Ever since Circuit City Stores (NYSE: CC) CEO Philip J. Schoonover sliced 3,400 sales people in March 2007 to save money, I have questioned the savvy of its management. That's because many of those fired sales people took their customers over to Best Buy (NYSE: BBY). As its stock lost 86% of its value, I was surprised that anyone would make a bid for it.
Yet Blockbuster (NYSE: BBI), the struggling video store chain, decided to buy. I don't know what got into Blockbuster's head to make it think that combining two struggling companies would make an agile competitor. The Richmond Times reports that it wanted to create a one-stop shop for movies, games, and electronic equipment. But that dream died when Blockbuster pulled its $1.3 billion offer after reviewing Circuit City's books.
Carl Icahn has said he would buy Circuit City. But it's losing money -- $164.8 million, or $1 a share, in its fiscal first quarter. This was $100 million more than its Q1 2007 loss. And Blockbuster's conclusion after a closer look at its financial statements does not bode well for Circuit City's future. Circuit City stock is down 7.8% in pre-market. Let's see whether any new bidders emerge.
According to Yahoo, "Microsoft is not interested in pursuing an acquisition of all of Yahoo!, even at the price range it had previously suggested."
With respect to an acquisition of Yahoo!'s search business alone that Microsoft had proposed, Yahoo!'s Board of Directors rejected it for three reasons:
Such a transaction would not be consistent with the company's view of the converging search and display marketplaces,
Would leave the company without an independent search business that it views as critical to its strategic future, and
Would not be in the best interests of Yahoo! stockholders.
Expect more loud squawking noises from Carl Icahn to follow. Cover your ears!
CNet's Web sites include News.com, TV.com, Mp3.com, MySimon and GameSpot. And CBS expects to use CNet to tap into the internet advertising market. This deal raises the question of whether any CBS competitors will decide to get into the game of buying internet content companies.
Here are three possible targets:
TheStreet.com (NASDAQ: TSCM) - This provider of business, investment and ratings content has $65 million in sales and a market cap of $236 million.
TechTarget (NASDAQ: TTGT) - This provider of online content for buyers and sellers of corporate information technology (IT) products has $95 million in sales and a $531 million market cap.
WebMD Health Corp (NASDAQ: WBMD) - This provider health information services to consumers, physicians and other healthcare professionals, employers and health plans has $332 million in sales and it's market capitalization is $1.7 billion
I think traditional media companies buying Internet ones could become a trend. It would only take two more such deals to make it one.
Lost in the flurry of activity over the weekend surrounding The Bear Stearns Companies (NYSE: BSC) is this morning's news that Carlyle Capital, the subsidiary of the Washington-based private equity king Carlyle Group, is 'winding up.' MarketWatch reports that Carlyle Capital, 15% of which is owned by Carlyle Group partners, has more liabilities than assets.
It is interesting that Carlyle can't utter the word 'bankrupt' -- instead preferring the innocuous-sounding term: 'winding up.' But Carlyle shareholders will be left with nothing. And, as I posted, since Carlyle borrowed $32 for every dollar of equity, or $16.6 billion, to buy mortgage-backed securities (MBS), the banks who take possession of those MBSs will probably be eager to dump them as fast as possible -- unless they think they will get a better deal by waiting.
But why wait? After all, the Fed lent $30 billion to JPMorgan Chase & Co. (NYSE: JPM) on a non-recourse basis to take over Bear Stearns's MBSs. This means that if Bear's MBSs go bad, the Fed will take the hit. Is there any active market at all right now for MBSs? If so, should the Fed just dump Bear's MBSs and take the hit now? Won't Carlyle Capital's banks do the same? And who will step in to buy all these MBSs? At what price?
The New York Times reports that a $2 billion hedge fund, Sailfish Capital Partners, has closed up shop -- flipped over by a lousy January. Granted, it was a tough month -- the average stock-picking hedge fund sank 4.1% in January. The S&P 500 was down 6% so that does not seem as bad -- but it was the hedge fund industry's worst performance since November 2000.
Hedge funds are big business. Since 2000, the number of funds has more than doubled, to 10,000 and they manage $1.9 trillion in assets. I guess that lousy performance explains why hedge funds have not been much help when it comes to recapitalizing U.S. banks. But I am a bit surprised at their lousy January performance. My newsletter was up 28% last year -- beating the S&P 500's 3.5% -- and up 2% in January thanks to one stock pick that rose 8% during the month.
Maybe I was just lucky but hedge fund managers are supposed to be masters of the universe and they certainly get paid enormous amounts of money -- 2% of assets under management plus at least 20% of the profits they generate above a minimum benchmark. And if hedge funds keep losing money, it's not clear how much longer it will be before some of the owners of that $1.9 trillion in assets start to withdraw their funds.
Bloomberg News reports on rumors that Wilbur Ross, a private equity investor who's made billions investing in industries like steel when they were down on their luck, will take over Ambac Financial Group (NYSE: ABK). Ambac's market capitalization has fallen $8 billion in the past year, and Fitch Ratings last week stripped it of the AAA credit rating it depends on to guarantee $556 billion of debt.
Why does bond insurance matter? Bond insurers lend their AAA rating to $2.4 trillion of municipal and structured finance debt. Downgrades would throw into doubt rankings on the debt the companies guarantee, including thousands of schools and hospitals as well as collateralized debt obligations (CDOs) owned by banks. CDOs account for $133 billion in write-downs and credit losses since the beginning of 2007 at more than 20 of the world's largest banks and securities firms.
If Ross buys into Ambac, it could be a far more effective solution than the one being discussed a few days ago involving a $15 billion bailout from weakened banks that was being pushed by the New York Insurance Department. I've been hoping that hedge funds or private equity would step into the breech. And if Ross is serious, this could be great news for the market.
The New York Times reports that Bank of America (NYSE: BAC) will buy Countrywide Financial (NYSE: CFC) for $4 billion in stock -- or $7.16 a share -- $500 million below CFC's current market value of $7.75 a share, or $4.5 billion. Although this outcome is better than a bankruptcy filing or a government bailout, Bank of America may be letting its ego get in the way of sound business strategy.
Yesterday I told TheStreet.com that I thought Bank of America -- which in August bought 16% of Countrywide by buying $2 billion in preferred shares yielding 7.25% with an option to buy 111 million shares of its stock at $18 -- was doubling down on a bad bet. Since then, Countrywide's stock has fallen 63% from $21 to $7.75 -- wiping out $1.3 billion worth of that 16% stake's value. To me this proves that Countrywide's CEO Angelo Mozillo was wrong when he said last March that the subprime mess would be "great for Countrywide because at the end of the day, all of the irrational competitors will be gone."
While this deal will end Countrywide's irrational existence, Bank of America is likely to survive. For Bank of America shareholders, the question is whether the value of Countrywide's assets -- a $1.4 trillion loan servicing portfolio, a bank, an insurance company, a subsidiary that provides borrowers with loan closing services like appraisals and flood certifications; and a broker-dealer that trades securities -- exceed the cost of its liabilities.
The Associated Press reports that Berkshire Hathaway Inc. (NYSE: BRK.A) is betting some capital and its AAA credit rating on the municipal bond insurance business. To do that, it is buying the reinsurance unit NRG of ING Group (NYSE: ING) for $436 million.
What interests me is that Buffett -- whose Berkshire has $47 billion in cash on its balance sheet -- opted against putting any of that cash to use in the recent flurry of bank capital infusions. This decision tells me that Buffett believes banks have further to drop and that perhaps he has had enough trouble for one lifetime as a major investor in a Wall Street firm. That's because he got tied up in a Treasury bond trading scandal in the 1990s after a big investment in Salomon Brothers.
Why did Buffett decide to start a municipal bond insurer? He sees competitors about to exit the industry as they lose the AAA credit rating needed to stay in the business. That's because these insurers lack the capital needed to cover the losses from subprime mortgage backed securities they insure. And with Berkshire's ample capital and AAA credit rating, it can waltz right into the market and scoop up business from these faltering rivals.
However, there could be limited demand since, as Bloomberg News reported, many municipalities are realizing they can sell bonds without getting insurance. Nevertheless, there should be enough demand to keep Buffett in clover for quite a while. Yet, it is his decision not to invest in banks when they're down that makes me wonder how much further they will fall.
BusinessWeek reports that The Bear Stearns Companies (NYSE: BSC), which reported earnings today, is behind $10 billion worth of Collateralized Debt Obligations (CDOs) at Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC). It all comes down to yet another new word to add to your financial vocabulary -- Klio Funding -- a brand of CDO that enabled Bear to sell to the $2 trillion money market fund industry.
What is Klio Funding and how did it cause all this damage? Klio Funding is "an entity" that sells Commercial Paper (CP) -- short-term loans -- and uses it to buy higher-yielding long term investments. Since Citigroup had agreed to refund investors' initial stakes plus interest -- through liquidity puts -- money market funds that bought Klios thought they would get higher yields at low risk.
Meanwhile, Ralph Cioffi -- who headed up three Bear hedge funds which eventually folded -- used money raised from the Klios to buy CDOs and to lock in year-long financing for his hedge funds. This is significant because hedge funds typically can only borrow money for weeks at a time due to their risk. Cioffi's CDOs were popular, raising $100 billion.
The Boston Globe reports that subprime's collapse is spreading its toxic waste to private equity. For example, in 2006, Boston buyout firm Thomas H. Lee Partners bought six businesses for a total of $65 billion. This January, it made just one such purchase, for $5 billion.
As I suggested to MarketBeat last week, subprime's impact on credit markets such as the one financing LBOs was obvious and dramatic. But MarketBeat supplied some compelling statistics to bolster my case. "Data from Dealogic shows how parched the deal landscape was in November. Global buyout activity fell 75% on a year-over-year basis, to $25.8 billion from $102.3 billion at this time last year, while U.S. financial sponsor buyout activity was even more ridiculously curtailed, with $2.35 billion in buyouts, down 97% from the $81.06 billion recorded at this time a year ago."
I appeared 10 months ago on CNBC suggesting that private equity had peaked. Unfortunately our economic leaders, including Fed Chair Ben Bernanke and Treasury Secretary Hank Paulson, were slow to pick this up. They stated last spring that subprime's damage to the economy was contained but they finally changed their tune in October. The credit crunch resulting from subprime's refusal to stay contained has scotched 17 LBO deals worth $96.6 billion so far this year -- almost ten times 2006's $11 billion worth of busted deals.
Either these guys knew what was going on and did nothing or they didn't know. While I certainly don't think private equity needs any government protection, when government is this incompetent, I believe that a new cast of characters is in order.
Last week, Citadel Investment Group, a Chicago hedge fund, bought E*Trade Financial (NASDAQ: ETFC)'s collateralized debt obligation (CDO) portfolio for 27 cents on the dollar according to The Wall Street Journal [subscription]. If this price was applied to the Level 3 assets of nine of the largest banks, it would wipe out the capital of three of them.
It's important to point out, before presenting this analysis, that the 27 cents on the dollar price that Citadel paid applied only to E-Trade's CDOs. It may represent a worst case scenario price for these banks. Furthermore, the Level 3 assets of these nine banks include other illiquid securities besides their CDOs. Finally, the calculations I'll show are based on the most recent Level 3 assets and equity of these banks as of last month.
Having said that, here are the three banks whose capital would be wiped out if that 27 cents on the dollar valuation was applied to their Level 3 assets and written off from their most recent capital levels:
2007 Nobel Prize Winner and 2000 Presidential election winner Al Gore has another notch on his belt -- partner at Silicon Valley's most prestigious venture capital firm -- Kleiner Perkins. (Thanks to the Supreme Court, Gore -- who won the 2000 Presidential vote -- did not serve.)
But he handled the disappointment well. His work on the documentary An Inconvenient Truth -- easily the highest payoff PowerPoint presentation ever made -- has helped make the world aware of the threat it faces from global warming and what people can do about it. Gore insightfully points out that climate change is a matter of war and peace. It has created conflict -- the drying up of a lake in Sudan contributed to genocide there and the melting of the polar icecap has set off an international sea grab at the top of the world.
So what's the deal with Gore at Kleiner Perkins? According to the New York Times, President-elect Gore's part-time job at Kleiner will be to assess the potential of alternative energy companies and to opine on whether Kleiner Perkins should invest in them. Gore plans to donate his salary from the venture to the Alliance for Climate Protection, a nonprofit policy foundation. But he was not clear about whether he'd get the partner's share of the 2% of assets under management and 20% of the profits from successful "exits."
He was clearer about his political aspirations -- noting "I don't expect to be a candidate again."
Bloomberg News reports that Blackstone Group (NYSE: BX) missed its profit forecast and it's stock is likely to open 29% below its $31 a share IPO price. The culprit was a 44% drop to $109.1 million in Blackstone's real estate revenue -- it is blaming subprime for a decline in its commercial real estate lending.
In August 2006, I began to post on the idea that private equity was peaking. And I got into an interesting debate on the topic on CNBC this February. So today's announcement on Blackstone's earnings miss does not come as a huge surprise. Blackstone missed analyst's estimates by nine cents a share -- profit excluding some compensation costs dropped to $234 million from $239.1 million in 2006. On that basis, profit was 21 cents a share -- 9 cents below analysts' 30 cent average estimate.
There was some good news though. Revenue in the corporate private-equity segment jumped 42% to $227.3 million on higher fees. Revenue in the alternative asset-management segment, built on hedge funds, surged 88% to $124.9 million with more fee-earning assets under management. Financial advisory revenue went up 60% to $84.3 million.
Wall Street has its own brand of breaking up. There may not be 50 ways but there are at least two -- the easy way and the hard way. According to the New York Times, KKR and The Goldman Sachs Group (NYSE: GS) are splitting with Harman International (NYSE: HAR) the easy way, while J.C . Flowers is taking the hard route to killing its deal with SLM Corp (NYSE: SLM).
The easy way, in the Harman case, is for the buyers to buy $400 million worth of Harman bonds instead of paying $8 billion to own the company. Under the new agreement, the buyout deal struck in April will be dissolved, with no litigation or payment of the $225 million termination fee. Instead, KKR and Goldman will buy bonds that can be exchanged for Harman shares at $104, below the $120-a-share price of the original offer -- but much higher than its current $85.87.
Harman gets some cash and saves face while KKR and Goldman get out of investing in a cratering company -- HAR's earnings of 50 cents a share for the most recent quarter are expected to be less than half of the $1.02 analysts had forecast.
The New York Times [registration required] reports that J.C. Flowers, the private equity firm that announced it was pulling out of its deal to buy SLM Corp. (NYSE: SLM), has changed its mind. Flowers is now offering $50 a share in cash, 10% below its original $60 a share offer for the student lender.
But J.C. Flowers has offered a kicker: warrants to buy SLM shares, which it claims could eventually be worth as much as $10 a share if SLM meets or exceeds its earnings projections. Warrants, which give their owners the right to buy shares at a specific price, are sometimes used in bankruptcy cases as a way to repay creditors. The idea is that if the company fares better than expected, warrant holders can share in the profits by exercising the options. But a few hours ago SLM announced it rejected the offer.
According to its statement, J.C. Flowers wanted out because of a law signed by the president which limited government reimbursement of student loans. But SLM countered with a statement reaffirming its rights under the merger contract. So what does the cash and warrants deal mean? It could be seen as a clever way to tie SLM's sale price to its business prospects. Or it may be an attempt to buy SLM on the cheap while claiming to stand by its previous bid
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Ever since Circuit City Stores (NYSE: CC) CEO Philip J. Schoonover sliced 3,400 sales people in March 2007 to save money, I have questioned the savvy of its management. That's because many of those fired sales people took their customers over to Best Buy (NYSE: BBY). As its stock lost 86% of its value, I was surprised that anyone would make a bid for it.
Lost in the flurry of activity over the weekend surrounding 
The 
