Post by unlawflcombatnt on Dec 25, 2007 6:40:42 GMT -6
from Business Day
Party's over for Wall Street deal makers
December 24, 2007
"With the days of cheap debt over, the buyout bubble has finally burst, writes Andrew Ross Sorkin.
FOR the past few years deal makers have been popping champagne corks and swinging from chandeliers. Now they are popping aspirin and sweeping up the pieces.
Despite the sharemarket's recent run, the buyout bubble has burst and some of the biggest names on Wall Street, including Henry Kravis of Kohlberg Kravis Roberts & Company and Lloyd Blankfein of Goldman Sachs, have found themselves wishing they could back out of some of the deals they agreed to just months ago, before the credit market seized up, and still hold on to their blue-chip reputations.
The hangover may fade, but some effects will linger. Every cycle creates its own lessons, and the latest one will probably lead to a rewriting of the rules.
Aggressive pricing, loose financing and conflicted roles, all of which helped to create the biggest mergers and acquisitions period in history, are apt to become rare, at least until the next deal-making boom erases memories of the last bust...
Foreign companies may continue to shop for acquisitions in the US, hoping to take advantage of the weak US dollar.
But the business of undoing deals is turning the world of private equity, once genteel, into a series of billion-dollar spats and not so thinly veiled threats. Public companies, which had been running into the arms of private equity and large takeover premiums, have become more reluctant.
Of all the expected changes in the buyout environment, the biggest is the most evident: deals will slim down substantially, because of the disappearance of cheap debt. Six months ago the possibility of a $US100 billion private equity deal seemed almost realistic; today it is laughable....
Private equity firms will have to provide more cash to finance their leveraged buyouts. There is an old line on Wall Street: LBO firms like their deals the way James Bond likes his martinis: extra dry. That means with as little equity as possible. The banks, which had been happy to mix this cocktail, have now taken the drink off the menu....
deals appear to be unravelling or getting renegotiated as quickly as they were put together. Recently Sallie Mae's buyers said they planned to abandon their $US25 billion deal unless they got a lower price, and Kohlberg Kravis and Goldman Sachs said they would ditch their $US8 billion acquisition of Harman International, which makes audio systems.
In both cases the buyers reckoned that those businesses had deteriorated so much that their contracts were void. Last Monday Silver Lake Partners and ValueAct Capital said they had negotiated to pay $US65 million get out of acquiring Acxiom for $US2.25 billion. These collapsing deals could convey another lesson, for sellers: buyers will not necessarily stand by their deals if things turn sour....
One reason that buyers have been so willing to walk is the recent advent of the termination fee, also called a reverse-breakup fee.
A termination fee allows private equity firms to abandon deals by paying a lump sum. It was intended to encourage firms to complete deals but has turned into a double-edged sword. With a termination fee in place, many private equity firms have decided simply to pay their way out of an undesirable deal.
Before the reverse-breakup fee existed, if a firm broke its deal its reputation would take a big hit. But now, James said, a broken deal was just a business transaction....
Will termination fees get terminated? Just the opposite, many on Wall Street say. They are likely to become much, much more expensive, making them less attractive as an escape hatch for private equity firms with cold feet...."
Party's over for Wall Street deal makers
December 24, 2007
"With the days of cheap debt over, the buyout bubble has finally burst, writes Andrew Ross Sorkin.
FOR the past few years deal makers have been popping champagne corks and swinging from chandeliers. Now they are popping aspirin and sweeping up the pieces.
Despite the sharemarket's recent run, the buyout bubble has burst and some of the biggest names on Wall Street, including Henry Kravis of Kohlberg Kravis Roberts & Company and Lloyd Blankfein of Goldman Sachs, have found themselves wishing they could back out of some of the deals they agreed to just months ago, before the credit market seized up, and still hold on to their blue-chip reputations.
The hangover may fade, but some effects will linger. Every cycle creates its own lessons, and the latest one will probably lead to a rewriting of the rules.
Aggressive pricing, loose financing and conflicted roles, all of which helped to create the biggest mergers and acquisitions period in history, are apt to become rare, at least until the next deal-making boom erases memories of the last bust...
Foreign companies may continue to shop for acquisitions in the US, hoping to take advantage of the weak US dollar.
But the business of undoing deals is turning the world of private equity, once genteel, into a series of billion-dollar spats and not so thinly veiled threats. Public companies, which had been running into the arms of private equity and large takeover premiums, have become more reluctant.
Of all the expected changes in the buyout environment, the biggest is the most evident: deals will slim down substantially, because of the disappearance of cheap debt. Six months ago the possibility of a $US100 billion private equity deal seemed almost realistic; today it is laughable....
Private equity firms will have to provide more cash to finance their leveraged buyouts. There is an old line on Wall Street: LBO firms like their deals the way James Bond likes his martinis: extra dry. That means with as little equity as possible. The banks, which had been happy to mix this cocktail, have now taken the drink off the menu....
deals appear to be unravelling or getting renegotiated as quickly as they were put together. Recently Sallie Mae's buyers said they planned to abandon their $US25 billion deal unless they got a lower price, and Kohlberg Kravis and Goldman Sachs said they would ditch their $US8 billion acquisition of Harman International, which makes audio systems.
In both cases the buyers reckoned that those businesses had deteriorated so much that their contracts were void. Last Monday Silver Lake Partners and ValueAct Capital said they had negotiated to pay $US65 million get out of acquiring Acxiom for $US2.25 billion. These collapsing deals could convey another lesson, for sellers: buyers will not necessarily stand by their deals if things turn sour....
One reason that buyers have been so willing to walk is the recent advent of the termination fee, also called a reverse-breakup fee.
A termination fee allows private equity firms to abandon deals by paying a lump sum. It was intended to encourage firms to complete deals but has turned into a double-edged sword. With a termination fee in place, many private equity firms have decided simply to pay their way out of an undesirable deal.
Before the reverse-breakup fee existed, if a firm broke its deal its reputation would take a big hit. But now, James said, a broken deal was just a business transaction....
Will termination fees get terminated? Just the opposite, many on Wall Street say. They are likely to become much, much more expensive, making them less attractive as an escape hatch for private equity firms with cold feet...."