bloggingbuyouts

Lately, there's been lots of dire talk about the private equity world. Returns are likely to be much lower and perhaps there will be many firms that shut down.

Indeed, such things may turn out to be true.

However, whenever there is extreme turbulence and a pervasive credit crunch, there are also big opportunities to make money. Just look at Apollo Management and Cerberus Capital. Both firms made a killing during the difficult early 1990s.

Fast forward to today, and we may be seeing something similar with one of the top beneficiaries possibly being Lone Star Funds. Yes, this week the fund purchased a collateralized debt portfolio from Merrill Lynch & Co. (NYSE: MER) at 22 cents on the dollar [subscription required]. The face value on it? About $30.6 billion.

This is not a one-off deal as it looks like Lone Star is hungry for high-risk debt. For example, the firm recently purchased the mortgage division of CIT Group Inc. (NYSE: CIT) and acquired Bear Stearn's mortgage segment. There was also the purchase of Accredited Home Lenders Holding Co. for $295 million.

First and foremost, calling this JP Morgan Chase (NYSE: JPM) $236 million purchase of Bear Stearns (NYSE: BSC) an acquisition is a stretch beyond what words can say. The $2.00 per share offer is perhaps the biggest fleecing of a deal ever. You probably heard takeover rumors on Friday regarding Bear Stearns. Well, this weekend it's true. The exception is that this is a take-under of the largest magnitude seen in the industry over at least the last two decades.

Frankly, the office building in New York alone is worth more than that. Add on the prime brokerage business. Then add on its equity underwriting business. The problem is all of its counter-party and derivative operations where the liabilities can theoretically never end on the fixed income side.

Back in January when the bad financial institution situation went from bad to worse, I noted that financial mergers may be mandated rather than preferred. Do the math. The Fed is providing financing for up to $30 Billion of Bear's less liquid assets, and close to $20 billion appears to be for mortgage related assets. Jamie Dimon and friends are stepping in for a fraction of what this used to be. $2.00 today, $30 on Friday, more than $60.00 a week ago and over $150.00 a year ago.

Many will try comparing this to Drexel Burnham Lambert implosion. That company wasn't public. That company was more of a junk bond player that didn't create as much of a systemic failure risk compared to this. You can't blame Jamie Dimon for being opportunistic like this, but the management team at Bear Stearns just got scarred for life.

Bear Stearns at first wasn't able to stop this run on the bank that happened last week and shortly before. But the firm put itself in this position over time with all of its leverage and there is ultimately no one to blame here but Bear Stearns itself, and its management that allowed this.

If you think the mortgage and financial meltdown will kill all rumor in the financial sector, think again. Bear Stearns (NYSE: BSC) shares are trading up today and even the stock options are active on the Friday Rumor Mill that the troubled brokerage firm could be for sale or have an expanded stake from China's CITIC.

Today is also options expiration date, so we looked further out the expiration calendar beyond February. Options are active in March from the $85 to $105 strike prices on call options. April is actually quiet. Specifically these March $85 call options. The July $75 and $100 strike prices each saw over 1,000 contracts trade.

What is interesting is that there is another report here that noted that Bear Stearns and CITIC may modify their terms. This may or may not be the case. Most sovereign funds so far are having to stick to original terms. It wasn't that long ago that they were criticized for taking large stakes in critical US companies. These funds may just have to take their deals as is if they want to keep buying up properties.

Bear Stearns has been the perpetual merger rumor target in the rumor mill for literally over 10-years now that I am aware of personally. When I was a bond broker in the early and mid-1990's, that was a typical "FRIDAY RUMOR" and then since switching to the equity side of the equation after the mid-1990's this "FRIDAY RUMOR" persisted one and off numerous times each and every years since then. Even Warren Buffett has been noted as a rumored buyer before. It appears that even the CDO and mortgage meltdown doesn't kill some rumors.

Who knows for sure.... Some time you might expect the merger to actually happen.

Bear Stearns stock is up today while many competing investment banks are not so lucky. Shares were up over 5% in afternoon trading to over $83.00 on nearly double average volume. It appears that a recent pullback is being attributed to David Faber reporting on CNBC that these rumors are not likely true.

Jon Ogg is an editor and partner of 247WallSt.com.

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.

Whatever the legal result of Barclays' (NYSE: BCS) lawsuit against Bear Stearns (NYSE: BSC) over hedge fund losses, the UK bank should have know better.

The mortgage-related securities bought and held by big financial companies should have been researched thoroughly, but the "due diligence" was thin.

According to Reuters, "Barclays Bank Plc accused Bear Stearns Co Inc on Wednesday of loading one of its hedge funds with about $500 million in troubled assets just weeks before it collapsed with another fund."

Barclays has a case if Bear Stearns simply dumped risky securities into the fund without any warning. But the UK bank certainly knew the overall asset mix of the pools and was still making a bet that mortgage-related securities would do well.

Did Bear Stearns lie to Barclays? Did it mislead the big bank? Perhaps. But the greed that drove big banks to invest in these instruments was not limited to Barclays. Neither was the lack of understanding about how the securities worked, or what their risks were.

Barclays can blame itself on those counts.

Douglas A. McIntyre is an editor at 247wallst.com.

When the Titanic was sinking, some of the members of the crew jumped into the lifeboats -- ahead of women and children.

According to a breaking story from BusinessWeek, something similar may have happened with Bear Stearns' (NYSE: BSC) two hedge funds which collapsed during the summer. It looks like some of the firm's insiders were able to jump ship before the clients could get out.

BusinessWeek says that the SEC and the U.S. Attorney's office in Brooklyn are looking into the matter.

No doubt, the clients are likely to cooperate with the authorities. Keep in mind that the financial loss was about $1.6 billion as the two funds filed for bankruptcy in July.

However, this is not to say that insider redemptions are wrong. After all, such things are common. But if investigators can show that the insiders knew things were going off the cliff yet continued to say rosy things to clients or blocked redemptions, then Bear Stearns could be in trouble.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

Chinese investors feel that they got burned when they took a stake in big private equity firm Blackstone (NYSE: BX). That IPO did not do well, so the disappointment is understandable.

But, the Chinese may be back. According to a report in the FT, the China Social Security fund, which manages over $62 billion in assets, has its eyes on KKR, Carlyle, and TPG. The fund is interested in a stake of 9.9% in at least one of the companies. The British newspaper quoted one analyst on the potential investment: "'China's interest in buying into overseas financial intermediaries is clearly part of a deliberate strategy,' said Isaac Meng, an analyst with BNP Paribas in Beijing. 'The government is hoping to do a better job in exporting its capital than the Japanese did in the 1980s.'"

That may all be well and good, but members of the US Congress are already concerned about the investment of China's Citic Securities in Bear Stearns (NYSE: BSC). It is unclear how such an investment would compromise US interests, but Congress could try to block these deals on the grounds that large investment and LBO firms control a huge portion of the investment capital in the US. They would not want any Chinese influence in the process.

The Congressional posturing on the matter is a red herring, but meddling by the federal government could simply make the Chinese wary of moving capital into the US. But, if Congress leaves the matter along, Wall Street firms are likely to have Chinese shareholders.

Douglas A. McIntyre is an editor at 247wallst.com.

In the wake of the collapse of two Bear Stearns (NYSE: BSC) hedge funds generating massive losses, some on Wall Street are wondering if the miscue could lead to the sale of the company. According to the New York Times DealBook, "CNBC's Charles Gasparino says it could. He reported Monday that if Bear's stock continues to fall - losing an additional $10 or more - the firm "clearly could be bought by a bigger player," he said." By the way, pick up a copy of Gasparino's Blood on the Street if you haven't already.

But the piece also quotes Portfolio.com's Felix Salmon, who wrote that "A $10 drop from current levels would take the stock all the way down to - oh, where it was back in September."

But my favorite quote of all comes from Bear's CEO James E. Cayne, who dismissed the takeover rumors as "old and repetitive."

Oh, I'm sorry Mr. Cayne: Are we boring you? But I suppose that the takeover rumors are boring, especially when compared with the collapses of the hedge funds that shook market confidence.

Bear Stearns does look cheap compared to the other investment banks, and maybe it will become a takeover target. But even if it doesn't, its low valuation might make it a good alternative for investors to competitors like Goldman Sachs (NYSE: GS).

Yesterday's New York Times [registration required] discusses the pending initial public offering (IPO) of Kohlberg Kravis Roberts & Co. (KKR). In so doing, it glosses over the role of its founding partner, Jerome Kohlberg. But just because The Times ignores him, that's no reason for you to.

That's because I interviewed him three years ago for the Swarthmore College Bulletin. So without further ado, here's my interview with him:

"Kohlberg was co-founder of the leveraged buyout specialist KKR and is now special limited principal of Kohlberg & Co. His business success began with the simple yet powerful notion that it was better to risk one's own capital than to be an intermediary. "One of my friend's fathers was a merchant banker,' he recalls. "He didn't act for commissions. He stood and fell on his own investments, which he put beside those of other clients. I realized that being a principal was what I wanted.""

Not that long ago, a deal from private equity firm The Carlyle Group would be a no-brainer. But things can change fast in high finance.

Carlyle is in the process of taking a mortgage bond fund public in Europe. But, as seen with the troubles with The Bear Stearns Companies, Inc. (NYSE: BSC), investors are getting skittish when it comes to mortgages. Another complication is the rise in interest rates.

For a firm that is known for timing, it looks like Carlyle has flubbed the deal. Instead of raising $400 million, Carlyle will have to settle for about $300 million. This is according to Bloomberg.

In light of the recent volatility, it is still impressive that Carlyle can get this deal done at all. And, with better pricing, it looks like investors may actually get a good deal on this one.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Over the past week, I've talked to a variety of reporters about the implosion in private equity. The problem? There has been no implosion.

Interestingly enough, they point to several articles in The Wall Street Journal on the matter. There was even a big piece on Blackstone Group (NYSE: BX) for the sister publication, Barron's.

Well, yes, the WSJ has another story on the topic today. As should be no surprise, it's negative and it's on the front page.

Basically, the negative view is that lenders are getting cold feet. After all, there are some danger signs. They include: rising interest rates, Bear Stearns' (NYSE: BSC) bailout of a biggie hedge fund, debt terms have been loosey goosey, and there funky investment vehicles like "payment-in-kind" notes.

As a result, lenders are pushing back on some deals. An example is US Foodservice's $3.6 billion transaction, which canceled its debt offering.

Basically, we are seeing mostly a readjustment in the marketplace, not an implosion (at least not yet). So deals should still get done. But, unlike the frothy past couple years, the costs will start to rev up for the private equity folks.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

It's finally here – the Blackstone Group LP (NYSE: BX) IPO. The stock is up about 15% even though the Dow is down 116 points. There are also serious concerns about some ailing hedge funds from Bear Stearns (NYSE: BSC).

I had a chance to interview Steven Howard, who is an attorney at Thacher Proffitt & Wood and an expert on private equity. His thoughts on the Blackstone IPO?

"It's of course difficult to predict the length of business cycles for sectors of the economy, but most commentators agree that the business cycle for private equity is mature, and that Blackstone is cashing out at the top. I believe that the top has not yet been reached, that Congress will not legislate any curtailments to the private equity/hedge fund business until at earliest the first quarter of 2008, so there is plenty of time for others in the IPO pipeline, like KKR, Apollo and others to explore the top. Nevertheless, Blackstone's IPO is very lucrative to Pete Peterson and Steve Schwarzman, and their senior managers. Just as Blackstone has wisely accelerated their IPO, so will the next group of IPO registrants in the rush to the market in the hope that they may get some 'grandfathering' benefits from any legislation, if in fact it is enacted in 2008.

"These private equity funds are notoriously difficult to value because of the nature of their investments which are illiquid and often require a sale to a third party before the private equity fund realizes any gains or losses from the investment. As a consequence of the difficulty to value the underlying investments, Blackstone may trade at a discount to its NAV (net asset value) over time, as closed-end funds typically trade at a discount to NAV in the aftermarket following their IPOs.

"Interestingly, investors in Blackstone will not be entitled to vote on who the managers of the Fund will be. Because the Fund is structured as a partnership, there is no equivalent of a Board of Directors. Peterson and Schwarzman will run the Fund until Peterson retires in December 2008 when Schwartzman will run it solo. Blackstone says in its Registration Statement that it did not want to change in any way its management since it's been so successful, so no shareholders' meetings ever, very limited corporate governance by public company standards and very little protection from conflicts of interest.

"A final note, it is a major mistake for anyone to underestimate the strength of the private equity/hedge fund lobbyists in Washington, DC, especially with a presidential election year in the very near future in which it is likely that THREE candidates will be from NYC (Clinton, Giuliani and Bloomberg), the home for many private equity and hedge funds, including, of course, Blackstone."

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.