The Private Equity Council, the trade group created by the leveraged buyout industry when its public image was taking a bruising, came out recently with a report on job creation and the LBO industry. The report doesn’t shed much light, though.

The PEC and the academics who assembled the report obviously worked hard on it–and they point out the truism that in fact, in certain cases, PE firms create jobs. But the study took only a tiny slice of the market (42 companies bought by private equity firms). In addition, it didn’t name the individual portfolio companies at the request of the private equity firms that control them. 

“They simply wanted to produce company data on an anonymous basis,” PEC spokesman Robert Stewart said, citing “competitive issues.”

Nevertheless, here are some of its findings:
    Among the 42 companies, 32 or 76.2 percent expanded their
workforces in subsequent years while the remaining 10 cut their workforces. 
    Across all 42 companies, 26,214 net new jobs were created, or an increase of 8.4 percent over their combined employment of 310,420 at the time of acquisition. 
     
Data was provided by Apollo, Bain, Blackstone, Carlyle, Kohlberg Kravis Roberts, Providence, Silver Lake, and Texas Pacific Group.
 
But without more information on how big a slice of the corporate universe controlled by private equity the surveyed companies represent, and why these particular companies were chosen for the survey and not others,  the report seems to raise as many questions about job creation as it answers.

(Image. PEC’s Doug Lowenstein)

Dividend recaps got an ugly name during the private equity boom, as the public became more and more aware that buyout firms were quickly adding extra debt and pulling cash from companies they were supposed to be fixing.  Less than a year after CD&R, Carlyle and Merrill bought Hertz, for example, they paid themselves a whopping $1 billion dividend.

As to which firms employed this device more than others, Moody’s has a report on the matter.

Moody’s reviewed 220 transactions rated by its Corporate Finance Group since 2002, and found that large private equity firms took dividends in over 45 percent of the deals rated before September 2006, with nearly 30 percent taking dividends big enough to remove all or almost all the equity contributed to the initial deal. In 10 percent of the deals, Moody’s says sponsors drew a big dividend within the first year of the initial rating. The study excluded deals where ratings were reversed within 2 years.

So who were the avid recappers during the buyout boom? According to Moody’s, six firms were particularly aggressive, taking dividends in 50 percent or more of their deals: Welsh Carson, Cerberus, Providence Equity Partners, Carlyle, Madison Dearborn and TH Lee. KKR, Goldman Sachs and Bain Capital, took dividends in one-third of their deals.  

The basic function of a dividend recap, or leveraged recap as they’re also known, is to borrow more money after a leveraged buyout to pay cash to the investors. As PEHub’s Dan Primack puts it here, “critics (like me) assailed the practice as short-term greed, and claimed it was rampant. Industry insiders called us ignorant alarmists, adding that it was rare, safe and legal.”

In more than one-third of their deals, TH Lee and Apollo took dividends within the first year, Moody’s said. Goldman Sachs, TPG Capital, Cerberus, and Warburg Pincus did so once.

But fear not, recap critics. The credit crunch has made recaps tough, and quick ones nearly impossible.

In case you weren’t watching Business Wire on Friday night at 11 p.m., CNET put out a release saying they adopted a shareholder rights plan, otherwise known as a poison pill.  Hedge fund Jana Partners is pushing for a major shake up at the company, amassing an 8 percent stake in its voting shares.
    
One view is is that poison pills can come off as shareholder unfriendly. In theory, a rights plan is designed to fend off an undesired acquirer–especially one the target feels is trying to buy it on the cheap. But that doesn’t necessarily gel with shareholders’ feelings about whether they want the company sold.

With private equity and corporate buyers paying top dollar to shareholders over the last few years (prior to the credit crunch), poison pills fell out of favor somewhat.  What hasn’t fallen out of favor is the percentage of companies resorting to them when they’re in play. Bear with us.
    
There were 100 first time poison pill adoptions in 2003, according to research firm FactSet SharkRepellent. In 2007, that number fell to 42. 
    
Renewal rates for such plans have also plunged. In 2001, 84 percent of companies with poison pills renewed them. Last year, it was 30 percent, FactSet SharkRepellent says.
    
But there is one element of the poison pill strategy that’s on the upswing:  Implementing it when the company is “in play.”

Of the 100 pills swallowed in 2003, 11 percent of them were adopted when an unwanted suitor came knocking.

But of the 42 pills adopted last year, 24 percent of them came when a company was in play, according to FactSet SharkRepellent.

That’s could be a reflection on the wave of activist hedge funds -formerly known as corporate raiders-that barrelled into the M&A scene in the last few years. Names like Icahn, Ackman, Peltz, Ubben, Loeb may make some companies realize that a pill could be the only defense mechanism against a forced sale.

If activists have proven anything, however, in their rise to prominence, it’s that it is tough to kill off an auction. Activist investors, the successful ones anyway, are relentless, rarely letting go of a target until the fund has forced a change.

Will CNET’s pill ward off Jana? It seems that shareholders don’t think so. The stock rose 4 percent on Monday.

(Michael Flaherty and Megan Davies)

(Image. www.hauntedportraits.com)

Amid all the buzz about the rising clout of sovereign wealth funds (SWF) and their affinity for foreign assets, there is at least one country that isn’t ready to roll out the welcome mat: France.
    
France will take steps to help its firms defend themselves from sovereign wealth funds and private speculators, French President Nicolas Sarkozy said on Tuesday.

That’s a far cry from the policy of the USofA, which has so far allowed SWF’s to swoop in and bail out troubled financial firms with mega chunks of money.

Apparently, that’s not something France is prepared to invite.
    
“There is no question of France not acting … France will make the political and strategic choice to protect its companies, to give them the means to defend themselves and to develop,” Sarkozy told a news conference.
    
He said state bank Caisse des Depots would play a role in implementing this strategy. 
     
So it’s probably safe to assume that while SWF’s are interested in pulling in American/European talent, they’re not scouring the market for French speakers.

(Image credit: Reuters)

At the end of the day, it’s just a number. Nonetheless, it’s a double-digit number that begins with a “2″ — and one that Blackstone Group and its shareholders would have liked to stay above on the New York Stock Exchange.

For the first time since the private equity giant went public, its stock finished below $20 on Monday, even as the Dow and S&P ended higher. That’s right. It’s trading in the teens.
    
It’s a milestone few expected in the spring, when Blackstone IPO hype was at its height, or even when shares priced at $31 in June and sprung higher when they opened. Then the stock fell, and has continued to do so. The sub-$20 dip came on a day when Blackstone took a bit of a bruising in the press. What a difference a few months makes.   
    
The New York Post came out swinging on Sunday with a Blackstone gut shot in an article on its CEO’s response to the PHH deal falling apart. The article seemed a tad hysterical in its accusations, and made mention of Blackstone Chief Steve Schwarzman offering peace pipes to the CEOs of the two banks that were supposed to finance the deal but didn’t: JPMorgan and Lehman. 
    
In fact, Deal Journal said that according to a person familiar with the matter, no such meetings took place, though the person did concede that duking it out with the banks wasn’t worth it.
    
The fact that Blackstone didn’t put up a fight shows that the firm probably wasn’t all that bummed by the collapse. PHH’s exposure to real estate market woes would be enough to make any buyer cringe — not to mention their bankers — when the mortgage mess and credit crunch came into full view during the summer.

And so it is that the private equity darlings and its CEO who shined during the height of the buyout boom endured another down day–symbolic in its representation of a leveraged buyout market brought to its knees by the credit crisis.

(NYSE trader. Reuters file)

The anti-club deal case lives on.

Another lawsuit related to private equity “club deals” was filed recen tly in state court in Massachusetts. Here’s the lawsuit.

To refresh your memory, parties filed suit in federal court in New York against Bain Capital, Blackstone, KKR and others claiming anti-competition practices relating to club deals–deals where several teams of multiple buyout firms got together to bid for a company.

The lawsuit was withdrawn in August, in part due to a Supreme Court ruling on a separate case.

But here comes another, similar suit aimed at the buyout industry, this time filed in state court.

The only problem is that at this point, club deals have gone the way of the dinosaur, and the private equity industry is in retreat following the credit crunch.

How far will leveraged buyout activity drop  in 2008? Sanford Bernstein analyst Brad Hintz says 30 percent in a research note on Thursday regarding U.S. and European M&A activity. Hintz says LBO activity will drop an additional 22 percent in 2009.

The curse of the credit crunch lingers on.

“The overhang of unplaced debt from 2007 transaction volumes, wider credit spreads and more conservative lending policies will limit announced 2008 global financial sponsor M&A activity,” Hintz says. “An economic slowdown in the USA and the EU will reduce corporate earnings growth and limit the willingness of corporations to risk new acquisitions. The overhang of $160 billion of unplaced deal paper, wider credit spreads in the debt market and tighter lending standards at syndicating banks will constrain financial sponsor demand.”

You can say that again. Of the roughly $350 billion worth of private equity related debt that got stuck on banks’ balance sheets last year, about 40% of that has been pushed off either through deals like TXU and First Data going through or cancellations such as United Rentals and Harman.

Wall Street is happy to have sold down that chunk of debt, but the banks are hardly in the clear in terms of getting the rest off their shoulders.

At the same time, deal fees to Wall Street, coming off record highs, are set to drop 20 percent this year, Hintz says.  
    
In the corporate strategic sector of M&A, Hintz expects a brighter picture in 2008-09. European strategic M&A volumes will fall 4% in 2008 before rising 6% in 2009, he says. For U.S. strategic M&A, Hintz expects a 10% decline in activity levels in 2008, followed by a 1% increase in 2009.

That’s an interesting twist on strategic M&A, as some analysts believe corporate buying will increase this year while sponsors sit on the sidelines. 

Hintz goes on to break down the M&A revenue percentages across Wall Street. 

“M&A revenues accounted for 6.9% of Goldman Sachs’ total net revenues in 2006. MS, LEH and BSC each generated about 5.0 to 5.5% of their 2006 net revenues from advisory fees,” Hintz writes. “Merrill Lynch is the least exposed to M&A as just 3.4% of its 2006 net revenues came from M&A activities.”

Too bad Mother Merrill’s exposure to subprime mortgages wasn’t as puny.

(Image: Bernstein analyst Brad Hintz)

For those on Wall Street who asked “What is Warburg Pincus thinking?” when the firm announced a $1 billion investment into embattled bond insurer MBIA, that question got a lot more pertinent on Thursday.

Warburg’s deal was announced last week, when MBIA’s shares were getting slaughtered on its exposure to CDOs and subprime mortgage assets.

Then on Thursday, MBIA came out with a doozy: The world’s largest bond insurer said its exposure to CDOs, in fact, was a whooping $30.6 billion — an amount bigger than its entire net worth.

MBIA’s stock dropped another 27 percent — no surprise there, given the scope of the exposure. Its shares are now down more than 70 percent this year.

But from a private equity standpoint, the questions abound about Warburg’s investment plan in MBIA. Did Warburg know about this exposure at the time of the deal? Can it back out of the offer? Didn’t they listen to Bill Ackman’s detailed presentation a few weeks ago on his compelling thesis that certain bond insurers, namely MBIA, will essentially be bankrupt by early next year? Warburg declined to comment on Thursday.

Deal Journal points out that so far, on paper, Warburg is losing $20 million a day on its MBIA agreement.

Granted, the key word there being paper, as the deal hasn’t closed yet so nothing’s really been bought or sold yet.

But let’s give Warburg the benefit of the doubt here for a minute. The firm is well respected across Wall Street, and it’s not your average private equity shop. In addition to large-scale buyouts like the big guys, Warburg does venture-style investing, growth investing, recaps and other non-traditional deals. So of all the big buyout shops out there, Warburg may be the one most likely to sit on this investment for a while, assuming that when the deal does close in January-ish, they’ll be buying at the bottom.

Looking at MBIA’s financials and its stock performance lately, that doesn’t exactly seem like a safe bet.

David Rubenstein, a co-founder of buyout giant Carlyle Group, chalked up another deal on Tuesday. This time, it wasn’t Carlyle purchasing Dunkin’ Brands, or Manor Care, or an under-performing industrial asset.

Rubenstein bought a copy of the Magna Carta. Yes, the Magna Carta. A rare 710-year-old copy of the document was sold to Rubenstein on Tuesday at Sotheby’s for $21.3 million. That ought to go over really well with the SEIU and other union and activist groups accusing Rubenstein and his buyout brethren of making too much money.

Rubenstein said that he bought the document because he wanted it to stay in the United States. As a former member of the Carter administration, Rubenstein said he viewed the purchase as a sort of favor to the U.S. government, which has been generous to him.

If you follow private equity’s tax structure, indeed, the U.S. government has been kind to Rubenstein and his peers. Debate rages on about the pros and cons of carried interest, but the bottom line is that buyout firms are charged 15 percent for their profits, as opposed to the 35 percent ordinary income rate.

So even if you think Rubenstein’s tax bill is unfair, you can’t say he’s unpatriotic.

(Photo. David Rubenstein, Reuters file)

Pershing Square has taken it on the chin with its Target stake. The retailer’s announcement on Wednesday that it’s suspending its credit card auction is yet another upper cut.
  
Mind you, Pershing founder William Ackman is one of the best known activist investors out there, having made a boat load of money shorting bond insurers and shaking up companies like Wendy’s. And he is said to be approaching his Target investment with a long-term view. (What exactly long-term means to an activist hedge fund is anyone’s guess? Two years, three years? Twelve months?)   
    
But so far, his stake in Target has turned out to be a dog, long-term view or not.      
    
For starters, Ackman started scooping up shares when they were around $59 per share. They’re at around $51 now. 
    
Second, Ackman wanted Target to sell it’s credit card portfolio, which the company really wanted to keep. The business was a cash cow, and had generated big profits for the company.  Ackman wanted greater focus on the capital structure.
    
In a bow to the activist at their doorstep, Target agreed to put its card business on the auction block in September, two months after disclosure of Ackman’s stake.
    
Tough timing.
    
The credit crunch sunk its teeth into the markets by late July, and by the time Target put the business up for sale, private equity buyers were out of the deal picture, thanks in part to the division’s $7 billion price tag.
    
The thought among some private equity investors was that no matter what price they offered, even in the best of times, GE would likely outbid it. Indeed, GE has a deep history in buying up credit card portfolios. But it apparently isn’t interested in Target.
    
So Target has decided to keep its card business for now, promising to revisit the issue in the first quarter.
    
Ackman, no stranger to publicly condemning companies not doing enough for their shareholders, spoke highly of Target’s management and strategy at a recent hedge fund conference. Huh? Wasn’t he at all ticked at the lagging sale process? The stock price?
    
Perhaps Ackman has come to realize that sometimes, you have to pick your battles. The consumer is not in good shape right now, the large-cap private equity M&A market is dead, and at this point it’s not even clear if selling the card business is the right thing for the company. Plus, he’s in attack mode right now on the bond insurers, mainly MBIA.
    
“We are not surprised by the news,” said Joseph Feldman, a retail analyst with Telsey Advisory Group, of the delay. “I think if it were not for Bill Ackman, they probably never would be considering (the sale) as publicly as they are.”
    
Red Gillen, senior analyst with Celent, a Boston-based financial research and consulting firm had the following take: “Given the current business environment of increased consumer credit write-offs and delinquencies, Target suitors may be few and far between.”
    
Morgan Stanley M&A banker Rob Kindler said in March that you can’t beat an activist. Invite them in, pull up a chair. Don’t fight them. Kindler said that in April, when if an activist told a company to sell something, there were a dozen private equity firms ready and willing to buy it. Times have changed.
    
So while Ackman may be inclined to hold onto Target for the long haul, his stake has hardly emulated the quick and profitable action by his previous, ahem, targets.

(Photo. William Ackman)