bloggingbuyouts

Eastman Kodak (NYSE: EK) is recently up $1.30 to $28.34 after the Financial Times reported Hewlett Packard (NYSE: HPQ) may take another look at EK as an acquisition target. EK has been frequently mentioned as a takeover target over the last four years. EK is expected to report EPS on 11/1. EK call option volume of 22,749 contracts compares to put volume of 11,136 contracts. EK October 30 straddle is at $2.15. EK November call option implied volatility is at 43, puts are at 49, above its 26-week average of 35 according to Track Data, suggesting larger risk.

Dow Chemical (NYSE: DOW), a diversified chemical company, is recently up $0.67 to $45.46 on unconfirmed reports DOW canceled an analyst meeting, renewing buyout chatter. DOW is expected to report EPS on 10/25. DOW call option volume of 16,275 contracts compares to put volume of 3,026 contracts. DOW November option implied volatility of 28 is above its 26-week average of 25 according to Track Data, suggesting larger price risk.

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

Quick! Go out and buy today's issue of the Financial Times before it's too late! It features an amazing 15-page insert called "Private Equity: Financial Times Special Report." In the issue, you'll learn about opposing viewpoints on whether private equity is good for anyone other than the firms themselves, the difficulty in measuring private equity performance, and the secrets of KKR's success. The articles are available online free at the Financial Times' Alphaville page.

Even if you don't think you need to know about private equity, I would argue that all investors do. The boom in leveraged buyouts has played a huge role in the recent bull market and a downturn could wreak havoc on the portfolios of the average investor. In addition, your pension money may be tied up in these funds.

Financial Times columnist John Authers took an interesting look at the returns achieved by private equity and reached an interesting conclusion: He ain't impressed. There is a long-held belief that private equity funds do well----after all, they wouldn't be able to earn those outrageous fees if they didn't. But it may be those outrageous fees that are preventing them for providing strong returns to investors:

Five- and 10-year returns, were respectable at 9.2 and 8.8 per cent respectively --- far better than anything that could have been achieved by investing in Nasdaq stock, and slightly ahead of returns on the S&P 500. So wherein lie the problems?

First of all, it is reasonable to expect even better returns. The Russell 2000 index of smaller companies - which tend to be prey to private equity buyers more than the biggest stocks - has gained 11.4 per cent over the last five years, and 10 per cent over the last 10 years, while the Russell 2000 Value index - focusing on stocks that appear to be undervalued by the public market, and should therefore be the prime targets of private equity buyers - has gained 14 and 13.3 per cent respectively. These are better benchmarks, and private equity returns fall far short of them.

Given the large amounts of leverage that these funds take on, it is also reasonable to expect them to do better. However, a recent European study showed that there is a wide discrepancy between the returns earned by top private equity funds and the rest: the difference in mutual fund performance is not nearly as wide. Funds in the upper quartile earned an average of 23.6% per yeah-rivaling the legendary rate at which Warren Buffett has compounded money. But funds in the lowest quartile lost 20.4% per year on average. Ouch.

When looking into investing in a private equity firm going public, such as Blackstone, investors would do well to ignore one of the best maxims from the world of mutual fund investing: Ignore fees at your own risk.