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Bear Broker Caught in Fund Storm Goes to Morgan Stanley

Bear Stearns broker Shelley Bergman, who recommended some of his clients invest in now-defunct hedge funds that are under the regulatory microscope, on Friday jumped ship for rival Morgan Stanley.The two-decade veteran of the scrappy Wall Street firm became a big producer in the company’s private-client unit, a small but successful group where James Cayne, who last week stepped down as Bear’s chief executive, made his name.Bergman manages a book of roughly $1 billion in client assets, according to associates, and produced more than $8 million in revenue over the past 12 months. But some of his clients got burned last year after their investments in two hedge funds run by Bear Stearns Asset Management, the High-Grade Structured Credit Strategies Fund and a sister fund that that had a higher risk profile, went awry. Both funds collapsed last July under the weight of bad investments in the market for securities backed by risky home loans, wiping out $1.6 billion in investor capital and badly tarnishing Bear’s reputation for risk management. Regulators, including the SEC, Massachusetts state securities cops and the US Attorney for the Eastern District of New York, are now circling.Late last June, when the two funds began their meltdown, three of Bergman’s clients filed complaints against him, according to records maintained by the Financial Industry Regulatory Authority, which regulates brokers and brokerage firms. In each case, the documents say, the customer alleged that there had been an inconsistency between the fund’s Â“described investment strategyÂ” and its actual investments. One customer, who filed his complaint June 21, indicated later that his allegations Â“were not directedÂ” at Bergman; a second customer, who failed the same date, later withdrew his or her case. The complaint of a third customer, who filed on June 19, appears to still be pending.Attempts to reach Bergman were unsuccessful, but a Morgan Stanley spokesman confirmed Bergman’s hire. Bergman’s attorney, Nelson Boxer, could not immediately be reached for comment and a Bear official declined to comment. â€“Kate Kelly covers securities firms for the Wall Street Journal in New York.

Read more : 15.01.2008 00:00:00

Will That Be Unleaded, Diesel or Bacterial?

Investors may have been about as bullish on troubled General Motors this past year as they have been on, say, bacteria. Now they don’t have to choose: GM has made an investment in Coskata, which will produce ethanol out of the waste products from certain strains of that icky stuff. For GM, the benefit is clear: the auto maker wants to get about half of its models ready to use ethanol by 2012. Ethanol helps reduce 85% of the carbon emissions you might get from engines burning gasoline alone. And federal legislation enacted in December mandates that US producers crank out one billion gallons of the kind of ethanol Coskata produces by 2012. What seems like a good move for GM, however, is bad news for some other big names, starting perhaps with Bill Gates and Sir Richard Branson. So where might these giants of industry go wrong in their ethanol investments? Branson said last year he wanted his company, Virgin, to spend around $400 million to produce ethanol mostly made from corn. And Gates’s private-equity firm, Cascade Investment, bought $84 million of convertible bonds in Pacific Ethanol, which has built its business mostly on deriving ethanol from corn. The investments look like smart ones: Federal rules require four billion gallons of ethanol Â– any old kind of ethanol Â– to be blended with gasoline every year. There also is a nice fat ethanol tax credit of 51 cents a gallon.The problem is that not all ethanol is created equal. In the US, ethanol comes from corn; in Brazil, mostly from sugar cane; and in Europe, from wheat. Then there are the new, fancy ethanols that come from things like switchgrass and fermented plants. That kind of ethanol, which is called 'cellulosic” is the kind that Coskata produces. Bankers who specialize in alternative energy say corn-based ethanol is dying, if not already dead, as an option for clean fuel in the future. Corn-based ethanol in the US is relatively expensive to produce and is so corrosive to pipelines that it has to be shipped to its destination by rail, barge, or truck.Wall Street bankers slapped their foreheads at the performance of some ethanol IPOs in 2006: VeraSun, BioFuel Energy, US BioEnergy and Aventine Energy all traded well below their offer prices. All these companies make mostly corn-based ethanol. The skies are much brighter for cellulosic ethanol, which includes the bacteria-produced kind Coskata makes Â– as do some companies you probably haven’t heard of, such as Iogen, Abengoa Bioenergy, Verenium and Dyadic International. Just ask Vinod Khosla, the Sun Microsystems founder and venture capitalist who helped finance Coskata from its birth in 2006 along with Advanced Technology Ventures and Great Point Ventures. Still, GM and Coskata shouldn’t count their bacteria until their petri dishes hatch. Coskata is at least a year away from making a marketable ethanol. And at least one analyst believes salvation is still in the distance: 'We believe we are still a few years away from cellulosic technologies emerging as commercially viable and contributing to the overall ethanol supply,” wrote Morgan Stanley analyst David Edwards in an October research report.Â”â€“Heidi Moore is US Bureau Chief of Financial News, a Dow Jones & Co. publication and a contributor to Deal Journal.

Read more : 15.01.2008 00:00:00

Will Hedge Funds Get Active ... on Themselves?

For those of us still trying to get our minds around stock exchanges that trade publicly - on themselves - here is another mind-bender: an activist hedge fund agitating for change at another hedge fund. We can’t help but wonder if that is what the future may hold some day after reading about the nearly 10% stake in Och-Ziff Capital Management taken by United Kingdom hedge-fund giant Lansdowne Partners. The announcement comes after the less-than-stellar IPO of Daniel Och’s hedge fund, with the shares down more than 20% since the November debut. Unlike other U.K. funds, such as The Children’s Investment Fund, Lansdowne isn’t particularly known for activism. Nevertheless, the investment raises the specter of a hedge fund agitating for change at one of its own breed, rather than the corporations that it typically targets. It is their business, after all. The performance of the 'alternative asset managers,” as they like to call themselves, has been dismal enough. Fortress Investment Group and Blackstone Group, which went public last year, have had debuts as forgettable as O-Z’s. Meanwhile, the golden boy of activism, Bill Ackman, has said he is considering a public listing for his fund, and Carl Icahn’s investment vehicle, Icahn Enterprises, went public last year. (So far its performance has been better than the others.)Should such a development ever occur, there is, we trust, at least one group that would pay top dollar for a front row seat to the smackdown: the legions of corporate chiefs that have proved such worthy punching bags for activists.

Read more : 15.01.2008 00:00:00

China Loves Lazard

Lazard Ltd. nearly pulled off a second big China coup in less than a month. The US advisory and asset-management firm was advising China Development Bank on its deal to buy around a $2 billion stake in Citigroup until Beijing decided to pull the plug.That almost-deal followed Lazard’s advisory work for the country’s $200 billion government investment fund, China Investment Corp., when it spent $5 billion on a Morgan Stanley stake in December. While Lazard may be a power player in US and European deal making, its name rarely comes up on the China deal-making scene. But these two deals show how it appears to have carved out a niche helping Beijing buy into Wall Street. That is because Lazard is one of the few big US advisory firms that a Western bank like Citigroup might allow to study its finances and operations, since Citigroup would at least feel uncomfortable and at most resist letting a rival like J.P. Morgan Chase or another full-service bank, study the Citigroup playbooks. Remember that China Development Bank hired Blackstone to advise it on its investment in the British bank Barclays PLC.It also boasts Gary Parr, a dean of financial M&A bankers and a vice chairman at Lazard who previously worked at Morgan Stanley. His fingerprints are on many of the biggest financial mergers of the past decade. He is a confidant of Jamie Dimon, who he helped engineer the combination of Bank One with J.P. Morgan Chase, which Dimon now leads. A Lazard spokesman in the United Kingdom, Richard Creswell, declined to comment on its role in the failed China Development Bank/Citigroup deal.

Read more : 15.01.2008 00:00:00

Why PE Gets Minority Stakes in Asian Deals: A Q&A

With deal making having slowed in the US and Europe since the credit crunch hit in June, private equity is turning its gaze to emerging markets to put money to work and seek Â– arguably Â– higher returns. Yash Rana, a partner in New York with law firm Goodwin Procter that has advised private-equity firms on investment in India, shares his thoughts on globalization. Deal Journal: Private-equity firms have been investing in Asia for some time. How are things different after versus before the credit crunch? Have we seen an uptick in activity there?Yash Rana: Asia, especially China and India, have been attractive to private-equity firms. Their economies, fueled by new middle-class populations larger than most other countries, have been growing at or near double-digit rates for the last several years. These growth drivers appear to continue to drive their domestic economies and markets for some time to come. In fact the SSE 180 index in China and the Indian BSE Sensex have both recently hit all-time highs and experts predict continued growth. As US and European credit markets have tightened and as the subprime-mortgage meltdown threatens the broader [US] economy, Asia becomes an even more attractive investment opportunity. Historically, technology (especially information technology services) and manufacturing have been recipients of foreign investments. In addition to these areas, we are seeing increased activity in the Indian real-estate sector, with well-known investors raising real-estate-focused funds. With these economic tailwinds and with larger pools of capital being raised, we expect to see continued growth in China and India-related deal flow, albeit with increasing valuations.DJ: India is often compared with China as destinations of PE capital. Despite the two countries’ differences, there seems to be one common trend: Firms often tend to make minority investments vs. control deals. Why is it the case in India?YR: Traditionally, the Indian government has limited foreign investors to minority positions in many sectors of the Indian economy. While the economic liberalization in India has mostly eliminated these restrictions, we continue to see foreign direct investment into India predominantly in the form of minority investments. There are two primary explanations for thisâ€“cultural conditions and bargaining power. First, India has a strong culture of passing on family businesses to the next generation, and promoters (company founders and management) are generally unwilling to give up control of their businesses to private-equity investors. Second, as a result of competition from growing pools of capital, well-informed and knowledgeable promoters (armed with increasing numbers of investment bankers), and with some very successful and well-publicized exits by institutional investors, the law of demand and supply dictates that promoters have greater ability to set the terms of investments. Therefore, we tend to see more minority investments, whether in private companies or in the form of PIPEs.DJ: Some market observers say Asia is getting overheated, while other emerging markets like Latin America might be better places to go. What’s your take on this?YR: Like everything else, these markets move in cycles. Both India and China have seen tremendous wealth creation over the last several years. They also have large and growing segments of the population with greater disposable income and a desire to consume goods that were previously unavailable, fashion, cars, real estate and more. I just returned from a trip to Bombay and was struck by the long line of private jets parked along the runway at the main airport. There are more high-end residential developments under construction there than in Manhattan. The socioeconomic factors mentioned above suggest that there is still a while to go in the Asian cycle. And the upward trend of deal-flow seems to bear that out.

Read more : 15.01.2008 00:00:00

LBO 3.0: Bain’s UNleveraged Bright Horizons Buyout

Deal makers aren’t giving deal commentators much to work with these days, so we turn our attention to a deal that would have barely crossed the radar just a handful of months ago. Bain Capital’s agreement to buy Bright Horizons Family Solutions is, after all, the biggest private-equity deal in nearly three months, according to Thomson Financial. The merger agreement also contains a few reminders that private-equity deals ain’t what they used to be. Take, for example, the amount of cash Bain is putting into the deal. At $640 million, it amounts to nearly half of the $1.3 billion purchase price for Bright Horizons’ equity. That is a far cry from the terms of deals struck in the go-go days. In the buyout of Harrah’s Entertainment, for example, TPG and Apollo Management, which are about to close the roughly $17 billion casino deal, are putting up just $6 billion, or a little more than a third of the price. It also seems to follow a new template for Bain. The Boston PE firm’s September agreement to buy communications-gear maker 3Com calls for more than half of the purchase price to come from owners’ equity.In some respects, deal making hasn’t changed all that much since easy credit disappeared. Goldman Sachs Group, which advised Bright Horizons, is providing the $850 million of debt financing for the deal, in an echo of the stapled-financing agreements that proliferated in the LBO boom. It also contains a 60-day go-shop. That is a two-month period during which Goldman and Evercore, Bright Horizons’ other bank, will look for better offers. It harks back to the days when buyout firms were falling all over each other to find places to park their cash. (Scaring up competing bids may be tricky, given Bain is paying a 47% premium.) The deal also doesn’t contain a 'financing condition,” as the company takes pains to point out in its press release. That would have given Bain an escape hatch if Goldman balked at putting up its end. Many deal watchers had predicted that financing conditions would come back into vogue given how badly banks have gotten burned on agreements to fund megabuyouts when the going was still good. The jury is still out of course on whether financing conditions and other, more-sober deal terms will return in force, as a $1.3 billion buyout does not a trend make.

Read more : 15.01.2008 00:00:00

China’s Forbidden Citi

Even China’s generosity has its limits. According to this story today from Wall Street Journal colleague Rick Carew, China’s state-owned Development Bank is thinking twice before sinking $2 billion into Citigroup. It would be a bit of a sad commentary for Citi, the once mighty icon of capitalism, to have its pleas for help rejected by Chinese bureaucrats. (Though the bank’s shareholders don’t seem too concerned; the stock is actually rising today.) But can you blame the Chinese? Recent investments in US financial institutions haven’t exactly been a roaring success. China’s Citic Securities agreed to invest $1 billion in Bear Stearns in October. Bear stock, already well off its highs, then traded at about $118. What has it done since then? Continued to drop, like a rock - it now trades at $79.90. Then there is Blackstone Group. State-owned China Investment Corp. pumped in $3 billion as part of the US private-equity firm’s IPO in June. With that stock down more than a third since then, that Chinese investment is under water to the tune of about $1 billion. (CIC also agreed to invest $5 billion in Morgan Stanley, but that stock has held up better since then. It is only down about $1 at $48.86.)A few weeks ago, we called attention to a danger facing would-be foreign white knights seeking to buck up US banks struggling with big credit losses. By and large, the investments have performed dismally. Though Asian and Middle Eastern state-sponsored investors are in it for the long term, it can’t be much fun for them to watch their investments sink precipitously on paper before the ink on the agreements is even dry.Book mark Deal Journal. Click here for the URL (no subscription needed).

Read more : 15.01.2008 00:00:00

Weekend Roundup: Goodbye Deals, Hello Regulators

Pre-deal trading: One of the big stories of the merger boom has been the trading in stocks ahead of announced deals. Now regulators are examining pre-deal trades by investment banks, according to this page-one article in the Wall Street Journal. The broad review follows a paper by three European finance professors, examining more than 1,600 US mergers from 1984 through 2003. The professors found that during the last quarter before a merger announcement, large investment banks serving as lead advisers to acquirers accumulated shares in target companies a little more than 19% of the time, nearly double the 10.5% rate of investment banks not serving in that role. Yet critics point to the limits of their methodology.Merrill Lynch: Meanwhile, the SEC is examining whether several current and former Merrill Lynch employees placed trades for Merrill’s own account ahead of client orders, according to the WSJ. And speaking of Merrill, the Financial Times is reporting that the venerable US broker is seeking about $4 billion in a second capital raising, with the Kuwait Investment Authority expected to be a major investor. KIA also could invest as much as $3 billion in Citigroup.German Takeover Laws: Germany is redrafting a proposed law that would enable it to block takeovers by state-owned foreign companies and sovereign wealth funds, the WSJ says.Countrywide Financial: Bank of America may need some aspirin to go with its proposed acquisition of the troubled mortgage lender. The WSJ is reporting that federal bankruptcy judges are questioning the business practices of Countrywide, which could create headaches for BofA if their $4 billion deal goes through.DEALS ALERT â€¢ Don’t miss another deal: Click here to automatically sign up for Deals Alert emails.Havas: The French advertising group purchased British media broker BLM Holdings, marking its first significant acquisition since a new management team took control of Havas three years ago. (Terms of the deal weren’t disclosed.)Technology company IPOs: Tech offerings were the stars of the IPO market in 2007, but 2008 could be a different story, according to this WSJ article. In recent weeks, tech stocks have taken a beating in the broader markets, and a survey found that most tech investment bankers are pessimistic about the market for new tech stock offerings.UBS: The Swiss bank will be allowing investment bankers to sell some of their share-based bonuses after just one year, in an effort to persuade investment bankers to stick with the company, according to the FT (echoing this WSJ article from November). Teva Pharmaceuticals: The world’s biggest generic drug maker will explore strategic alternatives for its animal-health business, according to Reuters.Credit Agricole: France’s biggest retail bank is selling a 2.07% stake in utility Suez valued at $1.85 billion, Reuters is reporting.â€“Stephen Grocer and Dana Cimilluca

Read more : 15.01.2008 00:00:00

BofA’s (Brief?) Moment in the M&A Sun

Investment banking may be getting a little more fun for Ken Lewis. Lewis, the Bank of America CEO, has officially backtracked on comments he made last year about having 'all the fun he could stand” in the investment-banking business. The now-famous comment, of course, gave rise to speculation that the company’s days in the business were numbered. As Valerie Bauerlein’s article today in The Wall Street Journal points out, Lewis plans to scale back but not exit completely the business after all. Though exotic trading operations will go, it will still stick with the (quite profitable) basics of investment banking: underwriting and deal advising.BofA’s deal-advisory business has gotten off to a good start in 2008. It landed a role on the biggest and most important acquisition so far this year: the $4 billion buyout of struggling mortgage lender Countrywide Financial. That puts BofA in an unaccustomed role of No. 2 in the world-wide M&A rankings, with $5.5 billion in announced deals to its credit. (It also advised on Alliant Techsystems’ $1.3 billion purchase of the space-related business of Canada’s MacDonald Dettwiler & Associates, announced Jan. 3.) In underwriting, however, BofA hasn’t done so well. It isn’t on the boards yet in 2008 in US equity underwriting; it ranks ninth in debt. For all of 2007, it was 10th and fifth, respectively. And the Countrywide buyout isn’t exactly a clean victory. After all, Bank of America is the acquirer. (Goldman Sachs Group, of course, won a role advising Countrywide, along with financial-services boutique Sandler O’Neill.) But hey, if history is any guide, BofA could wind up being one of the most voracious acquirers this year, especially if market turmoil leads to more financial-services consolidation. If that is the case, a rare top-10 finish for the company’s M&A team may be within reach.

Goldman Sachs Banker Matt L’Heureux Retires at Age 45

A nearly impossible-to-spell last name never held back Goldman Sachs banker Matt L’Heureux (pronounced Le-Roo), who spent 20 years becoming one of the busiest investment bankers on the Street.Now the 45-year-old head of Goldman’s Technology, Media and Telecom banking has retired. He offered his final farewell to colleagues at the end of last year, according to people familiar with the matter. His post will be filled by Gregg Lemkau and George Lee, both Goldman veterans. L’Heureux spent his entire career at Goldman, eventually working on some of the most high-profile and complex deals in recent memory, including Peoplesoft’s defense against Oracle’s hostile takeover bid, the buyout of Clear Channel Communications and Hewlett-Packard’s purchase of Compaq.Why retire at the peak of a career? People close to L’Heureux say he simply got too exhausted by the banking business and wanted a break. He plans to travel, they say, and then consider his next move. But no firm position has been settled on yet.