Xerox, which said early Monday morning it will buy Affiliated Computer Services for $6.4 billion, has had its eye on the IT services company for at least two years, but talks only began toward the end of the first quarter of 2009, several people familiar with the matter told Dealzone. Blackstone, which advised Xerox, worked with the company on this over the past 18 months, in addition to making the introductions earlier this year, according to one source.

Talks grew hot and heavy over the summer, especially as the credit market conditions improved, a second source said. Xerox has committed financing of $3 billion for this deal, which is being arranged by JPMorgan, so the deal only began to look like a real possibility once the financing side was sorted out.

ACS, which competes with other technology services providers such as Computer Sciences Corp and Accenture, is an attractive company because of its recurring revenue business model. It’s been an especially alluring target for private equity buyers, with Cerberus having offered to buy it for $62 a share in 2007. Cerberus withdrew its offer citing the credit crunch and ACS management’s refusal to engage with them. TPG was also interested in ACS about five years ago, the second source added.

Buyout firms didn’t lose the opportunity to sniff around at ACS this time around either, the sources said, although it’s not clear if the ACS management asked its bankers to run a formal sale auction.

“Every PE firm in the world that could raise the debt was kicking the tires on this one because of the cash,” said the third source.

So after doing the M&A dance for months, why did the companies rush to announce the deal on Yom Kippur, the Jewish holiday? Apparently, word got around on Sunday that Xerox was preparing a significant announcement, and some reporters were tipped off about it, two of the sources told Dealzone. But the board only ended up meeting late at night to approve the deal, and so it was considered “safe” to hold on to the announcement overnight, but not through all of Monday!

Update: From my colleague Franklin Paul, who said Xerox CEO Ursula Burns apologized to the audience on the ACS deal call “for our need to do this announcement on Yom Kippur.” “It was certainly not our intention,” Burns said, but they wanted to seal the deal before it began leaking. Certainly they did, given that Xerox has coveted ACS for a long time and probably would have hated to see the deal botched by rumors before the two sides signed on the dotted line.

Have two big Japanese lenders, backed by private equity, found a way to come up with a sensible merger plan? A merger between Shinsei Bank, nearly a third-owned by JC Flowers, and Aozora Bank, more than half-owned by Cerberus, is reported back on track after the Western firms cooled their jets on the deal last month, saying there was no strategic plan behind the tie-up.

Shares of both institutions have been on a tear since talk of a merger bubbled up last month, but are mere shadows of what they were earlier in the decade after their sale to private equity marked a fresh stab at rehabilitation in the Japanese banking industry. Just about the only thing going obviously well for the investments right now, aside from the merger bump, is the strength of the yen.

The banks plan to set up a holding firm in 2010 and merge a year or so later, the Nikkei Business Daily reported. JC Flowers and Cerberus will probably remain shareholders in the holding firm, according to the report, so this wouldn’t be a big cash-out for either.

Pooling their expertise make sense in Japan, where foreign ownership of local institutions has had a history of causing more friction than warmth. Analysts say the merged bank — which would be Japan’s sixth-biggest — would still need government money and face a huge challenge to win over depositors from the country’s megabanks.

Deals of the Day:

* A consortium of 11 banks and interdealer broker ICAP has bid 813 million euros ($1.07 billion) for LCH.Clearnet, Europe’s top independent clearing house, a source close to the consortium said.

* French energy giant EDF agreed to sell a stake in nuclear operator British Energy to Centrica, striking a partnership with the gas group to build a new generation of nuclear power stations in the UK. Centrica will pay 2.3 billion pounds ($3.4 billion) for the 20 percent stake.

* Shinsei Bank and Aozora Bank have agreed to merge around the middle of next year, the Nikkei business daily reported on Monday, a move that would form Japan’s sixth-largest bank.

* Australian brewer Lion Nathan has agreed the terms for a $2.5 billion takeover by Japanese brewer Kirin, which is making an aggressive push into Asian markets.

* Mitsubishi UFJ Financial Group Inc’s trust banking unit said it is still planning a $254 million purchase of Citigroup’s Japanese trust bank, denying a report that the deal was about to be derailed.

* Despite major social problems, now is the moment to create a big European car maker by combining Italy’s Fiat with the European operations of General Motors, including its German brand Opel, Fiat’s chief executive said.

(PHOTO: A man walks past a Shinsei Bank signboard at its branch in Tokyo April 27, 2009. REUTERS/Kim Kyung-Hoon)

Embattled Cerberus Capital Management, a private-equity firm named for the mythological three-headed dog that guards the gates of Hades, has been overwhelmed by clients seeking to withdraw money from its $2 billion hedge fund, Cerberus Partners.

Website FINAlternatives said that fund investors representing 17 percent of the assets wanted to withdraw their money in December, the most recent month for which statistics are available. Now, with Cerberus's investments in Chrysler and GMAC going bad and unemployed investors needing to tap more funds, that figure may be heading higher.

Now, according to this Bloomberg report, Cerberus sent a letter to clients warning them that it could take "years" to meet all the redemption requests, which have stacked up since the firm imposed gates in December.

“The fund’s withdrawal requests have increased substantially since the fund suspended withdrawals, partially because investors wanted to reserve their place in line and partially due to individual investors’ own liquidity needs,” according to the letter.

Like some other hedge fund firms juggling the desires of investors who want their money, with trying to avoid gutting their portfolio with forced selling, Cerberus is considering creating a special vehicle that would carve out a portion of the fund to be liquidated and distributed to investors who want out.  But it also says this would not be a quick fix. Company founder Stephen Feinberg told investors the fund “Would be managed by the general partner until it is fully liquidated, a process which might take several years.”

So should Cerberus investors lump the hedge fund in with its auto wrecks? The Cerberus Partners fund lost 16 percent in the year ended last November and fell 3 percent to $1.99 billion in the first two months of February, but at least one private equity investor tells us they are not any worse at this business than their competition. Still, investors may want to tread warily around the three-headed dog when Feinberg says the current mess has created some great new distressed debt opportunities for his firm.

Cerberus spokesman Peter Duda declined to comment for this post.

(PHOTO: A Belgian shepherd practises an attack on his trainer during the European dog show in Budapest October 3, 2008. REUTERS/Laszlo Balogh)

For M&A bankers, 2008 is perhaps best remembered using the catchphrase of Comic Book Guy from The Simpsons: “Worst. Year. Ever.”
    
Dealmaking reached record lows in 2008, dominated by cancelled deals. At the start of 2009, questions linger about several companies, executives and deals. Most notably, though, there is a big question mark over private equity.     

Last year was a bad year for PE firms as credit markets became too tight, stocks fell unpredictably low, and deals that were announced in better times began falling apart.  PE deals fell to a five-year low.

The ‘Golden Age’ of PE quickly faded as many of the biggest buyouts announced in 2007 collapsed in 2008, including the $41 billion deal for Canadian telecommunications operator BCE, the largest announced buyout in history.    

And many of the deals that did close are lining up to file for bankruptcy. Leverage – the backbone of PE deals — should be hard to come by for some time. And with the IPO market still frozen, firms will likely be holding on to their purchases much longer.    

Attention-shy Cerberus struggled this year with two bad bets –GMAC and Chrysler. The government stepped in to help the auto industry – and Cerberus benefitted too.   

As part of that deal, Cerberus had to hand over much of its GMAC stake to its investors. A big question for 2009 is whether investors will be able to get rid of their shares.

The handout of billions of dollars from the Treasury to Chrysler also put into question on Cerberus’ plans for the automaker in 2009. Unlike General Motors, Cerberus has provided few details on how it plans to make Chrysler viable. 

DEALS OF THE DAY    
** Immunodiagnostic Systems Holdings Plc said it sold its money-losing haematology business unit to Escalon Medical Corp, a Nasdaq-listed healthcare company, for 4.2 million euros.  

** British gaming firm NetPlay TV Plc said it acquired Venturygames.co.uk and Toucanwin.com, the mobile gambling and skill gaming businesses of Info-download Ltd, a unit of Zed Worldwide SA, for 1 million pounds ($1.46 million) in stock.

A company in the U.S. auto industry fails — and the government steps in as savior. Yet again. That’s right. Santa visits the automakers this year while the Grinch steals taxpayers’ Christmas.

The Bush administration is buying $5 billion in equity in GMAC – the finance arm owned by GM and Cerberus Capital Management. The Treasury has also offered a new $1 billion loan to GM so the automaker could participate in a rights offering at GMAC.

Yes, this in addition to the recent $17.4 billion emergency loan to save GM and Chrysler from bankruptcy.  In fact, the government already helped GMAC last week, when the Federal Reserve approved the finance company’s application to become a bank-holding company.

But the Fed’s approval was conditional on GMAC raising new capital.

GMAC said it had raised enough capital to satisfy the Fed’s conditions just as the Treasury announcement on Monday.

The Treasury’s generous moves help Cerberus just as much as they help the auto industry. Cerberus bought 51 percent of GMAC in 2006 and 80 percent of Chrylser last year. The private equity firm has been stung by both those investments as U.S. auto sales have plunged to record lows amid a sinking economy following its purchases.

A happy coincidence: Cerberus Chairman John Snow was the Bush administration’s treasury secretary before Henry Paulson.

The GMAC loans, as well as the original $17.4 billion in aid, come from a program within the Troubled Asset Relief Program to make investments directed at the auto industry. A Treasury official told the Wall Street Journal the new program did not have a specific dollar limit. Now there’s a scary thought.

DEALS OF THE DAY

** China’s three leading steel mills agreed to merge into one entity via share swaps which will create the country’s largest listed steelmaker and further speed industry consolidation. 
       
** Suzlon Energy Ltd, the world’s fifth largest wind turbine maker, said it had raised its stake in Germany’s REpower to 73.71 percent by paying Portugal’s Martifer 65 million euros ($91.98 million). 

** Nationwide Mutual Insurance Co will go ahead with the buyout of its unit Nationwide Financial Services Inc at a price struck months before life insurers were hammered by the market turmoil, the Wall Street Journal said. 

** PCCW’s financial advisers said the takeover offer for the company had been raised to HK$4.50 per share from HK$4.20, in a move aimed at prompting minority shareholders’ support for the buyout.

The Fed donned the red suit on Christmas eve for GMAC, giving the troubled auto finance company the nod to become a bank holding company.

The speedy approval should not come as a surprise, given that GMAC lends to consumers and GM depends on the finance company to sell cars — factors that could make its survival seen as key to fixing the economy.

The new status gives the company access to government lending programs and should allow it to continue financing loans for GM cars.

“In light of the unusual and exigent circumstances affecting the financial markets … the board has determined that emergency conditions exist that justify expeditious action on this proposal,” the Fed said in a statement.

The bank holidng status will come at a cost to GMAC’s majority owner Cerberus and minority owner GM: Both must cut their stakes in the company to comply with regulations that prevent many kinds of companies from owning too big a share of a bank.

DEALS OF THE DAY

** Nissin Foods Holdings, Japan’s top instant noodle maker, said it would buy a one-third stake in Russia’s largest instant noodle group Angleside Ltd for about $296 million, making a foray into the fast-growing market.

(Photo credit: Cheryl Ravelo, Reuters)

GM went trick-or-treating early but it looks no one answered the door. Either that, or its trick wasn’t very good. Either way, it appears to have come up empty-handed in its bid for government goodies.

The much-talked about General Motors-Chrysler merger is off the table for now. Reuters is reporting that talks hit an impasse after the Bush administration said “no” to funding for the deal, citing three people with direct knowledge of the talks.

GM had approached the Treasury in recent days about support for the merger through some $10 billion in new funding that would have included taking an ownership stake in the merged company, people familiar with the talks have said.

A Bush administration official told Reuters the administration was not negotiating direct aid for the deal.

Maybe GM will have better luck after Nov. 4. Halloween will be over but Christmas isn’t too far away.

More deals of the day:

** Britain’s second biggest bank Barclays Plc is to raise 7.3 billion pounds ($12.1 billion) from investors from Qatar and Abu Dhabi and others to allow it to avoid taking government rescue cash, it said. The bank said it is raising up to 3.5 billion pounds from Sheikh Mansour Bin Zayed Al Nahyan, a member of Abu Dhabi’s royal family. That could give him a 16.3 percent stake in the bank.

** UK life insurer Friends Provident said it is abandoning the sale of wealth management unit Lombard, nine months after putting the business on the market, and reported a worse than expected drop in nine-month sales.

** Blacks Leisure Group, the British outdoor clothing retailer will consider selling its underperforming Boardwear business, made up of 57 Freespirit, Mambo, Animal and O’Neill stores, its CEO said.

At the end of December 2007, Daimler’s 20-percent stake in Chrysler was valued at about $1.18 billion.

At the end of June, Daimler valued that investment at about $219.6 million.

Today, Daimler said the book value of that 20-percent stake is zero.

That’s right, zero.

To put that zero in perspective:

A year ago, after Daimler sold 80 percent of Chrysler to U.S. private equity firm Cerberus Capital Management, the German automaker listed the value of its minority interest at $1.8 billion.

Ten years ago, Daimler paid $36 billion for all of Chrysler.

For Daimler to disclose that the book value of its stake has come to nothing, and to do it at a time when it is in talks to sell that stake to Cerberus, is bad news for Chrysler.

In a move equally telling, Cerberus is trying to offload Chrysler and is talking to various parties about multiple options including a full sale or an asset swap, according to people familiar with the matter. In order to make any such deal simpler, it is also in talks with Daimler for the remaining stake.

Chrysler has been hit hardest by slumping U.S. auto sales. Industry-wide October auto sales are expected to hit 18-year lows. Chrysler’s sales are down 25 percent so far this year as tight credit conditions, high oil prices and a weak housing market have whacked vehicle demand.

Cerberus founder Stephen Feinberg, who bought Chrysler in a $7.4 billion deal last year, is eager to cut his exposure to the auto business and to increase his 51-percent stake in GMAC, the finance arm co-owned by GM, sources have said.

The write-down is partly bookkeeping (Daimler took a huge charge for the vanished value) and the carrying value may or may not reflect the stake’s value in a sale.

But if you couple that move with the difficulty in valuating auto assets (already considered distressed) and the poor visibility in the sector today, Daimler’s disclosure points to a fearful observation. It’s one that a few analysts and industry experts have recently cautioned about: Chrysler’s auto operations as a whole may, indeed, be worthless.

EBay’s lawsuit against Craigslist alleges that founder Craig Newmark and CEO Jim Buckmaster tried to dilute eBay’s 28.4 percent stake in the company after a marriage proposal. According to court papers unsealed Wednesday, Craigslist wanted out of the relationship since eBay had launched a competing product, Kijiji, but Meg Whitman countered with a bid to buy the entire company, leading to the allegedly “clandestine” meetings between Newmark and CEO Jim Buckmaster. At stake is the world’s third most valuable Web startup, as ranked by Silicon Alley Insider, valued at approximately $5 billion.

Microsoft’s board met on Wednesday to discuss its stand-off with Yahoo, but don’t get too excited: they failed to reach a decision on what to do next, according to a Wall Street Journal report. The board is still weighing whether to adopt a hostile approach and nominate a proxy slate of directors to replace Yahoo’s board, sweeten its cash-and-stock offer for Yahoo, or possibly walk away from the deal. A Microsoft-imposed “deadline” passed last Saturday.

Three-headed canine guardian of the gates of Hell, meet controversial private security contractor Blackwater. Cerberus Capital Management is in talks to invest $200 million for a stake in Blackwater USA, ABC News reported on Wednesday, citing sources. Or, not. The Wall Street Journal confirmed that Blackwater is seeking outside investment, but quotes a Cerberus spokesman as saying the private equity firm took a look but decided to pass. As the WSJ’s Deal Journal notes, the “secretive, billionaire, former paratrooper [Cerberus' Steve Feinberg] trains his largesse on a secretive, lucrative quasi-military operations company” story was just too good to be true.

** British software company Micro Focus International Plc said it was to buy U.S. peer NetManage Inc for an agreed $73.3 million, or $7.20 per share.

** Britain’s Hornby Plc has agreed to buy model car maker Corgi for 8.3 million pounds ($16.5 million) to add to its stable of iconic toy brands, which include Scalextric racing cars, Airfix model planes and its eponymous train sets.

** Turkey’s leading mobile phone operator Turkcell is in talks to buy 80 percent of Belarussian Telecommunication Network (Best), a Turkcell official told Reuters.

** Japanese staffing service firm United Technology Holdings Co Ltd said it had abandoned plans for a capital and business tie-up with bigger rival Goodwill Group Inc.