bloggingbuyouts

A report inthe Financial Times says that Merrill Lynch & Co. Inc. (NYSE: MER) is holding talks with TPG about forming closer ties. This may include the possibility of the private equity firm investing in Merrill Lynch if the investment bank needs more capital. John Thain met with key executives from TPG according to the report.

The companies have apparently been in discussions since last fall. One affiliate had offered to put in as much as $3 billion into Merrill Lynch. Merrill Lynch raised some $12+ billion in funds elsewhere for different terms.

What is interesting here is that the article notes that TPG doesn't want to appear too close to Merrill Lynch, because of the appearance of being too close to a competitor.

The company has also raised additional funds this month by selling fixed income and preferred securities.

John Thain's suspenders and belt might be a little tighter since he went on record saying Merrill Lynch will not need any more capital.

General Electric (NYSE: GE) and Merrill Lynch (NYSE: MER) announced a deal Monday, which will result in GE picking up most of Merrill's commercial finance business.

The deal is expected to be completed during the first quarter of 2008, and will add an estimated $10 billion plus in assets to GE Capital. Merrill has been hit pretty hard this year with the subprime mortgage mess, and this deal will result in around $1.3 billion worth of capital that the company will be able to allocate elsewhere.

Merrill, which announced a massive $8.4 billion worth of write-downs back in October is in the middle of what it is calling a "strategic focus on divesting non-core assets." This sale is beneficial to Merrill because the firm's commercial-lending business has become reliant on companies that do not posses investment-grade credit ratings and pose a financial risk that Merrill does not need to be assuming, especially after Merrill's recent write-down.

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.

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

Look at the history of Wall Street and you will see a major theme: conflicts of interest. After all, the business is based on relationships.

Conflicts of interest are not necessarily bad. So long as there is disclosure – and clients understand the dynamics – it should be fine.

But, there should still be vigilance. That's the take from a recent piece in the New York Times.

In fact, with the surge in private equity deals, it's getting tough to see who's representing who.

Perhaps the biggest issue is when investment banks engage in their own deals and also advise the client. This is actually becoming common for firms like Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and Merrill Lynch (NYSE: MER)

But in this scenario, is the client really getting good advice? Or is the investment bank just trying to get a juicy deal?

One way to manage this has been for investment banks to invest alongside others. Thus, there would be no control position.

But with Goldman raising a $20 billion fund and other investment banks in the process of forming mega funds, is this realistic?

In other words, investment banks are going to start looking more and more like private equity funds – that, incidentally, provide advisory services.

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