bloggingbuyouts

Lita Epstein wrote this article originally for BloggingStocks.

You may think the subprime mortgage mess is huge. Well, just around the corner a larger elephant is looming and its impact may be even more devastating than the current credit crisis.

While it sounded like good news when banks sold $30 billion of loans for leveraged buyouts last week, $26.4 billion of that was for the First Data buyout. That sale came with a big price tag -- banks agreed to sell the debt at 96 cents on the dollar, which means they locked in losses after their fees.

And then there was the problem of what to do with the other 90% of LBO loans in the pipeline.

The Wall Street Journal [subscription] reported today that Citigroup Inc. (NYSE: C), Credit Suisse Group and J.P. Morgan Chase & Co. (NYSE: JPM) hold $400 billion in debt they promised for financing purchases private equity firms have in the works globally. If they can't sell the debt, they're left holding the bag, which means a lot less money for other loans. If the economy slows as expected and corporate profits weaken, the only way the banks will be able to unload the debt they're holding will be a fire sale on that debt at even deeper discounts then the First Data deal.

Delivering on its promises to bolster its mergers-and-acquisitions activity, security software developer McAfee Inc. announced Monday, Oct. 8, it would buy privately owned SafeBoot BV for $350 million in cash.

SafeBoot, a Dutch company with offices in Naples, Fla., develops encryption security software for mobile devices. McAfee said SafeBoot's technologies will be a good complement to its existing offerings and that the deal will bolster its position in the data protection market.

This is a significant and exciting acquisition, one that opens up a multibillion [dollar] underpenetrated market," said David DeWalt, McAfee's president and CEO, in a conference call.

Continue reading about the McAfee deal for SafeBoot at TechConfidential.

In spite of the private equity slowdown, deal makers continue to seek value in fashion. According to The Wall Street Journal [subscription], "In August and September alone, designers Betsey Johnson and Matthew Williamson both sewed up deals with outside investors. NRDC Equity Partners, which owns Lord & Taylor, bought a stake in designer Peter Som's business for what was believed to be less than $10 million. Kenneth Cole Productions bought sportswear brand Le Tigre, and jeans maker Citizens of Humanity bought menswear brand Robert Talbott Inc."

You have to wonder if these firms are getting in over their heads. Fashion is a notoriously fickle industry, providing none of the reliable returns and stable growth that buyout shops typically seek. Sure, a lot of the deals will work out great but there will be a disproportionate number of fashion buyouts that end in big write-offs as the acquired brands lose their cache.

For a fashion company that looks cheap and could possibly be in buyout territory, check out BloggingStocks writer Kevin Kelly's take on Steven Madden (NASDAQ: SHOO).

Now that the United Autoworker's Union (UAW) is finished with General Motors Corp. (NYSE: GM) in terms of labor talks, next up to bat will be Chrysler LLC. The company is being acquired by private equity firm Cerberus Capital, but that's not stopping it from making vehicles and trying to dent into the domestic market share being rapidly enjoyed by Toyota Motor Corp. (NYSE: TM).

This past Sunday, the two parties began negotiating terms of a new labor agreement after nearly three weeks of stalling due to UAW's extension of Chrysler's existing contract so that the GM deal could be put to rest, which it was. UAW President Ron Gettelfinger now has his sights set on Chrysler and hopes that new ground can be broken with the Detroit automaker now that it has a new owner in a private investment firm (new blood, heh) along with the problem of slowing and stagnating sales -- a problem Chrysler has in common with GM and Ford Motor Co. (NYSE: F).

The broken-record syndrome currently facing all three domestic automakers is causing production plant idling and increased incentives to move out overloaded inventory just at a time when competitors like Toyota and Honda Motor Co. (NYSE: HMC) are increasing market share and are putting out highly competitive passenger vehicle models. Will Cerberus break new ground with its UAW labor talks that are significantly different from former parent Daimler (which still owns a 20% stake)? I'm thinking yes, or the company would not have bought the Chrysler brand for $7.4 billion in the first place.

Sallie Mae (NYSE: SLM) is sick of having sand kicked in its face by its potential buyer, JC Flowers, and Flowers' banks.The private equity firm that agreed to pay $25 billion for the student loan company has come back with a lower price, claiming that Sallie Mae's financial future has gotten much worse. Now, Sallie Mae is suing to get its break-up fee of $900 million

According to Reuters, "The suit seeks a declaration that Sallie Mae may terminate the merger agreement and collect the damages, that the buyer group has repudiated the merger agreement, and that no material adverse effect has occurred." SLM is arguing that there has been no meaningful change in its business since Flowers made its offer. The buyout firm and its banks make the case that legislation slashing subsidies to student lenders and a serious credit squeeze have cut Sallie Mae's value. Flower's banks are JP Morgan (NYSE: JPM) and Bank of America (NYSE: BAC).

The move by SLM may usher in a new wave of litigation as private equity buyers walk away from buyouts that they no longer think make financial sense. If Sallie Mae can win in court and collect its $900 million, a number of legal actions could follow brought by public companies that watched buyouts fall apart.

While it may seem odd, it is possible that the legal system will slow buyouts as much as the current credit crunch.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Molson Coors(NYSE:TAP) & SABMiller announced the intent to combine their U.S. and Puerto Rico operations of their respective subsidiaries in a joint venture to create a stronger, brand-led U.S. brewer with the scale, resources and distribution platform to compete more effectively in the increasingly competitive U.S. market place. The new company will be called MillerCoors and will have net annual revenues of approximately $6.6 billion. Anheuser-Busch (NYSE:BUD) has been frequently speculated as in partnership venture discussions with InBev.

Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Garmin Ltd. (NASDAQ: GRMN), a designer and manufacturer of navigation, communication and information devices, is recently up $4.11 to $107.82 on unconfirmed Microsoft Corp. (NASDAQ: MSFT)takeover chatter. Dow Jones reported American Technology raised its rating on GRMN to Neutral from Sell. GRMN call option volume of 14,448 contracts compares to put volume of 3,027 contracts. GRMN October option implied volatility of 58 is above its 26-week average of 42 according to Track Data, indicating larger price risk.

TJX Companies Inc. (NYSE: TJX), an off-price retailer with 1,530 T.J. Maxx & Marshall stores, is recently up 40 cents to $29.49 on unconfirmed LBO chatter that Thomas H. Lee and Bain will announce a $38 tender offer for TJX. TJX October 30 calls have traded 88 times on transaction volume of 2,764 contracts. TJX October option implied volatility of 38 is above its 26-week average of 28 according to Track Data, suggesting larger risks.

Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

The blind leading the blind. U.K. mortgage bank Northern Rock has almost gone under. If it were not for funds provided by the government, it might be gone already. But Northern Rock is still looking for help. In a twist of irony, that aid may come from Citigroup (NYSE: C), which has its own problems with mortgage instruments. The big U.S. bank said its earnings would drop 60% for the last quarter, some due to mortgage securities to write-downs.

According to a report in The Telegraph, there are several options being weighed to save Northern Rock. "One possibility being discussed by the Government and the company would see Citigroup, the U.S. bank advising Northern Rock, provide a funding line of up to £10bn to enable the board to run it for the long term."

The British government could also encourage a sale of the mortgage company to a hedge fund. U.S. hedge funds JC Flowers and Cerberus have expressed interest. But, a buyout from one of these firms is likely to be at a very low price that could wipe out public shareholders and some of the companies bonds.

If Citi does make the loan, it will be profiting from the mortgage problems of another company after taking a beating in the same market on its own. It would be a perverse twist of fate.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Intercontinental Exchange(NYSE:ICE) closed at $157.76. ICE has been frequently mentioned as a potential consolidation candidate over the last 16-months. On 10/2/07 ICE reported September 2007 contract volume rose 33.7% compared to September 2006. ICE is expected to report EPS in October. ICE over all option implied volatility of 44 is below its 26-week average of 48 according to Track Data, suggesting decreasing price movement.

SAP AG(NYSE:SAP), a German software company, announced its $6.8 billion takeover of Business Objects(NYSE:BOBJ), a global provider of business intelligence software solutions BOBJ. Cowen says: "1) What other dilutive deals the company is considering further reducing ROIC? 2) Why SAP paid so much (relatively) for a company that announced 3Q earnings shortfall the same day it got bought, and 3) can the company integrate such a large acquisitions?"

Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

Shares of Trump Entertainment Resorts (NASDAQ: TRMP) are up 17% after the Star Ledger of Newark reported that the Cordish Co., a Baltimore developer looking to get into the casino industry, is looking a buying the company.

Shares of Trump have plummeted in recent months after the company dismissed an offer from Dennis Gomes as too low.

According to The Ledger, "Analysts have long said finding a buyer for Trump Resorts is a long shot. The company carries a heavy debt load -- $1.25 billion plus a $500 million line of credit -- and would be an expensive proposition. A buyer also would have to pay a premium on the price of the company's bonds. And Trump has veto power over the sale of any of the casinos. If he waives that right, the company would have to pay up to $100 million to cover taxes he would owe in a sale."

The huge jump in the stock price is hard to fathom. Merrill Lynch spent months searching for a buyer with little success even as the stock price tanked which, in theory, should have made it a more attractive target.

Trump is bloated and in terrible shape, lacking the funds to revitalize itself. Oh, and Trump Entertainment Resorts is in a similar situation too.

I'll be shocked if anything comes of this latest rumor.

The gunfight at the OK Corral: Private equity firm JC Flowers tried to back out of its deal to buy student loan company Sallie Mae (NYSE: SLM). Then the firm came back with an offer $10 below the original $60/share price.

The whole matter put the Sallie Mae board in a bind. Take a lower price, or take nothing and watch the shares fall. The stock trades just above $49 now.

But SLM got a big vote of support in its efforts to push Flowers to honor the original deal. Three of its big institutional shareholders said that the private equity firm has to do the right thing and write the $60-a-share check. The firms include Barrow, Hanley Mewhinney & Strauss, New York hedge fund QVT Financial and Capital Guardian Trust Company.

"We strongly support your decision to hold firm to your contract and a $60-per-share sale price and hope you will continue to reject any overtures to renegotiate the contract price or the structure of the consideration," QVT Managing Director Nick Brumm said in a letter obtained by The New York Post.

Now, it would appear that Flowers is on the hot seat. These large investors are saying that it is liable for the $25 billion deal. No one should be surprised if they decide to take the buyout operation to court.

With $25 billion on the table, the action has turned very unfriendly.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Goldman Sachs (NYSE: GS) is heading toward Japan in a partnered bid with Aetos Capital LLC to buy Japanese property company Simplex Investment Advisors in a 65% premium share bid, for the equivalent of about $1.1 billion to $1.35 billion, depending on your price calculations in current and closing prices of yen on the Japanese stock prices versus closing prices. The bid is for at least 80% of Simplex, and it appears that Nikko Cordial, part of Citigroup Inc. (NYSE: C) in Japan, is selling its 42.5% stake to the venture.

If you think the U.S. property weakness has been bad, the situation in Japan has been worse. Japan experienced its own bubble back in the 1980s, and only in recent years have things seemed to get better. Goldman Sachs has already been active in buying commercial and recreational properties in Japan over the last decade, but this would mark a larger leap into a property market that may hold relative values.

Goldman Sachs was Jim Cramer's #2 Value Pick for 2007, and he recently said he thinks its stock could go to $300.00 per share next year. If you look at how Goldman Sachs recently crushed earnings by betting against mortgages, you'll know why.

Goldman Sachs has raised over $4 billion this year for property acquisitions, so you can assume more land grabs are coming. Bloomberg has a pretty detailed piece that gives more background on the ongoing landgrabs in Japan. If you want to look up more data on Simplex Investment Advisors, it trades under the numeric stock ticker "8942" on the Tokyo Stock Exchange.

Jon Ogg produces the SPECIAL SITUATION INVESTING NEWSLETTER and he does not own securities in the companies he covers.

"What's very interesting is that there hasn't been much innovation in online advertising over the past few years," said Frank Addante, who is the CEO and founder of the Rubicon Project. Keep in mind that he is one of the pioneers of online advertising. After all, he took L90 public and eventually sold it to DoubleClick.

Well, this week, the Rubicon Project raised $6 million from lead investor Clearstone. In other words, Addante now has a chance to see if he will be the one to bring innovation back to the space.

Yesterday he gave me a demo of the new platform, and so far it looks pretty slick.

"We believe there are about 300 advertising networks in the US," said Addante. "Of course, there are those from Google Inc. (NASDAQ: GOOG) and Yahoo! Inc. (NASDAQ: YHOO). But there are also many niche networks."

Dan Loeb continues his reign as one of the most successful activist investors. PDL BioPharma (NASDAQ: PDLI) has agreed to put itself up for sale, just one month after the company insisted it would pursue a stand-alone course. Shares rallied on the news.

TheDeal.com has a good summary of Loeb's battle with PDL, but these are some of my favorite snippets from Loeb's 13-D letters to the company's executives and directors. Every public battle that Loeb launches with a public company culminates in a "greatest hits" collection containing Loeb's best barbs directed at the company's brass:

... it is critical that you, the non-management directors, exercise your fiduciary duty and finally take action: terminate Mr. McDade before he is allowed to destroy shareholder value at our Company for even one more day. [ -- a request that was fulfilled with McDade's resignation.]

Mr. McDade's record of incompetence, egregiously bad business judgment and serious ethical lapses has been well documented by one of PDL's founders, numerous current and former employees, as well as by Third Point.

Mr. McDade lacks the ability to communicate with the investment community effectively in part because he has a poor understanding of even basic financial concepts...

For an interesting analysis of Dan Loeb as a poet, check out this piece from DealBreaker.

Sprint Nextel Corp. (NYSE: S), which operates a wireless and wireline network servicing 54 million customers, closed at $18.76. The Wall Street Journal says, "Activist investor Ralph Whitworth is turning up the heat on Gary Forsee, chief executive of Sprint, and other directors of the wireless carrier. 'We have lost confidence in Gary Forsee,' Mr. Whitworth said."

EchoStar Communications (NASDAQ: DISH) closed at $48.94. DISH announced on September 26 the proposal to spin off its technology and infrastructure assets. AT&T (NYSE: T) & DISH have been frequently mentioned over the last seven years as possible transaction partners. DISH October option implied volatility of 51 is above its 26-week average of 31 according to Track Data, suggesting larger price risk.

Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.