While Goldman Sachs Group, Inc. (NYSE: GS) managed to beat earnings handily, there is a key metric for private equity investors. That metric isn't that Goldman Sachs beat greatly lowered earnings targets nor that shares are up 8% after earnings.
Goldman Sachs noted that it ranked first in global mergers and acquisitions for its fiscal year to date. But there was a key drop in investment banking revenues. Its $1.17 billion in revenues in the investment banking segment were 32% lower than the first quarter of 2007 (year over year) and were down 41% from the fourth quarter of 2007 (sequentially). That signals a slower annual trend but an even slower trend in the near-term has occurred.
More specifically, its net revenues in Financial Advisory Services were $663 million, down some 23% from the first quarter of 2007, reflecting a decrease in industry-wide completed mergers and acquisitions. Its net revenues in its Underwriting segment were $509 million, 40% lower than the first quarter of 2007. On that it notes significantly lower net revenues in debt underwriting, due to a decrease in leveraged finance and mortgage-related activity in difficult market conditions.
The bad news is that is not showing any immediate reprieve in the arena of private equity lending, nor in the number of mergers. The good news is that we should have already known this. There is a giant de-leveraging transition happening on Wall Street (and Main Street for that matter). This may be the new norm for the time being.
2006 and 2007 were more fun to cover the M&A frenzy, but the deals started getting stupid. This is not at a all the death of of private equity nor will it be the death of M&A. The billionaires might have to make more normalized acquisitions from here on out, and they might even even have to use mostly their own money.
Semiconductor design startup Intrinsity Inc. said Monday it raised $31.5 million in a fifth round of venture capital, a strong endorsement of the company's three-year transition into a "chipless" company devoted solely to licensing its intellectual property.
Late-stage investors Goldman, Sachs & Co., Altitude Capital Partners and Northwater Capital Management Inc., all of New York, joined the round, which also included previous investors Adams Capital Management of Austin, Texas, and Hillman Co. of Pittsburgh. The deal brings total investment in the 11-year-old company, which is based in Austin, to nearly $100 million, and will allow it to expand existing licensing programs and continue developing design tools and proprietary code for creating ultra-fast programmable chips, primarily for the wireless telecommunications infrastructure industry.
Rob Kramer, managing partner at Altitude, said the firm was attracted to the deal based on the strong royalty agreements Intrinsity has in place for licensing its high-speed, low-power embedded processor cores, along with the company's opportunity to generate additional licensing business. Altitude is a three-year-old firm that invests solely in companies with an IP-licensing model, and Kramer said Intrinsity has quickly amassed a number of long-term deals that ensure a healthy revenue stream, even as it continues to develop new technology.
This would not happen in the U.S., or most other places for that matter. But, China is China, and the rules there are different. Goldman Sachs (NYSE: GS) "China partner, Fang Fenglei, is moving forward with plans to set up a private-equity fund that could complicate his relationship with Goldman as both hunt for investments in China," according toThe Wall Street Journal. Fang will probably get to keep his title as chairman of the investment banking joint venture, Goldman Sachs Gao Hua Securities.
But why? Feng is about to take dollars out of Goldman's pockets. Feng's new fund will be partners with an investment arm of the Chinese government. Who is going to get first look at the best deal, Goldman or a fund run by the locals? The Journal points out that insiders already have an advantage. "Foreign private-equity investors have found their ability to close deals hampered amid booming Chinese stock prices and mounting concern within China about foreigners buying into important industrial assets."
Yes, the Chinese want to keep the best part of the steak for themselves. It is a closed system, so it can do that. But, Goldman does not have to make it easier.
Douglas A. McIntyre is an editor at 247wallst.com.
Despite all the rumors, the $24.7 billion buyout of Alltel (NYSE: AT) got done. With the credit crunch and botched deals, the stock definitely showed volatility. But, the private equity folks at Texas Pacific Group and Goldman Sachs (NYSE: GS) certainly didn't lose interest in the company. The stock price on the transaction was $71.50.
No doubt, Alltel made some key strategic moves to make itself attractive to private equity sponsors. Perhaps the most important initiative was the spin-off of its wireline business in 2006. Basically, this provided more focus for the company.
To get some more perspective on the deal, I checked out the proxy disclosures. Alltel took the approach of a quicker auction – so as to minimize leaks as well as try to get a better valuation.
Alltel had its financial advisors put together a summary LBO (leverage buyout) analysis. The estimates ranged from $59.75 to $70.50. This assumed that the company could fetch 6.5x to 8x multiples on EBITDA by 2012, which would produce a return ranging from 17.5% to 22.5% per year.
All in all, this looks like a textbook example of a quality deal. Yet, there are certainly risks. After all, Alltel will need to manage a debt load of $23 billion.
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.
When KKR and Goldman Sachs walked away from the $8 billion buyout of Harman (NYSE: HAR), it looked like there would be a massive legal fight.
But that's been cleverly avoided. KKR and Goldman have agreed to buy about $400 million in Harman's convertible debt. The conversion rate is $104, which means that there is hope that the stock will make a comeback (the current stock price is about $86).
More importantly, KKR and Goldman will avoid paying a $225 million break-up fee.
True, it's not perfect. But, then again, this is a compromise, right? A legal fight would a big drain, in terms of money and time. Besides, this agreement is a sign of a new trend in private equity – that is, making minority investments. With a lack of big-time financing, it looks like private equity firms may have no other choice.
Goldman Sachs (NYSE: GS) is heading toward Japan in a partnered bid with Aetos Capital LLC to buy Japanese property company Simplex Investment Advisors in a 65% premium share bid, for the equivalent of about $1.1 billion to $1.35 billion, depending on your price calculations in current and closing prices of yen on the Japanese stock prices versus closing prices. The bid is for at least 80% of Simplex, and it appears that Nikko Cordial, part of Citigroup Inc. (NYSE: C) in Japan, is selling its 42.5% stake to the venture.
If you think the U.S. property weakness has been bad, the situation in Japan has been worse. Japan experienced its own bubble back in the 1980s, and only in recent years have things seemed to get better. Goldman Sachs has already been active in buying commercial and recreational properties in Japan over the last decade, but this would mark a larger leap into a property market that may hold relative values.
Goldman Sachs has raised over $4 billion this year for property acquisitions, so you can assume more land grabs are coming. Bloomberg has a pretty detailed piece that gives more background on the ongoing landgrabs in Japan. If you want to look up more data on Simplex Investment Advisors, it trades under the numeric stock ticker "8942" on the Tokyo Stock Exchange. Jon Ogg produces the SPECIAL SITUATION INVESTING NEWSLETTER and he does not own securities in the companies he covers.
"The Fed's moves do not mean we are out of the woods as far as further market corrections go; however, we do want to increase our exposure to the market, particularly top quality financial stocks," says Daniel Frishberg.
The host of BizRadio 1320 and editor of The MoneyMan Report is adding two stocks to his portfolio that he considers among the "best companies in the world" – the Blackstone Group (NYSE: BX) and Citigroup (NYSE: C).
He explains, "The market's action has been very impressive. Our Market-Ray indicator shows that demand was overwhelmingly positive and while supply dried up. That is a great recipe for higher prices."
He continues, "One thing that we believe is clear is that the Fed is more interested in global growth and the impact on Americans than the risk of inflation at this time. This will put a floor on certain asset groups such as financials."
One favorite financial holding, already in the advisor's portfolio, is Goldman Sachs (NYSE: GS). Now, to boost his exposure to the financial sector, Frishberg says, "We're adding two dominant stocks at cheap levels, Citigroup and Blackstone."
This will begin to seem like a broken record now. KKR and Goldman Sachs (NYSE: GS) are close to either renegotiating or walking away from a deal to buy Harman International (NYSE: HAR), the big audio components company (check the name on your computer speakers). According to The Wall Street Journal, due to "a credit crunch and lackluster financial results from Harman, KKR and other investors in the deal have soured on the transaction."
Most buyout deals have clauses that say that if a company's fortunes go through a "material change," buyers can back out. But operating income at Harman in the June quarter was over $81 million on revenue of $911 million. Not as good as some quarters in the past, but hardly a disaster.
The buyout does have a $225 million break-up fee, but Harman's board is likely to insist that KKR and Goldman stay in the deal. The stock trades at about $112 a share, which is well below the $125 offer. Harman traded under $100 before the offer to take the company private was made.
Although KKR's and Goldman's reputations could be harmed by walking on the deal, they may feel that it is better to face this kind of setback than to lose billions of dollars on a company they no longer believe can cover the debt that a buyout would require. But, Harman's board and management are unlikely to be satisfied with that explanation. It is not much to take to their shareholders.
If the transaction falls apart, the odds are very high that Harman will take the two big financial firms to court. And, it may be only the first case among several brought on by a tough credit environment where risk is no longer popular.
Douglas A. McIntyre is a partner at 247wallst.com.
You know the feeling. You've done a lot of shopping -- and used your credit card heavily. It's so easy, right? Of course, until the heavy interest payments pile up.
Simply put, that has been the story for big-time financiers, such as Goldman Sachs (NYSE: GS), Lehman Brothers (NYSE: LEH), Merrill Lynch (NYSE: MER), Citigroup (NYSE: C), JP Morgan (NYSE: JPM) and so on. They kept committing their balance sheets to provide loans to buy up companies. And, of course, private equity funds -- like KKR, TPG, Apollo, and Blackstone (NYSE: BX) -- were ready, willing, and able to take the largesse.
But now the bill is coming due.
Well, in this week's Barron's [a paid publication], there's an excellent story on this topic. In fact, the lenders were so eager to make these mega loans that they were loosey-goosey on the terms. For example, some loans even allowed for deferring debt payments (perhaps the subprime market was not the only crazy place, huh?)
Oh, the lenders also were willing to forgo escape clauses in loan agreements. Hey, wouldn't the gravy train last forever?
So what happens to the hundreds of billions in buyout debt? Barron's thinks that the lenders will sell the stuff at deep discounts. True, this will mean significant losses. But, if things are bad, might as well get everything written down now and then pave the way for a better future, right? Although, I have a feeling banks are going to be a little more circumspect when it comes to new buyout loans.
This week, private equity firm Fortress Investment Group (NYSE: FIG) reported its Q2 earnings. Well, as should be no surprise, compensation costs were higher (not cheap to hire investment gurus). In fact, there was a net loss of $55.1 million. Although, the firm thinks a better metric is "pretax distributable earnings," which came to $143 million in Q2.
What's more, revenues fell from $328.3 million to $268.1 million. No doubt, the private equity game can be volatile.
On the conference call, Fortress CEO Wesley Edens had some interesting things to say about the turmoil in the financial system.
He said that it's going to take some time to clear out the huge amounts of debt that have yet to be placed for buyouts. Much of the debt is on balance sheets of firms like JP Morgan Chase (NYSE: JPM), Lehman Brothers Holdings (NYSE: LEH), and Goldman Sachs Group (NYSE: GS).
The strangest news this morning is that Goldman Sachs (NYSE: GS) has arranged a $3 billion bailout of its Global Equities Opportunity (GEO) Fund, which before this investment had a $3.6 billion net asset value. DealBreaker posts Goldman's official statement.
This news is a little hard to understand. But it looks to me like this fund's value may have been completely wiped out. The investors include Goldman Sachs -- which TheStreet.com reports put in $2 billion, C.V. Starr & Co. Inc. (headed by former American International Group (NYSE: AIG) CEO Hank Greenberg), Perry Capital LLC and real estate development and financial services mogul Eli Broad.
The bailout raises many questions: What happened to GEO's $3.6 billion net asset value? How will the $3 billion in cash be spent? Why couldn't Goldman bail itself out of its own mess? What rights will that $3 billion entitle these investors? Why are these investors making the investment? What has happened to Goldman's other funds, such as Global Alpha, which Reuters reports is down 27% so far this year? Will they also require bailouts?
I don't recall a previous crisis in which Goldman needed other investors to bail it out of trouble. But I am glad that the government has yet to finance any bailouts. My hope is that the banks pay the entire cost of their mistakes.
It was certainly nice that Blackstone (NYSE: BX) had a strong Q2 with net income jumping from $224 million last year to $774 million. The stock is up over 7% in the pre-market.
The company's June IPO was highly anticipated and was viewed as a proxy for the health and financial success of private equity firms. It bombed. Shares fell from $38 to under $23 in less than two months.
But, the second quarter is not the number that bears watching. It was undoubtedly a success, but it came ahead of the credit crisis that has sucked financing for big LBO and private equity deals out of the market. Analysts are worried that the disappearance of liquidity in that buyout market could hurt the results of large financial institutions like Goldman Sachs (NYSE: GS) and Citigroup (NYSE: C).
Based on early trading, Blackstone's shares may make it back to $28 today, but to move back toward $38, the firm will have to prove that it can turn in another big quarter in a very bad environment.
Alltel Corp. (NYSE: AT) -- volatility Elevated; buyout expected to close in early 2008. AT, a customer-focused communications company, announced on May 21 it will be acquired by TPG Capital & Goldman Sachs Group (NYSE: GS) for $27.5 billion ($71.50 in cash). TPG & GS are expected to close on the purchase of AT in early 2008. AT is recently trading at $66.54. AT October option implied volatility of 16 is above its 9-week average of 12 according to Track Data, suggesting larger risk.
Hilton Hotels Corp. (NYSE: HLT) -- volatility flat; buyout expected to close by year end. HLT announced on July 3 Blackstone Group (NYSE: BX) would acquire all the outstanding common stock of HLT for $47.50 per share. HLT is recently trading at $44.11. BX expects the deal to close before year end. HLT over all option implied volatility of 16 is near its 3-week average according to Track Data, suggesting non-directional risk.
Zale Corp. (NYSE: ZLC) -- implied volatility Flat as ZLC near 13-month low. ZLC, an operator of 2,400 retail jewelry stores, is recently down 11 cents to $22.94. SIG, a specialty jeweler retailer terminated merger talks with ZLC on June of 2006. ZLC over all option implied volatility of 30 is near its 26-week average according to Track Data, indicating non-directional price risks.
Daily M&A Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.
For months, we've expected someone to pick up Guitar Center (NASDAQ: GTRC), the largest U.S. musical instrument retailer. Now, Bain Capital Partners affiliates will pay $1.9 billion in cash, or $63 per share, equal to a premium of 26% over yesterday's closing price of $50.06. Additionally, the buyers will assume about $200M in debt. Goldman Sachs Group (NYSE: GS) helped to auction them off, and the deal is expected to close in the fourth quarter.
Guitar Center, which went public in 1997, now has over 210 stores. Last year they bought instrument retailer Woodwind & Brasswind for about $30 million. Back in March came word that Sageview Capital upped its holdings to 8.69%. Brokers responded with strong buys, buys and some holds, based on expectations of solid growth in the year ahead. Now it's time for private equity to tune it up. The stock had been a disappointment and the direct response business needs help.
BloggingBuyouts is provided for informational purposes only. Nothing on the service is intended to provide personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. You are solely responsible for any investment decisions that you make. The contributors who provide the content of BloggingBuyouts may, from time to time, hold positions in the securities discussed at the time of writing and they may trade for their own accounts. Such holdings will be disclosed at the time of writing. By using the site, you agree to abide to BloggingBuyouts' Terms of Use.
BloggingBuyouts is the best resource for news, opinion, and research on the least understood, most powerful force driving financial markets today -- private equity investing. Michael Rainey, editor.
For more coverage of America's favorite publicly traded stocks, check out BloggingStocks
Semiconductor design startup Intrinsity Inc. said Monday it raised $31.5 million in a fifth round of venture capital, a strong endorsement of the company's three-year transition into a "chipless" company devoted solely to licensing its intellectual property.
Despite all the rumors, the $24.7 billion buyout of 
and 
. He also operates 
.gif){kind=logo}
