For now, the private equity industry has dodged the “carried interest” bullet.

House Ways and Means Committee Chairman Charles Rangel, a New York Democrat, on Thursday said he is working on a temporary Alternative Minimum Tax relief bill that would drop the private equity and hedge fund carried interest provisions and use less controversial measures to cover the cost of extending AMT relief.

Carried interest, to review, is the profits private investment firms earn when they sell a company or any of their assets. In the typical private equity firm structure, for example, they keep 20 percent of the carried interest and give the rest to their investors.
Okay, so with that being a significant income stream for a private investment fund, you’d think that Uncle Sam charges them the 35 percent ordinary income tax rate. Not so.

They’re charged at the 15 percent capital gains rate. And therein lies the rub. Unions and politicians seized on the issue when it became clear to the public just how rich the private equity/hedge fund industry had become. Stephen Schwartzman’s quick leap to a $7 billion man was the last straw before Congress acted to take on carried interest, and try to get the firms to pay the 35 percent tax rate on profits.

Some called this the “war on prosperity.” But even private equity executives themselves called it common sense. For years, the buyout industry operated under the radar. It was a “dirty secret” that they paid capital gains on profits. 

Some private equity executives have defended the capital gains rate passionately, saying that its premise is to reward risk takers that, in the entrepreneurial spirit of capitalism, are willing to invest capital to create economic growth.

But opponents point out that the capital being invested is mainly other people’s money, namely institutional investors. So is private equity investing entrepreneurial, or just one heck of a way to make money, thanks in part to a low tax rate.

The PE firms’ defense of the carried interest rate lost some of its luster when a study came out that said most firms make most of their money off of fees, not carried interest. Fees earned by buyout firms are charged an ordinary interest rate, in most cases.

The bottom line, most private equity honchos interviewed by Reuters have said raising the carried interest tax rate really wouldn’t have a big impact on them, nor their institutional investors. For some smaller private investment firms, sure. But for the most part, jacking up the tax rate was a pain in the neck as opposed to a death knell.

Whether or not the issue will return to the Congressional calendar is up to lawmakers. But surely the private equity industry, and its intense lobbying effort, is pleased to have the issue on the backburner for now.

As for the industry’s critics, the tax rate will remain a sticking point–a loop hole they believe is open only to the richest Americans.

(Photo. Charles Rangel, Reuters file)

In the ongoing buzz about airline industry mergers, one carrier in particular stands out–Delta. 
    
The question remains: Will Delta be the airline that sparks consolidation or sputters it? If the economy keeps heading south, airline investors will be hoping for the spark.
    
The company, which rejected a hostile bid by US Airways early this year, and was recently thought to be exploring a merger with United Airlines, is happy to fly solo, it’s CFO told Reuters on Thursday.

“When you look at consolidation, you have to look seriously at your stand-alone option,” Edward Bastian (pictured below) said at the Reuters Aerospace and Defense Summit in Washington. “We feel very comfortable that our stand-alone plan is viable.” 

Delta has denied it was in talks with United. Nevertheless, the company has hired advisors to help it explore strategic options, meaning in M&A terms that it is more or less on the block.  
     
As reported by Reuters’ Chris Reiter, mergers could be a way out of the industry’s looming troubles, but so far, it’s just talk.  Naturally, US Airways CEO Doug Parker thinks Delta is the catalyst that will turn that talk into action.
     
“Delta will be the trigger if they want to be,” said Parker, who engineered the 2005 merger of America West and US Airways. “When they decide to do something, that will be the trigger.”
 
He said Delta’s the likely trigger because US Airways and Northwest Airlines Corp are too small to kick start the process, while United is willing but has been unable to pull off a deal. Meanwhile, American Airlines parent AMR Corp and Continental Airlines Corp appear unwilling to initiate the process. 
 
Parker thinks that now is the time to merge, because a new presidential administration will only make anti-trust approval more difficult.

(With material from Chris Reiter and Kyle Peterson)

Photo. Delta CFO Edward Bastian. Reuters file

Listen up young Wall Streeters! It’s been a tough year, with the mortgage and credit mess, and your bonus may only be the size of a New York City municipal worker’s salary — but don’t let one night ruin your career.  

You may want to take some advice recently emailed to us under the subject: “Office Party ‘Schmoozing’ for Career Success.” The email leads with the point that “strategic networking” at holiday office parties can boost a person’s career (or end it, as it were). It features tips from John McKee, one of America’s leading business success coaches and author of “Career Wisdom - 101 Proven Strategies to Ensure Workplace Success.” 

How to schmooze without coming off as a brown-noser? How to chat up a head honcho and not appear like a rookie? Is dancing on a table appropriate? Fortunately, McKee has answers.

Here are some of his bullet-pointed tips (and we’re not kidding) — and some of our questions/observations in italics. Please feel free to comment with your own.

Imbibe and socialize with caution.  There is no quicker career killer than public displays of drunkenness at a business function. Don’t embarrass yourself by dancing like a crazy person or like a predator at a club, get caught necking or act aggressive in any way. (Does doing the back-spin or worm qualify as “crazy person” dancing)

Debrief your guest.  The person you have chosen to accompany you to a business function, and how they behave, reflects directly on you - whether positively or negatively. (But what if you really like to party with this person? Won’t bosses respect you for bringing someone who likes to have a good time?)

Maintain your visibility. The location where you are situated should be highly visible.  Stand in a place that is approachable - not behind chairs or the kitchen door where there is high traffic. (Standing by the bar all night is certainly a recipe for disaster).

The great can articulate. Being able to effectively communicate, off the cuff, what you do for an organization, without gloating or over-inflating, is critically important. (Is telling your boss that their spouse is “hot” out of the question then?)

You can talk about airline industry consolidation all you want. But actually integrating two businesses is tough, according to Henri Courpron, president of the aerospace division for Seabury Group. 
     
“You need a solid plan,” he said at the Reuters Aerospace and Defense Summit in Washington D.C. “The airline industry is so complex.” Gone are the days of two CEOs going out to dinner and outlining a deal on a napkin, he said. Seabury provides investment banking and consulting services to the transportation and logistics industries and other industries.
     
Courpron’s take on consolidation comes as the U.S. airline industry continues to explore ways to survive through mergers. 
     
Once two airlines do decide to combine, the “change management” that goes into effect is a lot different than managing the business day to day, Courpron says.  
     
The name of the game? “Execute, execute, execute.”

(With Pat Fitzgibbons)

(Photo. Henri Courpron. Reuters)

Will Cerberus’ reputation be damaged, as the firm has now had two deals fall apart in the past month alone? The answer is, probably, no.
    
Certainly a company’s board will raise the issue of loyalty at future meetings. But will they slam the door shut when Cerberus shows up offering a 20 % plus premium to an undervalued company? Unlikely.
    
On Tuesday, Cerberus’ Option One deal with H&R Block was officially called off, to the surprise of very few. Unlike United Rentals, a deal that Cerberus pulled last month to the shock of the market (and frankly, a lot of top folks at the company), the Option One agreement had been unraveling since the subprime mortgage meltdown took hold this summer. The original majority buyout was toast as of a few months ago, and all that was left was the possibility of Cerberus scooping up some servicing units. So much for that idea.

Oh and by the way, Cerberus’ portfolio company Aegis Mortgage Corp. filed for bankruptcy in August.

A blow to their image? Maybe. But Cerberus will still be getting plenty of business, bankers and investors say.
  
Folks on Wall Street say that Cerberus’ behavior in the United Rentals deal is hardly exemplary in terms of painting buyout firms as the friendly, faithful-to-the-end buyer–or, if you will, the “white knight” swooping in to fend off angry shareholders and tired management teams.  Buyout firms typically seal deals with a “you can count on us,” kind of handshake.
 
The buyout industry has tried very hard in the last year to boost its image from the “asset stripper and flipper” reputation that has clung to it. Cerberus’ decision to walk from United Rentals without even citing a material adverse change in the business certainly hasn’t painted a pretty picture of the industry.
    
But there is one thing that so many on Wall Street point out. Under the leadership of the legendary Stephen Feinberg, Cerberus is seen more as a trading shop, as opposed to a nuts and bolts buyout firm.
    
Indeed, they are the only major buyout player with such a sophisticated hedge fund operation. To be fair, Cerberus is very much concerned about its image after the United Rentals dust up, and has ramped its public relations effort since the mud-slinging began.
    
So with a United Rentals decision yet to be determined, and with Option One deal behind it, Cerberus will keep treading through the market searching for targets in need of capital and industry insight. And they’ll find them, and will likely keep minting money and raising loads more of it. 
     
(Image credit. Cerberus, three-headed dog. Alison Smith.  http://www.amosink.com)
   

Brave New Films, Robert Greenwald’s company behind the movie “WalMart–The High Cost of Low Price,” is taking aim at another industry: The private equity world.

On Thursday, the company will release the first of a series of short videos on private equity.  The first piece is called “A Home for the Holidays” and its “world premiere” will occur this Thursday on the sidewalk outside of Henry Kravis’ home at 625 Park Avenue.

The group says the clips will be viewable online.  “Future videos released over the next six months will focus on other corporate excesses by private equity firms and the stories of their many victims,” the group says.
    
First, the SEIU workers union went after Kravis near his Hampton’s house, as part of its campaign to target what they believe is unfair tax treatment on the leveraged buyout industry. Then the SEIU staged a protest outside of KKR’s Midtown Manhattan headquarters after the Toys R Us lead paint recall (Toys is a KKR and Bain portfolio company).
 
Now, the activists are at it again, and Kravis is in their crosshairs. According to the film company, the gathering on Thursday will feature folks wearing sandwich boards with embedded TVs showing “A Home for the Holidays.” 
    
The film comes after a United Kingdom-based report commissioned by the industry said companies owned by private equity ought to provide a business review similar to that disclosed by listed companies.
 
The report said companies should disclose industry trends, information about employees, as well as details on risk management and uncertainties such as those relating to debt.  Blackstone CEO defended the LBO industry shortly after the report came out.
 
While U.S. lawmakers are taking aim at the tax treatment of private equity firms, the UK has been more aggressive lately in getting the private investors to be public about their business. 

Whether the legal pressure, or even the attention from unions and film makers will impact the industry remains to be seen. Despite all the negative attention on the industry, the private equity pros profit most handsomely when valuations are in the dumps, which, many sponsors argue, is exactly where company prices are headed.

For those following the United Rentals-Cerberus legal battle, the equipment rental company filed a motion for summary judgement last night, hoping a Delaware judge can quickly rule on the case.

To all interested parties, click here for a copy of the legal filing.

HSBC decided to hire some heavy hitters to beef up its leveraged finance group in the last month or so, at a time when other banks began freezing loans to private equity firms.
  
Focusing on a financial sponsor/lev fin team during a credit crunch seemed questionable at the time. How many deals, after all, would buyout firms pull off in this environment? 
    
The other side of that argument is that private equity folks have around $1 trillion at their disposal, so they’ve got to spend their money somehow, even if it isn’t on Mega-LBOs promising massive fees to banks. Witness TPG’s purchase of Axcan Pharma on Thursday for $1.3 billion — hardly the $20 billion plus deals they chased only a few months back.
  
Who provided debt financing for the deal? HSBC. Bank of America was another lender, with both banks showing that they’re lending desks are open for business at a time when other banks like Citigroup and Merrill Lynch have all but shut theirs. 
     
HSBC and BofA now hope the loans don’t suffer the same fate as other LBOs that found scant buyers, leading to large write-downs across Wall Street. For now, HSBC is happy to be taking an underwriting fee while their banking brethren on Wall Street are twiddling their thumbs until bonus time.

Nice guy, that Bill Ackman.

Speaking at a value investor conference in New York, hedge fund hell raiser William Ackman pummelled the bond insurer industry and predicted that MBIA was headed for catastrophe. 
    
After excoriating the sector, Ackman the Activist founder of Pershing Capital, showed his “nice side.” Having already made a boat load of money on his short position on bond insurers, Ackman made a pledge.

From now on, the profits he makes from the decline in bond insurers will be donated to his charitable foundation, he said. Ackman is of course aware that a meltdown in bond insurers would hurt mom and pop, as the insurers back a big chunk of municipal bonds. But he’s pretty sure that the insurance subsidiaries will be saved, in the event of a blow up, while the holding companies are what he expects to go under.

When an audience member asked him about his investment in Borders, Ackman gave the following explanation for his angle:

“Big picture? I like reading, and I think other people do. I think they’ll continue to read.”

(Photo credit, New York Business)

Could the battle for Restoration Hardware become another situation like EGL, Inc? If so, Restoration CEO Gary Friedman may be upset at the prospect of a rival bidder, but it sure does help when that rival is willing to pay more.
 
Restoration agreed to be bought on Nov. 8 by a group including Friedman and private equity firm Catterton Partners. The management buyout was valued at $6.70 per share, or around $267 million.
 
Any buyouts that involve management often come under scrutiny, because after all, the deal involves an insider any way you slice it. Despite management’s supposed independence from the special committee deciding whether to do such a deal, the committee is intimately close with that manager(s). The likelihood of them getting the green light is pretty high. 
 
On the flip side, an outsider arriving at a management buyout deal is probably not going to get as a warm a reception, for obvious reasons. In the Restoration Hardware deal, Sears is that other party. Not surprisingly, it looks as if the special committee has hardly rolled out the red carpet for them.
 
Sears, the retailer controlled by hedge fund guru Eddie Lampert, offered $6.75 per share for Restoration Hardware on Monday. Sears complains that Restoration is not offering any peaks into its books, despite a go shop period in place following the management-Catterton deal. 

Will Restoration open its books to Sears? That remains to be seen.
 
If you’re wondering how this will all end up, take a look at what happened with trucking company EGL, Inc. And keep in mind that Sears’ buying power is a lot stronger right now than a private equity firm, which is limited in its borrowing levels thanks to the credit crunch. 
 
In the case of EGL, Inc., a buyout group led by its CEO and Founder, James Crane, looked ready to seal a deal for the company earlier this year. Crane’s private equity partner was Centerbridge, which replaced General Atlantic after that firm got cold feet. 
 
The deal looked good until Apollo Management not only offered a higher bid, but complained about being shut out of deal discussions. After some back and forth, Apollo handed over the highest price and won the deal. Money talks.
 
One thing to keep in mind in these situations is the “manager” or “managers” involved. Even though Friedman could end up losing the deal to another party, a bidding war raises the takeout price.
 
So if you’re him, which do you prefer? Being part of the company’s “go private” transaction, or seeing your stake in the company go up a few million bucks. Reuters data show that Friedman owns 2.6 million shares as of Nov. 8, or more than 6 percent of the company.
 
Sure, he’d probably like to stay with the company. But watching your shares go up in price isn’t a bad consolation prize.
 
In the case of EGL’s Crane, his original buyout offer was $36 per share. Apollo’s winning bid was $47.50 per share. It stinks to lose, but making millions in the process probably softens the blow.