M & A wrap: A Buffett bailout for BofA
Warren Buffett’s Berkshire Hathaway will invest $5 billion in Bank of America, stepping in to shore up the company in the same way he helped prop up Goldman Sachs during the financial crisis.
Bank of America shares rose 20 percent in pre-market trading on the news. Shares for the largest U.S. bank by assets have lost roughly a third of their value in August, and half their value since the beginning of the year.
The news of Steve Jobs’s resignation had many of his peers weighing in on the Apple co-founder’s legacy. Former Google CEO Eric Schmidt said Jobs is the “most successful CEO in the U.S. of the last 25 years,” while former eBay CEO Meg Whitman said his contributions are “unparalleled in the business world.”
Samsung Electronics Co reiterated on Thursday it is not interested in buying Hewlett-Packard Co’s PC business, shooting down persistent market talk the South Korean firm may snap up the unit to become the world’s top PC maker.
The deadline for initial bids in the auction for Hulu was extended until the end of the week to allow interested parties more time to examine the online video site’s financial information, according to people familiar with the situation. Yahoo, Google Inc, DirecTV and Amazon.com were among the parties preparing to submit an offer for the U.S. online company, the people said.
Is there a future for Morgan Stanley and Goldman Sachs? That’s the question WSJ’s Dennis Berman tackles on Mean Street.
Deals wrap: The value of Groupon
Groupon is likely to pick Goldman Sachs and Morgan Stanley to lead a second-half initial public offering that could value the fast-growing daily deals site at $15 billion to $20 billion, according to a source.
Commodity trader Glencore’s planned $12 billion London listing has long been seen as the first step to merging with Xstrata, in what could be the biggest mining takeover in history. The question for most analysts and investors since the IPO was confirmed is not if the deal happens but when — and how.
BP’s partners in its Russian venture TNK-BP rejected the UK oil major’s offer to settle a dispute caused by its $18 billion tie-up with Rosneft, casting further doubt on the deal.
The New York Times reports that CVS Caremark is under pressure from consumer groups and shareholders to split up the merger of the drugstore chain and the pharmacy benefits manager. Regulators are also investigating whether the company used anticompetitive behavior.
Deals wrap: Mixing it up at Morgan Stanley
Morgan Stanley’s surge in fourth-quarter profit indicates its strategy of diversifying its businesses to reduce a reliance on traditional investment banking operations may be paying off.
Wendy’s/Arby’s Group plans to sell its struggling Arby’s roast beef sandwich chain to focus on the Wendy’s hamburger business. The move comes at a time when other fast-food companies are trying to shed assets or even sell themselves.
The Carlyle Group’s back-to-back sell-downs worth $2.6 billion of China Pacific Insurance, put the U.S. buyout fund on course for its best exit ever.
Man Group saw $1 billion of net client outflows in its third quarter, dashing hopes that last year’s purchase of rival GLG would deliver a quick turnaround at the world’s largest listed hedge fund manager.
The Great American IPO?
We (the taxpayers) paid some of the $50 billion to bail General Motors out of its bankruptcy misery last year. Now, the former American industrial icon is going to launch one of the biggest U.S. IPOs of the decade.
According to estimates by Independent International Investment Research, GM’s initial offering would raise $12 billion, higher than any U.S. IPO this year and exceeding all over the last ten years, except for Visa’s offering in 2008 and AT&T Wireless in 2000.
The Wall Street Journal said this morning that GM is close to picking JPMorgan and Morgan Stanley as lead underwriters for the IPO. The U.S. Treasury, which owns a 61-percent stake in GM, said on Thursday that the timing would be decided by GM, based on market conditions.
Creating an appetite for a company that lost more than $80 billion in four years and has more than $14 billion debt, is not going to be an easy sell. Still, with GM swinging back to profitability and auto sales showing a rebound, the former backbone of industrial America coud just be the next Great American IPO.
The afternoon deal: Regulation overdrive
It’s been a busy day on the regulatory front. The New York Attorney General’s office is investigating eight banks for possibly misleading ratings agencies on the quality of mortgage securities, a source says. The Fed is conducting a broad criminal investigation into whether major Wall Street financial firms misled investors on mortgage bond deals, another source says.
Adding to the mix: –the Senate voted to impose tighter regulations on credit-rating agencies. –Federal Reserve Chairman Ben Bernanke is concerned about a Senate proposal that could force banks to spin off their swaps business –the White House and two state attorneys general said they don’t like an amendment to the Wall Steet reform bill that would give the federal government more power than states to regulate banks
From the Web:
Goldman, BofA, Citigroup….Did Prosecutors Leave Anybody Out - WSJ “It’s Thursday, and one thing is clear from this morning’s headlines: Pretty much all of Wall Street is under investigation.”
Analysts Not Sweating Probe Of Morgan Stanley – WSJ “They’re surely no worse than others, and maybe they’ll even come out ahead.”
Reduced competition juices banks’ trading records - Reuters “Four major banks generated trading profits every day in the first quarter, an almost unheard of event that signals how competition has abated since the financial crisis began.”
Rigged-Market Theory Scores a Perfect Quarter – Bloomberg “The intrigue is high. If a too-big-to-fail bank’s traders were able to make money every day of a quarter, were they really trading in any normal sense of the word? Or would vacuuming be a more accurate term? What kinds of risks do such incredible profits entail, for the banks and the rest of us taxpayers? And are results such as these too good to be true?”
Reinventing Glass-Steagall
With Congress already debating a sweeping overhaul of financial regulation, perhaps the most enduring regulatory stricture of the Depression era is again getting an airing in Washington. The venerable Glass-Steagall laws that barred large banks from affiliating with securities firms and engaging in the insurance business were repealed in 1999. Now, as the banks try to move on from the dreaded salary caps and the humiliation of TARP, lawmakers are wondering whether getting rid of Glass-Steagall was such a good idea.
Financial giants such as Goldman Sachs could be broken up under two bills introduced in Congress on Wednesday, one with the backing of former Republican presidential nominee John McCain. Both would reinstate Glass-Steagall. Passage of the Cantwell-McCain bill would force firms at the center of last year’s financial crisis — such as Goldman Sachs, Morgan Stanley, Citigroup, JPMorgan Chase and Wells Fargo — to spin off investment and insurance operations, according to Demos, a progressive think tank in New York. A similar measure was offered on Wednesday by six Democrats in the House of Representatives.
To be fair, many have wondered whether dumping Glass-Steagall was such a good idea. What’s odd is that the discussion about bringing it back comes as almost an afterthought to the massive regulatory reform bill now before Congress. Rather than start from scratch, it may have made more sense to try to reinstate laws that the marketplace was already familiar with, and add new bits around the edges.
While the banks may think they are strong enough to shed TARP, it’s hard to see how they would survive the cleaving of Glass-Steagall at this stage of their recovery. Perhaps by forcing the sector to resplit itself, the remaining banks would be forced to go back on TARP. While that might have some political appeal, analysts say restoring Glass-Steagall is probably a non-starter because it would be seen as stoking unemployment. Going back to more Depression-era regulation would also be difficult to sell as a progressive approach to modern day problems.
It may be impossible to put that “genie back in the bottle”, but the government needs to enact some meaningful legislation that forces these financial institutions to be responsible for themselves. The public certainly has not benefitted from all the money given to these institutions. Naysayers to any regulation will counter that this money kept us from a depression, but they fail to show how any but the finanacial institutions have gained. The FED now hides all the Toxic Assets within its (hidden) balance sheets and somehow thinks we who are actually paying for this bailout will forget. Durbin may have been 100% correct when he stated that Wall Street runs the government. A very sad state of affairs for a once great nation.
Deals du Jour
TMT is heating up. Vodafone, the British mobile phone operator, is pondering a bid for T-Mobile UK, while Microsoft has hired Morgan Stanley to sell its digital agency Razorfish. Both stories are in the Financial Times. Private equity group Candover says it has ended talks with potential acquirers, confident it can meet debt covenants. For all Reuters Deals news, click here.
And here’s what other media are writing today.
* Anglo American (AAL.L) is building its defences against a 41 billion pound ($67.74 billion) merger approach from Xstrata (XTA.L) by plotting talks about a major Chinese investment, the Sunday Telegraph reported.
* Switzerland’s UBS (UBSN.VX) is to pay 3 to 5 billion Swiss francs ($2.77-$4.62 billion) in the next two weeks to settle a U.S. tax probe into the bank, Swiss newspaper Sonntag reported on Sunday.
* China National Offshore Oil Corp (CNOOC) (0883.HK) and Petrochina are planning bids for a stake in Canadian oil firm InterOil Corp’s (IOC.N) natural gas project that could be worth up to $500 million, the South China Morning Post reported on Monday.
* The potential buyer of General Motors Corp’s (GMGMQ.PK) Hummer division will begin formal talks with Chinese regulators on Monday in an effort to win approval for its acquisition, The Wall Street Journal said on Saturday.
* British train and bus operator National Express Group Plc <NEX.L> has rejected an unsolicited takeover bid from rival FirstGroup Plc <FGP.L>, the Financial Times reported on Monday, without citing sources.
Repaying TARP on a high
As several large banks rush to the market to raise capital, one question remains: What’s the correlation between their ability to raise equity now and their strength in the face of a deeper recession if the early signs of a possible recovery prove false?
This morning Morgan Stanley joined the bandwagon of banks raising capital to pay back TARP. The Wall Street bank said it intends to raise $2.2 billion in common equity to satisfy a supervisory condition to enable it to redeem TARP preferred capital. It follows JPMorgan Chase and American Express, which announced their plans Monday.
The offerings come after the Fed said Monday the government will announce next week which of the 19 stress tested banks will be allowed to repay the funds. One condition for repayment is that they are able to raise money in the public equity markets.
But these banks are raising money at a time when investors are betting on a recovery. The S&P 500 posted its highest close in seven months on Monday, as reassuring economic data reinforced hopes that demand will stabilize. The Dow climbed to its highest finish since January.
The stress-tested banks have already been tested for their ability to deal with a steeper downturn. So what does their ability to raise capital in this market really prove?
Post Traumatic Stress Test Order
A week ago, when the Fed and Treasury mesmerized the financial world with the results of “stress tests” and capital-raising targets for banks, nobody spent much time asking “what if they can’t raise the money?” There was a sense that authorities had washed away enough uncertainty in the sector to satisfy investors. In short order, healthier institutions started raising capital. Those that didn’t need any stepped up efforts to rid themselves of onerous state support.
Bank of America shares are on a tear after the bank raised nearly $13.5 billion through a stock sale. Along with money it raised by selling part of its stake in China Construction Bank, this put Bank of America about half way to filling its stress-test gap.
But when Regions Financial, a large U.S. Southeast regional bank that was stress-tested, announced plans this morning to raise $1.25 billion through stock offerings — also about half of what federal regulators told it to raise — investors balked, sending its stock down more than 8 percent.
Just goes to show that not everybody can fail a stress test and impress shareholders with massive ownership dilution. Regions’ trouble may be that aside from selling stock, it has far less to offer than bigger banks in terms of asset sales to make shareholders feel better about doubling down. If nothing else, the market reaction could put a scent in the air that might interest an acquisition-minded lender needing exposure in the U.S. Southeast. If such a creature exists, it might find many more stressed-out lambs in the U.S. financial pasture.
GMAC, I mean Ally Bank can not raise money, they will call the Treasury, ask for a (many)few more billions. Why do we keep giving this worthless firm anything. Fold it. Many bank already availible to loan. . . Who cares, fake company, fake bankruptcy, fake about everything, makes me sick. Billions down a rathole.
Will UnTARPed Banks Boost M&A?
News that top investment banks want to pay back their TARP funds is welcome news for the M&A market. Though the tens of billions of dollars in capital that will slosh out of the banks and into government coffers may sap the banks of the funds to make big buys, the fact that most post-stress-test capital-raisings have gone smoothly must be encouraging for dealmakers.
Plus, banks that are unable to pull themselves from the government teat will have a whole lot less pricing power. It was interesting to see HSBC commenting on Tuesday that it expects industry consolidation in the second half of this year and in 2010. Though they may be looking more closely at non-U.S. assets, given the burns on their fingers from their foray into the U.S. mortgage market, that big global may sit out the next round of mergers. Will they be missing the boat, particularly given the conviction of many analysts that the U.S. economy will be the earliest to recover?
A key question that could rain on any M&A party is asset quality, and the radiation emitting from the toxic assets still poisoning the financial system. While most of it has been moved to the bomb shelter balance sheet of the U.S. taxpayer, there is little conviction that valuations will have the golden glow of yesteryear, and plenty of lingering fear that the glow is the toxicity of the lost decade.
