This is the second time Alliance has sued Blackstone over the proposed merger. In January, they withdrew a law suit that attempted to force the completion of the merger after Blackstone assured them the deal would go through. Apparently and no one can blame them, they backed out again, prompting the latest law suit.
Blackstone said the pull out is due to a $400 million backstop requirement imposed by the Office of the Comptroller of the Currency to support OCC regulated Alliance. Alliance alleges Blackstone failed to use "its best efforts" to earn OCC approval and that Alliance took many steps to solve the problem.
Blackstone maintains they did not breach any conditions outlined in the merger agreement and the accusations will be strongly contested. Alliance shares are down over 2% today to $51.55 on a 52-week range of $39.54 to $80.79. The deal valued Alliance shares at $81.75. Blackstone shares are also down by 2% to $18.50 on a 52-week range of $13.40 to $38.00.
Private-equity companies are under attack by union groups such as Services Employees International Union (SEIU) due to worries that the weakening economy will motivate private equity companies to encourage portfolio companies to cut jobs and benefits. The Washington Post ran a great piece outlining this.
Rather than strikes and marches, these protesters are using less-conventional tactics:
Protesters presented a satire in front of Henry Kravis's Long Island home in which they asked passerbys to give the buyout master a cut on his property taxes.
At a recent conference in NYC given by Carlyle co-founder, David M. Rubenstein, protesters sneaked in sporting a banner reading "Why does he pay taxes at a lower rate than the hotel's doorman?"
In addition to shaming, the unions are also pointing to links between Middle Eastern oil money and private equity.
Buyout firms respond by highlighting to the fact they have been responsible managers of their portfolio companies in the past and that unions themselves have actually invested pension fund money in private equity firms. The goal of these unions is for private equity firms to take steps to ensure that employees in their portfolio firms are treated fairly with benefits and job security. Since the movement was initiated, any potential legislation for the benefit of the unions goals has been withdrawn.
The battle of the haves and the proles continues......
If you look at the history of M&A, there are a variety of waves. Some of the main forces include changes in technology, innovations in financing, economic growth and regulatory change.
So, with this year's heated presidential election, it's a good idea for dealmakers to take note. Actually, this is the topic of a piece in today's Wall Street Journal [a paid publication].
If the Dems get into the White House, we may see a backlash against the buyout folks. After all, such transactions often lead to layoffs. Besides, as businesses consolidate, there may be less competition and higher prices. Thus, the Dems may also get more aggressive with antitrust enforcement.
Oh, and something else: we may see a rollback on lower taxes, such as the favorable rates for dividends and capital gains. No doubt, this would have a big impact on dealmaking.
The problem? Well, the financial system is mired in a credit crunch and banks are holding back on transactions. So while there may be many eager investment banks hunkering for deals, it's probably a good bet we won't see much of a pickup anyway.
In private equity circles, a club deal is a situation where two or more buyout shops pool their resources to acquire a company. But these deals do not come without controversy.
Vector Capital and Francisco Partners were sued after they agreed to do a buyout together -- after the two had been bidding against each other for the target company. The lawsuit alleged antitrust violations but a federal court in Seattle tossed out the suit, saying that two firms bidding together did not constitute unfair competition because the field of companies that buy other companies is so broad.
In the decision, Judge Richard Jones wrote that their offer was accepted not because of collusion but because of "lack of market interest in WatchGuard," the company that was acquired.
According (subscription required) to The Wall Street Journal, "the decision will likely be cheered by the buyout industry, which has been under antitrust scrutiny regarding joint bids and club deals. In 2006, the Department of Justice opened an inquiry into possible anti-competitive behavior related to club deals that were all the rage at the peak of the buyout boom."
Regulatory openness to club deals could give a boost to the weakened buyout market.
Basically, the robustly profitable (those overdraft fees have to go somewhere!) BofA will be able to use Countrywide's losses to offset its own income. One tax expert told Sloan that the acquisition could save the company half a billion dollars in taxes over the next five years, and considerably more after that.
So let me get this straight: Countrywide CEO Angelo Mozilo is getting a $100 million plus severance package for dumping stock while running his company into the ground and then tossing it to Bank of America at a tiny fraction of its previous high -- and part of the deal is essentially being financed through tax savings for Bank of America.
Given that taxpayers, you and me, will essentially be paying for this in the form of lower taxes for Bank of America (shifting the tax burden to other people), I think I'm entitled to at least as much of a bonus as Mr. Mozilo. But I'm not greedy, so I'll be happy to settle for an even $50 million.
If you're a Countrywide Financial executive and you have my check ready, leave a comment and I'll be in touch.
"Score one for the barbarians" -- so reads the New York Post today. The reference, of course, is to Barbarians at the Gate, the sordid tale of the leveraged buyout of RJR Nabisco in the 1980s. Today, the private equity barbarians have won another battle: there will be no new tax on carried interest, at least not this year.
Charles Rangel, the House Ways and Means Committee Chairman has dropped a proposed change in the tax laws that would raise taxes on hedge fund managers. The change was relatively simple, raising the tax rate on fund profits and management fees from the current 15% to the 35% that corporations (are supposed to) pay. Needless to say, the private equity industry fiercely opposed the change, which would have raised $54 billion in new taxes.
The change in the tax code was part of a bill aimed at alleviating the effects of the Alternative Minimum Tax, which now affects 23 million households. The idea was to "fix" the AMT to keep it from being applied to broadly; the resulting loss in revenue could then be made up by increasing taxes on fund managers. But it looks like the managers are too powerful to allow that to happen, at least this time around. Hey, do you think this could have anything to do with campaign contributions and the growing political power of the newly gilded elite? Nah, couldn't be...
While the investment industry as a whole is still hoping to sideline efforts to reclassify the way that management fees and carried interest are treated under the tax laws, and private equity firms and hedge funds are massively stepping up their efforts to influence legislation, venture capitalists are still holding on to what they believe is a historic record of defending their position. VCs certainly aren't in a position to throw their bigger-money peers under the bus to save themselves just yet, but National Venture Capital Association president Mark Heesen clearly believes its members must highlight a unique role in the finance industry.
Tribune (NYSE: TRB) is recently down $1.42 to $26.50. Sam Zell announced on 4/2/07 his group would pay TRB shareholders $34 per share. The closing has been expected to occur in the fourth quarter of 2007. The Chicago Tribune reported, "A sudden uproar on Capitol Hill over media ownership rules might disrupt TRB's chances of getting the temporary cross ownership waivers needed to complete its planed $8.2 billion deal to go private." TRB November option implied volatility of 50 is above its 26-week average of 28 according to Track Data, suggesting larger price risks.
Daily M&A Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
Despite some improvement, the private equity folks are facing some serious problems. Just take a look at the implosion of deals like Harman International (NYSE: HAR). And, of course, major Wall Street banks are taking massive write-offs for problematic buyout loans.
Oh, and there's something else -- private equity firms also must deal with a possible tax hike. In fact, Senator Charles Schumer plans to introduce a bill on the matter according to Bloomberg.
Even if dealmaking slows down, a private equity surcharge could be a nice source of revenues. With current rates at only 15%, there is certainly lots of opportunity for Congress to soak.
Interestingly enough, Schumer is not too optimistic about his bill. That is, he thinks that President Bush will use his veto pen.
But, I have a feeling the tax issue won't go away. Simply put, it's just too big to ignore. And, no doubt, I'm sure private equity heavies are paying some big bucks for their tax advisers to gin up some creative strategies.
A piece in The New York Times' DealBook looks at changes in the way that Wall Street players are making their campaign contributions. There is an increasing, and I would argue disconcerting, trend toward big donors giving big to candidates in both parties.
According to DealBook: The result has been a blurring of the ideological fault lines as registered Republicans in Greenwich, Conn., give to Senator Obama, and hard-core Democrats . . . contribute to Senator McCain. Fueling the trend are the age-old practice of hedging bets and an extraordinary pressure on a small number of donors in the financial services industry to help provide the hundreds of millions of dollars that candidates need for their marathon campaigns.
Some experts argue that this trend is a result of relationships and a quid pro quo between donors -- "You donate to my guy and I'll give some to yours too." Federal regulations limit the amount that an individual can donate to a candidate. But should political contributions really be used as a away to kiss your boss's behind? Shouldn't be about showing support for the ideas that you believe in? And if you strongly oppose abortion rights, wouldn't you just feel weird donating to Hillary Clinton?
But given that taxes on private equity and hedge funds are becoming a big issue, they may be looking to hedge their bets and buy influence in Congress and the White House.
In one of the few signs that maybe Washington isn't as corrupt as it often seems, Hillary Clinton and Barack Obama have attracted huge amounts of money from hedge fund managers and private equity bosses -- and have still stuck by their belief that raising taxes on these firms makes sense.
According to The Wall Street Journal (subscription required), China made a decision to allow two of its largest investment banks to make equity investments in other companies. In other words, China is clearing the way for Chinese private equity firms, an idea that was effectively banned in 2001.
Earlier this year I wrote that private equity bigwigs see China as the next great opportunity for the industry. The news that American firms may now have to deal with competition for deals from Chinese companies couldn't come at a worse time: Facing widespread called for increased taxes on the industry and a credit crunch, this just adds to the industry's struggle.
And according to The Wall Street Journal, "China's financial system remains flush with liquidity, despite the global credit crunch brought on by problems in the U.S. housing market. Some Chinese officials have grown wary of turning over control of state assets to foreigners. Domestic private-equity funds may represent a key tool for the government to counterbalance an influx of foreign capital."
The Wall Street Journal's Holman Jenkins writes [subscription] that Congressional attempts to increase taxes on private equity firms are hitting some resistance. According to Senator Charles Grassley, "There are powerful forces in this town that have been organized specifically on this issue that are probably going to be able to slow it up into next year."
As Jenkins writes, "Hooray for special interests." This is pathetic. Other than money and influence, there is no real reason that private equity firms should receive such favorable tax treatment compared with competitors like Goldman Sachs Group (NYSE: GS).
I would argue that this special tax treatment may be the industry's greatest competitive advantage. Jenkins says that "In any case, private equity's fat returns are likely to be reduced by competition before Congress can get its hands on them."
But here's the problem: How can you compete with someone who has to pay less than half as much in taxes as you do? The loophole these firms are exploiting has a material impact on their valuation models and allows them to outbid other concerns -- if only because they can count on a smaller tax burden.
The failure of Congress to correct this grossly unfair situation would be further evidence of corruption and cronyism in the capital -- as though we need more evidence of that.
As an M&A junkie, I'm always interested in cool blogs on the topic. The problem is: they're not many. But over the past couple months, I've been regularly following the M&A Law Prof Blog.
The blogger is Steven Davidoff, who is an assistant Professor of Law at Wayne State University. Before this, he was an attorney at Shearman & Sterling. Oh, and he is also the founder of Wasabi Sushi.
On his blog, Davidoff goes into detail on the intricacies of M&A transactions, covering things like Material Adverse Change clauses, tender offers, poison pills and so on. It's great stuff.
Well, he has a must-read M&A Fall Preview. Basically, the private equity crowd is going to be very busy with restructuring deals, renegotiations -- and perhaps some litigation. That's good news for strategic buyers (and, of course, deal attorneys). Also, it's a good bet that deal making in Europe will continue apace.
All in all, the M&A Law Prof Blog is standout. So, if you want to increase your deal-making IQ, definitely check out the site.
A group of minority and business leaders including former basketball star Earvin "Magic" Johnson plans to form a group called the Access to Capital Coalition to fight against efforts in Congress to end the tax advantages enjoyed by the hedge fund and private equity industry, according to the Wall Street Journal [subscription].
"Members of the new coalition argue that increasing the taxes on carried interest, also known as the carry, would reduce the incentives for private equity funds to invest and would make it harder to recruit top talent, particularly for small and midsize funds," the paper said. "Many of the new coalition's members run smaller funds that focus on investing in low- and moderate-income areas."
The U.S. Chamber of Commerce released a study today detailing the damage that these proposals could cause the economy, according to Reuters.
So, making hedge fund and private equity billionaires pay their fair share of taxes would somehow hurt poor people. I don't believe it and I doubt this coalition will do much to sway members of Congress. This issue isn't about taxation, it's about fairness.
Instead of paying the ordinary tax rates of 35%, these private equity and hedge fund managers pay the 15% capital gains rate on their carried interest. It's tough for most Americans to understand why one group of very rich people pays much lower taxes than another group of rich people. There is no political upside for any member of Congress to stick up for the industry, particularly as the presidential contest kicks into high gear.
There seems to be broad bipartisan support in Congress to close this loophole. It's not a question of if the industry pays higher taxes but when and how much.
Just last week, I addressed some of the pending mergers that are being deemed at risk as far as "WILL THEY CLOSE?" and there are still some pretty large spreads between today's stock prices and the implied merger prices. That merger risk-arb is an area that has made fortunes for many funds, and it has led to many a demise. Here are some of the pending deals covered today so you can see where there is risk and where there is opportunity.
Tribune (NYSE:TRB) is perhaps one of the most frequently referred to deals. This is one that we have speculated will have a price cut. After all, would you loan Sam Zell and this company this much money when the media fundamentals are as bad as they are (and they only get worse)? Shareholders have approved the deal, but that was a given. Tribune's $34.00 buyout price has an implied return of over 20% to today's prices of $28.15, but I think a safe bet is for a lower-than-voted-on price.
First Data Corp. (NYSE:FDC) is the one of the biggest mergers pending that is still at risk. First Data is set to receive $34.00, and shares are currently at $32.51. The good news is that this KKR-led deal is MUCH better in risk-arb terms than it was two weeks ago when shares dipped to under $32.00.
Sallie Mae, or SLM Corp. (NYSE:SLM), is really perceived as being at risk. It isn't just the financing being at risk. The regulatory agencies may want this blocked as it is a quasi-agency status. If you don't think a $60.00 buyout price is a risk when the shares are at $49.05 today, then what can be said? J.C. Flowers & Co., Bank of America Corp.(NYSE:BAC) and JPMorgan Chase & Co.(NYSE:JPM), have said that legislation could kill the deal.
TXU Corp. (NYSE:TXU) is the real biggie, and still up in the air. You have to wonder why Warren Buffett wouldn't have stepped in for his WHALE OF A DEAL, particularly since he has telegraphed that he'd like to own utilities. ISS has recommended that shareholders vote in favor of the buyout.
Jon Ogg is a partner in 24/7 Wall St., LLC; he produces the Special Situation Investing Newsletter and does not own securities in the companies he covers.
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If you look at the history of M&A, there are a variety of waves. Some of the main forces include changes in technology, innovations in financing, economic growth and regulatory change.
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Tribune
Despite some improvement, the private equity folks are facing some serious problems. Just take a look at the implosion of deals like 
