of state-backed funds buying U.S banking assets provokes any response from US regulators.Air France-KLM could provide strategic or financial help in Delta Air Line Inc’s pursuit of a merger with another airline, according to The Wall Street Journal. The Journal said Northwest was more likely to emerge as Delta’s 'preferred partner” than United Airlines, which has been talked about as a possible merger candidate, and that Air France-KLM may back up a Northwest bid with cash. Any stake Air France-KLM might take in Delta would be limited by rules capping foreign ownership, but would give the acquisitive European carrier prime real estate in US skies.