Thursday, December 20, 2007

3 Pictures, 3,033 Words

December 13, 2007: Lufthansa buys a 19% stake in JetBlue (JBLU) for $7.27 per share.

JetBlue CEO Dave Barger said selling the stake to Lufthansa was a "short, quick decision." (Bloomberg)

No shit, really?
* * *

November 14, 2007: Hedge fund Pardus Capital sends a letter to Delta Air Lines (DAL) urging an immediate merger with United Airlines.

“We will do everything we can to kill this merger.” — Lee Moak, head of Delta's pilots' union (DealBook)

So that's what $140 million sounds like when it's flushed down the toilet.

* * *

June 21, 2007: The Blackstone Group (BX) prices its initial public offering at $31.00 per share.

"I think the public markets are over rated." — Stephen Schwarzman (Reuters)

Ya think?

* * *

For those of you who have nothing better to do but check my word count, the total excludes my editorial commentary and the mouseover nuggets hidden in the pictures. You better watch out, though, or you're going to end up like that poor slob at UBS in London who spent two hours looking at this blogsite a couple of days ago: bored and unemployed.

© 2007 The Epicurean Dealmaker. All rights reserved.

Thursday, December 13, 2007


A target company stock price that is depressed.

A weak US dollar.2

Delusional foreign CEOs who never learn.3

All for this one moment.

1 Noun : (head'-en-up-pen-dee-ass-eye-ten) : The condition afflicting any CEO who makes a cross-border minority investment in a passenger airline.
2 John Stewart: "John, in your expert opinion, what has caused this steep decline in the value of the dollar?"
John Hodgman: "I would have to say God. I mean, it's right there on the dollar, 'In God We Trust.' We counted on Him, and we were fooled. I mean, what kind of Benevolent Deity would allow our money to be equal to that of Canada?" — The Daily Show
3 US Airways/British Airways. Northwest/KLM. British Airways/Iberia. Need I go on?

© 2007 The Epicurean Dealmaker. All rights reserved.

Tuesday, December 11, 2007

Frequent Flyer


© 2007 The Epicurean Dealmaker. All rights reserved.

Monday, December 10, 2007

Full Fifty Men

"Follow. But! Follow only if ye be men of valor, for the entrance to this cave is guarded by a creature so foul, so cruel that no man yet has fought with it and lived! Bones of full fifty men lie strewn about its lair ... So, brave knights, if you do doubt your courage or your strength, come no further, for death awaits you all with nasty, big, pointy teeth."

— Monty Python, The Holy Grail

I guess the witch doctors at McKinsey ran out of chickens, so the executive bobsled team at UBS has decided to purify their sins in a bath of their shareholders' blood. So many shoes continue to drop in the global credit system that the financial sector is beginning to look like Imelda Marcos' closet in an earthquake.

Because the announced $10 billion in writedowns at UBS seem to be connected to subprime mortgage exposure, it remains unclear whether McKinsey's advice to push decision making authority for leveraged loans down into the investment bank helped the bank make better lending decisions or worse. Any guesses from the peanut gallery?

The good news is that Our Favorite Consulting Firm now has brand new material to work with, helping the fondue-eating writedown monkeys scour the streets of Zurich for loose change to fund the cash portion of its investment bankers' bonuses. That shouldn't take too long, but I expect compiling the report about it will add another six months to the project billings.

Talk about scope creep.

© 2007 The Epicurean Dealmaker. All rights reserved.

Sunday, December 9, 2007

Sleeping Dogs

If you're gonna dance with the Devil, make sure to wear sturdy shoes.

— Anonymous

In between reading every legal brief on Lexis/Nexis, parsing pending merger agreements into Esperanto and Swahili, and sleeping no more than two hours a day, hyper-prolific law professor and perennial Customer of the Month at the Wayne State University Starbucks Steven Davidoff has apparently found time to produce yet another comprehensive tome on merger practice.

This time, he addresses what he calls the "Do's and Don'ts of Private Equity," from the perspective of corporate executives and Board members, M&A lawyers, and public shareholders. It is a pretty good list, in my view, and worth a gander if you have a fresh Venti Caramel Macchiato and twenty minutes or so to spare. If not, just e-mail the link to your favorite corporate lawyer requesting that he or she read all the merger agreements Davidoff appends for private equity deals which have closed since August. (After all, what fun is it being a big shot corporate exec if you cannot torture your lawyer?)

I will not add overmuch to your Monday morning reading duties, but I do want to offer a few observations on a couple of Professor Davidoff's points.

In the first instance, he advises his fellow lawyers to eschew overly complex wordsmithing in merger agreements and their ancillary documents. He has railed against sloppy, careless, and unnecessarily (and counterproductively) obscure drafting in other contexts, and it is clear that he views an extra hour or so of a lawyer's time to be well spent in cleaning up such messes before they end up in court.

Surely, a great deal of such poor drafting can indeed be attributed to laziness, haste, or sheer incompetence, as Professor Davidoff implies. But I have another theory for you. Based on my experience, I believe a non-trivial amount of such obscure legal drafting is in fact intentional. I believe some lawyers draft clotted legalese or do not attempt to clarify others' scribblings because they realize, at a conscious or subconscious level, that the confusion in the text reflects a fundamental disagreement or misunderstanding between the parties to the agreement in question. Haste, pressure of time or events, or sheer wishful thinking encourages such lawyers to whistle past a particular graveyard, or let a particular sleeping dog lie. After all, virtually no-one—not even most lawyers—actually wants or expects an agreement to end up in litigation, and that is usually where the parties' differing intent and interpretations of sloppy contractual language is aired and ultimately resolved.

You can see this as cowardly, or lazy, but I prefer to view it as reasonably pragmatic. After all, the great majority of merger agreements do not end up in court, and you can bet that is not because they are all drafted to an ABA-approved level of clarity and precision. Furthermore, lawyers understand that they work for businessmen, who want to strike deals, but who themselves may not have a good understanding of all the risks and issues involved in a particular M&A transaction, much less how they feel about them. In such circumstances, is it really so bad to cross your fingers and whistle past that nasty contractual briar patch wherein lie all sorts of differing intentions and interpretations of, e.g., specific performance? Not only is the perfect the enemy of the good in contractual law, but arguably the bad is not necessarily the enemy of the good, either. The intent of M&A dealmaking, after all, is to make deals.

On a second note, Professor Davidoff recommends corporates involved in private equity deals get themselves a good independent financial advisor; that is, one not embedded within an investment or commercial bank which is also offering to finance the deal. This is indeed good advice, since no matter how trustworthy an individual banker may be at Goldman Sachs or Credit Suisse—and believe it or not there are still a few who make Mother Theresa look like a check kiter—the economics of banks with large leveraged finance businesses means that he or she simply cannot deliver the firm in all circumstances.

Even if your banker is working for you, the CEO, or the Special Committee of your Board, if his or her firm makes a lot of money lending to private equity, you're screwed. I don't care whether you run a Fortune 50 company or not, unless you are General Electric or Cisco, KKR, TPG, and Blackstone each pay more money to Wall Street in a year than you have done in a decade. And credit crisis or not, everyone expects that to continue for the indefinite future. Your banker Joe may be your old college pal and godfather to your daughter, but if his bank is not purely focused on M&A, your little old billion dollar buyout is just a sideshow.

So if you are the CEO or Chairman of the Board of a public company, no matter how large and well-banked by the cream of Wall Street, pick up the telephone and arrange to meet some of the independent M&A advisors out there. (Much to my anticompetitive chagrin, there are plenty of them.) It is definitely not stupid to have a few pure advisory bankers you know and trust in your rolodex before Henry Kravis comes knocking on your door.

© 2007 The Epicurean Dealmaker. All rights reserved.

Friday, December 7, 2007

True Story

A recent DealBook article questioning the independence of fairness opinions made me chuckle yesterday. It also made me recall an incident from my halcyon past, when I was a bright-eyed, bushy-tailed young investment banker deeply involved in a rather large and rather prominent merger between two publicly traded companies.

As is sometimes the case, the proposed merger had come about in a rather circuitous fashion. My client had been talking to a smaller third party about acquiring them when the eventual merger partner intervened in an attempt to prevent the acquisition. (They wanted control of the small fry themselves.) The two CEOs met over brandy and cigars to hash out a compromise, one thing led to another, and they both decided they had so much in common they set a wedding date right there. We bankers were called in the next day to paper over the deal and put lipstick on the pig, but the particular porker had already been picked out.

For various reasons I will not bore you with here—just in case the SEC Enforcement Division is still reading—it also happened to be the case that, while the other party was approximately twice the size of my client, my client had the upper hand in negotiating the merger. The exchange ratio was set, the various "social issues" (like who got the CEO title and the cutest personal assistant) were nailed down, and the bankers trundled off to our respective Fairness Opinion Committees to get internal sign off on the deal.

Now, for those of you who are not in the know, a "fairness opinion" is something a party to an M&A transaction requests from an investment banker. It usually takes the form of a letter, clotted with all sorts of equivocations, qualifications, and other legalese and supported by reams of analysis on the deal, comparable transactions, and the like, which boils down to Investment Bank XYZ representing to the Board of Directors of Client Company ABC that the transaction under consideration is "fair from a financial point of view." The actual origins of this little deal artifact are lost in the mists of time, but its purpose is very clear: it provides yet one more piece of paper for the Board of a public company to cover its ass, usually from attacks by disgruntled shareholders who feel the Board and management have sold their company down the river.

The clever TED reader will have already figured out that, as such, a fairness opinion is not really an investment banking document at all. It is a legal safeguard, pried kicking and screaming out of the investment bank by the client's corporate lawyers to make sure that someone other than their client is at least potentially on the hook if the deal is challenged. You can just imagine the hissing and spitting, biting and gouging, and other lawlerly shenanigans that take place between company lawyers and the investment bankers over the wording of a fairness opinion, with the lawyers wanting the investment bank to say as much as possible and the investment bankers wanting quite the opposite.

Because investment banks realize that they face some (contestable) legal liability from issuing a fairness opinion, they usually require that the bankers working on the deal prove its "fairness"—at least to the standards of a fairness opinion letter—to a committee of senior M&A bankers who are not otherwise involved in the transaction. In theory, at least, if the deal bankers cannot prove the deal is fair to their client's shareholders, the committee will not approve the letter, and the investment bank has to tell its client it cannot issue one. You can just imagine how much fun that conversation is to have with your client.

So, in the case of the big merger I was telling you about, the final deal was so lopsided in my client's favor that the Fairness Committee meeting was actually rather uncomfortable. I mean, there was no question that the deal was "fair" to my client's shareholders—in the same way that Genghis Khan was adept at striking "fair" bargains for food and supplies from villages his ravening hordes galloped through—but my committee bankers were seriously worried that the other party's investment bank would not be able to say the same. They signed off nonetheless, simply warning the deal team that we might face demands to retrade terms once the other party's Board got the bad news.

Well, it turned out their concern was for nought. The deal sailed through the other party's bank's Fairness Committee, and the Boards made a joint announcement of the proposed merger the following Monday. Problem solved.

Oh, and the other party's investment bank issuing the opinion? Goldman Sachs, of course.

Which is why I find all this hoohah about the independence of fairness opinions rather amusing. You do not really think there is some objective measure of "fairness" in an M&A deal, do you? Do you really think Fidelity Investments and Legg Mason derive a great deal of comfort and guidance from the investment banks' fairness opinion letters filed with a merger agreement?

Not being a lawyer myself, I have never really understood the putative value of these pieces of paper. Either a deal was negotiated in good faith, at arms length, with a rigorous price discovery process, or not. If it was, then of course it was fair: it was the best deal the Board could get for their shareholders at the time. If not, well ... And you will be sure to find this out in the legal discovery process should someone with enough standing and enough outrage challenge the deal in court. I can guarantee you that no Delaware judge worth his salt will take a look at a Goldman Sachs fairness opinion letter and say, "Well, that's settled, then."

Certainly the investment banks have never thought fairness opinions had much value. Parse it how you will, a bank which is getting an advisory fee to close a deal has always thrown in the fairness opinion for free. Investment banks will charge for a fairness opinion if they are brought in specifically for that purpose and that purpose alone—an "independent, third party" look—but they'd all much rather have the success fee. And the DealBook article makes that clear.

No truer words were spoken than those offered by the professional shareholder mentioned at the article's close:
Consider this cynical comment from an unnamed buyside equity analyst who took part in Thomson’s survey. Asked if companies should hire an independent third party to render an additional fairness opinion, the analyst said: “It would not introduce additional integrity into an already flawed process. It would only add to the number of pigs feeding at the trough.”

So here is some free advice to all my friends in Corporate America and the lawyers who advise them from someone inside the sausage factory: Skip the "independent" fairness opinion and spend your time and attention running a rigorous M&A process that will stand up to the light of litigation. You'll save some money, and you'll cover your ass in far more effective armor than empty boilerplate.

© 2007 The Epicurean Dealmaker. All rights reserved.

Wednesday, November 21, 2007

Lis Pendens

I guess Stephen Feinberg has finally gotten tired of being United Rentals' punching bag. Yesterday he sent his attack puppy Mark Neporent to disabuse The Wall Street Journal of the "outrageous spin and misinformation" being bandied about by spurned buyout target URI over their disputed merger agreement. The article recaps the issue at hand:
At the heart of the dispute is another arcane M&A term that has taken new meaning as the credit crunch turns the deal world on its head. This one is called “specific performance,” and refers to the ability of a seller to force a buyer to complete an agreed-to buyout.

Cerberus points to a line in the merger agreement that says, in part: “In no event…shall [Cerberus or affiliates] be subject to any liability in excess of the” $100 million breakup fee. People in the URI camp say that interpretation ignores the specific-performance language in the same document that a judge will also take into account and which they say will force Cerberus to go forward with the deal.

Neporent is certainly correct in saying that the merger document seems to limit Cerberus' liability for damages strictly to the breakup fee. The "line" (rather sentence) in question at the end of Section 8.2 of the agreement says the following [annotations mine]:

In no event, whether or not this Agreement has been terminated pursuant to any provision hereof, shall Parent, Merger Sub, Guarantor or the Parent Related Parties [Cerberus and its homies], either individually or in the aggregate, be subject to any liability in excess of the Parent Termination Fee [100 million spondulics] for any or all losses or damages relating to or arising out of this Agreement or the transactions contemplated by this Agreement, including breaches by Parent or Merger Sub of any representations, warranties, covenants or agreements contained in this Agreement, and in no event shall the Company seek equitable relief or seek to recover any money damages in excess of such amount from Parent, Merger Sub, Guarantor or any Parent Related Party or any of their respective Representatives [most especially Stephen A. Feinberg].

But Mr. Neporent slips into spin mode himself when he continues.

Referring to the shell company Cerberus created to buy United Rentals, Neporent adds: “RAM negotiated an agreement that allows it to pay $100 million to walk away, unconditionally and under any circumstances. RAM has lived up to the contract it negotiated.”

Uh, no, that's not how I read it. In order to pay $100 million and walk away, Cerberus has to formally terminate the agreement. But it cannot unilaterally terminate the agreement at whim. Its ability to do so is strictly limited to the occurrence of specific conditions, including, principally, a material adverse effect in URI's business. Cerberus has not claimed an MAE or any other termination condition has occurred. Of its own volition, it remains a party to the signed agreement. It simply claims that its liability under any circumstances is limited to the breakup fee, whether the agreement terminates or no.

* * *

So what is this "specific performance" schtick that URI is flogging in the Delaware Chancery Court anyway?

I will risk alienating the three corporate lawyers left in my audience who are too lazy to have cancelled their subscriptions by wading into the debate with a few well-chosen observations. Lacking the pedigree or training of an accredited legal education, I will of course turn to that font of all legal scholarship, Wikipedia. It says the following about specific performance:

In the law of remedies, an order of specific performance is an order of the court which requires a party to perform a specific act. While specific performance can be in the form of any type of forced action, it is usually used to complete a previously established transaction, thus being the most effective remedy in protecting the expectation interest of the innocent party to a contract. ...

Under the common law, specific performance was not a remedy, with the rights of a litigant being limited to the collection of damages. However, the courts of equity developed the remedy of specific performance as damages often could not adequately compensate someone for the inability to own a particular piece of real property, land being regarded as unique. Specific performance is often guaranteed through the remedy of a writ of possession, giving the plaintiff the right to take possession of the property in dispute. However, in the case of personal performance contracts, it may also be ensured through the threat of proceedings for contempt of court.

Orders of specific performance are granted when damages are not an adequate remedy, and in some specific cases such as land sale. Such orders are discretionary, as with all equitable remedies, so the availability of this remedy will depend on whether it is appropriate in the circumstances of the case.

Given that URI and its shareholders are probably facing the erasure of a couple billion dollars of market capitalization for the foreseeable future if Cerberus walks, it does appear to Your Dedicated Correspondent that URI can argue a $100 million goodbye kiss is not an "adequate remedy" for damages suffered.

There are some circumstances where specific performance is usually not granted. Wikipedia lists them as:

  1. specific performance would cause severe hardship to the defendant
  2. the contract was unconscionable
  3. the claimant has misbehaved (no clean hands)
  4. specific performance is impossible
  5. performance consists of a personal service
  6. the contract is too vague

Because Mr. Neporent boasts to the Journal that Cerberus has $10 billion of ready liquidity, it does not appear credible that buying URI for $7 billion would be a severe hardship. Neither is it apparent to a disinterested observer that any of the other conditions apply in this case. Chalk another one up for URI.

On the other hand, it is not obvious to me as a layman that what Cerberus has to deliver under the contract—seven billion dollars, more or less—is really that unique and irreplaceable. (I could see Cerberus bringing a claim of specific performance against URI if the tables were turned, since URI itself is arguably a unique collection of assets which Cerberus could not obtain elsewhere.) Why can't Cerberus argue that URI is not permanently harmed because it can simply go back out and find someone else to buy the company if it really wants to sell? Sure, the selling price may be lower, but dems da breaks, no? Notwithstanding the fact that the credit markets still seem to be suffering from a collective case of the vapors, there remain quite a few strategic and financial buyers out there with plenty of the folding, and the last time I looked the dollar was still a fungible, if depreciating, currency. Add a tally to the Cerberus column.

And yet, Cerberus has presumably triggered this dispute by getting cold feet about the price it agreed to pay for URI. It has not claimed that a material adverse effect has occurred, and a cursory reading of the conditions under which either party can terminate the merger agreement (Section 8.1) seems to indicate that Cerberus indeed has no cause to terminate the deal unilaterally. (If it did, it could pay the reverse breakup fee and walk away. URI would have no remedy but to pound sand and plant unflattering rumors about Feinberg in Vanity Fair.) Therefore, the merger agreement is still in force, and presumably Cerberus is still subject to all of its obligations thereunder, including the non-trivial one of delivering a suitcase full of 7 billion simoleons to the closing ceremony. It cannot terminate, and the company will not terminate. What does signing a contract mean if you can just sit back passively and refuse to deliver your side of the bargain? Forget about specific performance; what about simple performance?

Since URI seems to have limited its ability to collect liquidated damages from Cerberus to the $100 million breakup fee, I guess its only option is to get the Chancery Court to enforce the merger as agreed. Hence, I presume, its approach based on specific performance. Since the facts do not appear to be in dispute, and the language of the contract does not seem to be unclear, the outcome will presumably come down to a question of law. Will the court compel Cerberus to perform under a contract which it has not chosen to (and apparently cannot) repudiate, or will it tell URI that—tough cookies—it waived its ability to collect more than $100 million from Cerberus under any circumstances other than the closing of the merger? Stay tuned for the answer.

(Oh, and you're welcome for the cut-rate legal education. Send your checks for $1,000 each made out to the TED Legal Defense Fund, care of Stephen Feinberg, 299 Park Avenue, New York, NY 10171. We also accept euros, pounds sterling, and Canadian loonies, but only at last year's exchange rates. Pip-pip.)

* * *

UPDATE: A colleague of mine with even less legal education (and therefore substantially greater clarity of thought) than me points out that one can indeed read the critical language in Section 8.2 above as limiting Cerberus' liability to the breakup fee even if it intentionally breaches or repudiates any or all provisions of the merger agreement, including the obligation to close. If so—which I presume is the interpretation Cerberus itself intended and sought by negotiating it into the document—that would be a new one to me. Sort of like a "Nyah, Nyah, Just Kidding" clause, or a "Contract? This Ain't No Stinking Contract" provision. If it stands in court, and URI actually agreed to give Cerberus a $100 million Get Out of Jail Free card for a $7 billion acquisition, I think it should be enshrined in the annals of contract law as the United Rentals, Inc. Dumbshit of the Century Clause. I would fully expect that none of us will ever see it a second time.

Any time any of you clever legal eagles out there would like to weigh in on the subject and illuminate me, feel free to drop me a line. I'm scratching my head so hard my hair is beginning to fall out.

FINAL UPDATE: For those of you looking for more informed speculation on this little brouhaha, and with time to spare over the long weekend, you could do far worse than to start here at the M&A Law Prof Blog. My interpretation: things don't look so good for URI.

© 2007 The Epicurean Dealmaker. All rights reserved.

Monday, November 19, 2007

Shotgun Wedding

This should be interesting.

United Rentals, Inc. filed a lawsuit today in the Delaware Chancery Court to compel Cerberus Capital Management to go through with its agreed $34.50 per share take-private of the company. The $7 billion planned wedding began to look a little shaky last Wednesday, when Reuters began running stories hinting that Cerberus was getting cold feet and might walk away from the deal.

It turns out that the prospective groom delivered a "Dear Sally" letter to URI that very day, explaining that he just wasn't ready for marriage, but was willing to try a little experimental cohabitation (at a lower price) instead. If URI did not agree, Cerberus made it clear he was ready to send a really nice box of chocolates (and $100 million wrapped up in a bow) as a farewell present, "no hard feelings."

Apparently the would-be bride, surrounded by hundreds of wedding reception centerpieces, custom printed cocktail napkins, and a two-hundred pound melting ice sculpture of Rodin's The Kiss, took the letter a little poorly. For one thing, the wedding itself was only days away, and for another Mrs. Cerberus-to-be was distinctly in a family way, pregnant with a full-term bouncing baby LBO. News that Cerberus might pull out of the deal sent her social standing plunging over 30% on the New York social circuit and almost guaranteed her little darlings would never get into Greenwich Country Day School. It did not help matters that she suspected Cerberus himself or his college drinking buddies were the scallywags who leaked the embarrassing news to the press.

So, being one of those modern gals who do for themselves, URI broke out the shotgun and the high priced lawyers and decided to "learn" Mr. C. just who it is that wears the pants in her family. From the evidence of her opening salvo, it looks like she's planning a long and nasty fight. Knowing that her former paramour Stephen Feinberg is of an excessively shy and retiring disposition, she made sure to identify him by name in the very first sentence of the press release accompanying the filing of the complaint today. If I were a betting man, I would lay even money on the fact that we can expect to see copious mentions of Mr. Feinberg and his associates in frequent press releases published by the company from now on. After all, URI is a public figure, so she is naturally obligated to share all important developments with her legions of friends and family on a regular basis. I wonder how Mr. C. will hold up under the pressure.

What is more interesting to me, however, is how old Steve got himself in such a predicament in the first place. According to URI's complaint, Cerberus tried to renegotiate a lower price for the deal or just walk away (after paying the $100 million reverse break up fee) because it didn't "feel comfortable" hitting up its committed financing banks for the leveraged loans to fund the deal. (Uh, excuse me, but since when did any private equity shop worth its Park Avenue address give a flying fuck in a rolling donut what pain their financing banks had to endure to fulfill a financing commitment?) Cerberus didn't invoke a "material adverse effect" or MAC clause, which URI alleges would have been the only alternative under the merger agreement which would have allowed Cerberus to repudiate the deal and pay the break up fee. In fact, URI alleges Feinberg and his associates specifically denied that an MAE had occurred when they were asked.

Of course, we have only heard the girl's side of this story to date, and we all know that Cerberus must have some sort of defense for its behavior. Unlike most "he said, she said" situations in real life, however, there is an actual legal document in this case which governs the parties' allowed behavior. According to a Bloomberg story today, Cerberus told the SEC "that it intentionally negotiated a higher price [for the deal] in order to include an 'out clause' that would allow the firm to walk away by paying the $100 million fee," so presumably it thinks there is language in the contract which supports its position. Only time—and the Delaware Chancery Court—will tell. I for one will hang on the outcome like a disease.

In the meantime, you, I, and the financial media will wait with bated breath for the details of this sordid affair to meet the light of day. Was Cerberus simply stupid, or was it trying to show its limited partners and its financing banks that hey, it tried to get out of an unfavorable purchase contract, but those nasty Delaware Court judges just wouldn't cut it any slack?

That would be a new approach: fiduciary out by reason of legal incompetence.

© 2007 The Epicurean Dealmaker. All rights reserved.

Wednesday, November 14, 2007

Resistance Is Useless!

And then, one Thursday, nearly two thousand years after one man had been nailed to a tree for saying how great it would be to be nice to people for a change, one girl sitting on her own in a small café in Rickmansworth suddenly realized what it was that had been going wrong all this time, and she finally knew how the world could be made a good and happy place. This time it was right, it would work, and no one would have to get nailed to anything.

Sadly, however, before she could get to a phone to tell anyone about it, a terribly stupid catastrophe occurred, and the idea was lost forever.

This is not her story.

— Douglas Adams, The Hitchhiker's Guide to the Galaxy

Where are the Vogons when you need them?

* * *

I was thrilled to find out today that the bright bulbs at Pardus Capital have discovered how to make the world a good and happy place, and—unlike Mr. Adams' unfortunate girl in Rickmansworth—they were actually able to make it to a telephone (or an e-mail server) to communicate it before anyone obliterated the planet to make way for an interstellar bypass.

Their world-changing idea—in case you missed the public notice in the media today—is to effect a no-premium stock-for-stock merger of equals between Delta Air Lines and United Airlines. By way of this impressively clever and original mechanism, Pardus proposes to eliminate vast cartloads of duplicative costs ($585 million, to be exact) and put the merged airline on the path to prosperity in an age of rising fuel prices and looming Democratic re-regulation. Implicit in this strategic thunderbolt I can only assume there must be additional benefits, as well, such as the eventual recovery of pricing power by pathetic hub-and-spoke carriers, fresh pillows and mints for every economy class passenger, and the permanent global eradication of jock itch. Left unstated in the press release is whether anyone will need to be nailed to a tree or any other wooden structure to effect this revolutionary outcome, but I suppose we must take it on faith that our intrepid Pardusians have thought of this, as well.

"Damn!," you exclaim, "Why hasn't anyone else come up with such a brilliant and simple idea?" Good question. I guess the legions of M&A and corporate finance bankers plying their trade in the aviation sector over the past several decades just didn't have the intellectual firepower or sheer visionary drive of Pardus principals Karim Samii and Shane Larson. Either that, or they were too busy picking lint out of their collective belly buttons to notice a brilliant idea like this when it trotted up and pissed on their shoes. Who knows?

On behalf of my fellow investment bankers, I must humbly accept this rebuke for having had our collective thumbs up our asses for so long and express my sincere thanks to our hedge fund brethren for having so gently shown us the error of our ways. I confess that I, too, was ignorant of the fact that the firmament had been graced with the shooting star that is Pardus, but I am profoundly grateful that Mr. Samii was not content to rest upon the laurels of "a successful career at the investment firm W. R. Huff of Morristown, N.J." but rather chose to illuminate our pathetic fumblings with the radiance of his intellect.

Now, a cynic and a caviller might object to our heroes' proposal with a laundry list of the usual objections to airline mergers (chief among them the rather intransigent sticking point of how you merge employee seniority lists between pilots and flight attendants at two different airlines into one happy, cohesive family who are delighted—simply delighted, I tell you—to deliver improved customer service to a planeload of $49 passengers from Detroit to Orlando), but I for one will resist such negativity. After all, Messrs. Samii and Larson have correctly identified the looming threats of permanently higher fuel prices and crushing structural debt as problems desperately in need of a solution, and who are we to object to the patently obvious answer of merger and cost-cutting they lay before our dazzled eyes?

Others might say that the legacy airline business typified by carriers such as Delta and United is doomed to stumble along ad nauseum until public outcry breaks down the political and regulatory barriers to consolidation by merger or liquidation, but this is nothing more than unhelpful pessimism. Sure, both Democrats and Republicans have been diligent in preventing meaningful consolidation through cross-border mergers (no "foreign person" can own more than 25% of the voting stock of any US carrier), intra-US combinations (viz. the damp squib that was USAirways/United), or even the judicious application of Chapter 7 liquidation to the zombie air carriers who seem to revisit bankruptcy every few years or so, but we must understand that all those distinguished grey-haired pilots and curvy stewardesses wield a pretty mean lobbying stick. Furthermore, no Congressman worth his or her salt wants to preside over the (arguably necessary) destruction of (tens of) thousands of excess jobs in the name of economic rationality. After all, how can you serve the public good if you cannot get re-elected?

Besides, we know the Pardus Capital gang have already thought through all these trivial issues. After all, they spent a tidy chunk of their limited partners' capital on hiring both Gordon Bethune and SH&E to give them the answers they wanted to hear. They even went so far as to pro forma Continental's and Northwest's numbers into a two-page merger model with Delta, but their grizzled industry experts waived them away from the apparently greater cost savings of the latter and the "difficult management succession issues" of the former as non-starters. Whew. I'm glad those are out of the way.

And we know that Pardus is serious. A hundred and forty million dollars serious. They just added four million shares to their now-seven million share holding in Delta, so their interests are fully aligned with those of the rest of us widows and orphans who have a soft spot for legacy air carriers headquartered in Atlanta. Not for them to talk up the Delta shares just so they can trade out of the tar baby they just stumbled into, no sir.

So, in that spirit, I am offering my M&A advisory services to Pardus to help them effect the industry-transforming merger they have proposed. I suggest a modest success fee of $75 million if we succeed, and a "Sorry, better luck next time" pat on the back if we don't. Being successful hedge fund guys themselves, they should understand that kind of "trader's option" incentive structure perfectly well.

Not that that is what they do, mind you.

© 2007 The Epicurean Dealmaker. All rights reserved.

Thursday, November 8, 2007

Ave atque Vale

Well, Percy Walker has taken his marbles and gone home. We citizens of the blogosphere are the poorer for it. (Approximately $10.4 billion poorer, if you take Ol' Perce at his word.)

This is a bad thing, in my opinion. Percy was "the world's foremost authority on the proper tax treatment of carried interest," in his own words, and it is always a great loss to the public weal when the leading theorist on a contentious social issue is forced to leave the field due to a few overzealous Spitzer wannabes. I would much rather have watched Percy and Vic "Carrot Top" Fleischer continue to mud wrestle over the issue and bite the occasional chunk out of each other's ear lobe. Everybody loves a good fight.

I suppose it is a sign of the maturation of the issue of private equity taxation that things have taken such a turn. Realizing that the private equity industry has no more than three actual friends on Capitol Hill (out of a total of 54 lobbyists and six dogs), Carlyle's David Rubenstein has dropped his previous strategy of wrapping Henry Kravis in the American Flag and wearing a lapel pin made out of apple pie in favor of pointing out that any tax targeted at carried interest will gore a great number of oxen that have no relationship to picayune plutocrats with Rod Stewart fetishes; namely, oil and gas and real estate. And everyone knows that we can't even look sideways at Real Estate nowadays without having the poor wretch burst into tears.

Vigorous theoretical defenses of the indefensible and scathing ad hominem attacks on your enemies simply no longer cut it in this Brave New Corporatized World of private equity. Christ, Rubenstein talked so much about "global brands" at the Deal M&A conference this week he began to sound like a Procter & Gamble ad manager. Plain speaking pioneers like Percy Walker are being frogmarched into retirement by weasely image consultants and PR specialists who are less interested in the truth than in soaking the previously principled PE firms for all they are worth.

Not that I agreed with Percy, mind you. I have no prouder trophy than Percy's blog post anointing me as one of his "Private Equity Haters." (You wouldn't believe how expensive and dangerous it is to bronze an entire computer while it is logged onto the internet, but I did it.) A great man is largely defined by the power and influence of his enemies. By that token, I am officially a Bad Ass.

Anyway, wipe away a tear for the passing of a great man. And pay absolutely no attention to those scurrilous rumors that Percy has eloped with sardonic memoirist Equity Private of PE fan site Going Private. While it is true that She Who Must Be Obeyed has been missing in action for over a month, I know for a fact that there is no truth to the rumor that she has been personally preparing a leafy love nest on a deserted Tahitian island in advance of Percy's arrival. Like all good private equity professionals, she outsourced it.

© 2007 The Epicurean Dealmaker. All rights reserved.

Wednesday, November 7, 2007

Being Bruce Wasserstein

Once again, I am sorry for any disappointment I may have caused my Faithful Readers for another extended absence, but I have been busy trying to persuade some Europeans and other unwashed furriners to use their ridiculously inflated currency to put a number of my US clients out of their undercapitalized misery. Attention K-mart shoppers, Blue Light Special in Aisle 3: Corporate America! Of course, being the upstanding patriot you know me to be, I refuse to accept payment of my fees in anything other than small-denomination pound notes, FOB the Isle of Man.

Anyway, in between moving assets frantically off shore, I dropped by The Deal's 2008 M&A Outlook conference in New Amsterdam today for a few giggles. A marquee list of the Great & Good—along with the usual admixture of shills and sponsors—trotted out the usual platitudes about the M&A market and its imminent climb to $50 trillion in volume any month now. A few people distinguished themselves by not making complete and utter fools of themselves, but it is against my policy to praise competitors in public, so I won't.

The highlight of the program for me was the triple billing of Bruce Wasserstein, Marty Lipton, and Leon Black, who did a creditable job of talking past each other in a very deferential and collegial manner. So polished was their family juggling act—Uncle Brucie, Grampa Martin, and precocious Little Leon—that they might want to consider the circus should credit armageddon or a Democratic Administration truly shut down the merger game for good.

For such a large bear of a man, Leon Black constantly surprises me when he opens his mouth to release a little, high-pitched voice more suited in my view to a prepubescent teen. That being said, there are plenty of squeaky voiced terrors out there with proven ability to kick my ass from here to Sunday—including Mike Tyson and David Beckham—so I never make fun of him to his face. Marty Lipton laid on the Grampa Munster act a bit thick, but knowing him he probably did it to keep the audience off balance for some devious ulterior motive of his own.

Bruce was another story. I don't know about you, Dear Reader, but I often scratch my head over the success and prominence of people at the pinnacle of my industry. I have met most of them, I have worked with and against them, and I usually can't see why they made it to the top of the slippery pole over dozens of other investment bankers with just as much apparent talent and ambition. Usually I just put it down to an over-developed Napoleon complex and leave it at that. I had not run across Bruce myself for several years, so I suppose I had slipped into thinking his ascent to his lofty, well-compensated perch was due primarily to a finely tuned talent for politics and some efficient knife work in a back alley.

But hearing him again in person reminded me of the impression he has made on me several times in the past. The man can talk. And by that, I do not mean the content of his speech, or the brilliance of his insights (which were middling). I mean his voice. For his voice is Bruce Wasserstein's true instrument, and he plays it like a master. It is persuasive, dynamic, melodious, and insinuating, with a noticeable throb and catch that cries out for his listeners to say, "Yes, yes! What that man is saying makes perfect sense. He is so ... reasonable." I always laughed when I heard him described as "Bid 'em up Bruce," but today I was reminded why he usually succeeded in advising his hardheaded clients to go for the gusto. They just curled up in a ball and purred, "Sure, Bruce, whatever you say. Just keep talking."

So with that in mind I offer up some free casting advice for Oliver Stone or whatever director decides to produce Bruce Wasserstein's life story: cast John Malkovich in the title role. The voice match is almost perfect—although Bruce actually has a lower register—and a little less hair and a little more tan would make Malkovich an almost perfect match in appearance. (Bruce has lost a lot of weight in the past six months or so.)

Besides, Malkovich the actor—whom I also admire—is in some deep, elemental way profoundly disturbing. Who better to play the Pied Piper of M&A?

© 2007 The Epicurean Dealmaker. All rights reserved.

Saturday, October 27, 2007

Down the Rabbit Hole

It's a rainy day here in Manhattan. Perfect weather to stay in and read a good post on the "Demise of the Quants" by my fellow bloggist and tetchy ranter Baruch over at Ultimi Barbarorum1. Fire up the coffee pot, break out a dictionary, and read it. You'll learn something.

Unless he2 is actually perma-deb Tinsley Mortimer playing an incredibly elaborate joke on us all3, Baruch appears to invest in equities for an unnamed Swiss financial institution which shall remain nameless. (I will give him the benefit of the doubt and credit for his obvious native intelligence to conclude that it is not my favorite Schweizerdeutsch whipping boy, UBS.) He writes in reaction to a semi-triumphalist article on the quant meltdown this August in MIT's Technology Review magazine and his own informed reflections.

Most of what he says rings true, and—best of all—unlike Your weasely little ticket-scalping middleman Faithful Correspondent, he actually appears to invest for a living and therefore presumably knows what he is talking about. Like I said, read it.

I read the same MIT article recently, too. However, my strongest reaction had less to do with the trials and travails of a bunch of overpaid ex-nerds and more to do with the apparent epistemological and ontological underpinnings of the Grand Quant Paradigm: namely, that in financial markets, math is what matters. In its strongest form, this intellectual substrate can be characterized as described in the MIT piece:
Beneath all this beats the great hope of the quants: namely, that the financial world can be understood only through math. They have tried to discover the underlying structures of financial markets, much as academics have unlocked the mysteries of the physical world. The more quants learn, however, the farther away a unified theory of finance seems. Human behavior, as manifested in the financial markets, simply resists quantification, at least for now.

"At least for now." Classic.

I find it hard to believe that anyone with an IQ over 60 could believe such shit, but I am humble enough to know that even I can be mistaken.

* * *

Gosh, where do I begin?

Stripping away the sloppy journalistic overkill ("the financial world can be understood only through math" [emphasis mine]) and the drive-by analogy to physics ("a unified theory of finance") still leaves me with the gaping howler that at least some of these knuckleheads believe the financial markets can be understood primarily through math. This, as the man said, is nonsense. Even the eminence grise and pioneering quant Emanuel Derman has figured this out, although it is not clear he has figured out why:

Quantitative finance "superficially resembles physics," he says, "but the efficacy is very different. In physics, you can do things to 10 significant figures and get the right answer. In finance, you're lucky if you can tell up from down."

Interestingly enough, the repeated references to physics in the article are instructive, since that—plus pure mathematics—happens to be the academic background of many if not most of the quants practicing today. (Über quant and sesquitillionaire James Simons of Renaissance Technologies is a world class mathematician who co-authored the Chern-Simons theory on geometric invariants, widely used in string theory. No innumerate slouch he.) Their influence shows. Perhaps the most widely known formulation in mathematical finance—and arguably one of its foundational theories—is the famous Black-Scholes theory of option pricing, which holds as its central insight the assumption that a security price propagates through time based upon geometric Brownian motion, like the molecules in a gas.

By any measure, B-S4, along with its numerous variants and competitors, is a phenomenally successful theory, one that describes and enforces price relationships among cash securities and their derivatives in markets trading trillions of dollars every day. If anything has the status of Holy Writ in financial markets today, it is the Black-Scholes model. But Black-Scholes did not create the derivatives market; it is a heuristic construct which describes the arbitrage relationships and conventions which market participants use to trade these securities. The equity options market, while small, predated Fischer Black's and Myron Scholes' little exercise by some years, and seemed to function quite nicely before it had a rigorous quasi-physical theoretical underpinning. (In fact, if memory serves, Black and Scholes tried their hand at trading options using the insights from their formula and got their very large heads handed to them by the unenlightened louts in the options pit.)

Write this down: Black-Scholes works not because it describes some external ontological fact about how pricing relationships between securities and their derivatives have to work; it works because everyone agrees, more or less, that that's how prices should work. It is a convention, not a physical or financial law. This is the central epistemological trap that quants fall into when they conflate the tools, techniques, and ontological assumptions of physics, which attempts to describe that which is (more or less independent of us humans), with those of mathematical finance, which attempts to descibe how human beings trade and value financial instruments and their derivatives.

It is a true and remarkable fact that mathematics, in the words of physicist Eugene Wigner, is "unreasonably effective" in describing substantial swathes of the physical world. (If you do not find this fact remarkable, even disturbing, I would posit that you understand neither math nor physics. Think again.) But at least part of the reason mathematics has been so effective to date in helping us understand the physical world must be due to how well-behaved the physical world is. Math can describe the orbits of the planets and the fissioning of an atom with astonishing accuracy, but that is because the questions we are trying to answer in these particular cases are so narrow. We can ignore mountains of superfluous data (presuming, for example, that the color of an orbiting planet does not affect its orbit) in order to use math to answer what turn out to be relatively simple questions.

But this approach breaks down in the social sphere, where the interacting particles under investigation happen to be living, breathing people with opinions, conscious and unconscious biases, and adjustable rate mortgages. Financial markets are social systems, comprised of the countless interactions of conscious (and self-conscious) agents. It is Heisenberg's Uncertainty Principle—according to which the experimental observation of a small enough physical particle affects the outcome of the experiment itself—writ large. Look back at the central point of Ultimi Barbarorum's discussion of the quant strategy blow-up. By all accounts, the data seem to indicate that these clever boys and girls arbitraged away the persistent mean-reversion tendencies they so carefully identified in the first place by crowding into the same pairwise stock and sector trades as everybody else. Then, when the subprime doo-doo hit the fan, cross-sector contagion induced by market wide leverage and other connections blew those carefully researched historical relationships clean out of the water. It wasn't arbitrage or Brownian motion at work here. It was panic. Gas molecules in a box don't all rush for the exit at the same time when you open a hatch; people do.

Anyway, I'll finish my rant with an exchange from the quant conference the MIT article described which I find illuminating:

"How many [people in the room] think spreads will widen?" [conference leader Leslie Rahl] asked.

The hands of about half the smartest people on Wall Street shot up.

"And how many think they'll narrow?"

The other half—equally smart—raised their hands.

"Well," she said. "That's what makes a market."

Equally smart, indeed.

1 Don't ask. Better yet, read the site. It has something to do with Dutch-Portugese-Jewish philosopher Baruch de Spinoza ranting about some very naughty people in the mists of time. Hey, what did you expect the guy who publishes "The Epicurean Dealmaker" to read in his spare time? Gawker?
2 Come on, now, girls, don't get your panties in a twist. Surely it is a safe assumption that "Baruch" is packing the Y chromosome, isn't it? After all, UB is a finance site, on the internet. Need I say more?
3 What are the odds? Hmmm.
4 Sorry. Couldn't resist. By the way, aren't footnotes great?
© 2007 The Epicurean Dealmaker. All rights reserved.

Friday, October 26, 2007

Dead Man Walking

The New York Times tells us today that the Board of Directors of Merrill Lynch is placing collect calls to a number of Wall Street personalities to gauge their interest in taking over the CEO position from current tenant Stanley O'Neal. You know, Dear Readers: that same Stan O'Neal who just announced the largest quarterly loss in Wall Street history, after projecting somewhat less than half the actual amount only weeks before, and who capped it all by going hat in hand to Wachovia begging them to consider a prophylactic merger. "Wachovia?," you ask. Yes, Wachovia.

Apparently the house of Pierce, Fenner & Smith has not sunk low enough for the MER board to tolerate this. O'Neal's handpicked director poodles are so upset that great clumps of their manicured curls are coming off in their jaws, and they are baying (privately) for O'Neal's blood. Not privately enough, of course, to prevent the entire financial media from picking up the story.

I cannot speculate what will happen next at Mother Merrill, but I can guarantee you O'Neal's days at the helm are numbered. Being a CEO at an investment bank is not unlike crowd surfing at a mosh pit: it's a pretty cool way to move around quickly, you are supported entirely by other peoples' efforts, and everyone tries to get a piece of you. Unfortunately, when the crowd loses interest in supporting you, you tend to fall fast, hard, and painfully. In addition, after dropping you lots of your former investment banking subordinates—both friend and foe—have the added charming tendency to skewer you repeatedly with long knives. Et tu, Brute?

By allowing the news that they are talking to potential CEO replacements to leak into the public domain, Merrill's board have guaranteed a complete collapse of confidence in O'Neal. His enemies (legion, by all accounts) will be gunning for him, and his friends and sycophants will be running for cover. Few administrations of any stripe can stay in office after losing a public vote of no confidence, much less one in the Lord of the Flies environment of investment banking.

Fortunately, O'Neal will no doubt have a plenty cushy negotiated severance package to fall back on. Plus, he always has golf. Should he still feel a little saddened by his newly straitened circumstances, however, he can always console himself with philosophy. I suggest Boethius, for a start.
"Why, O my friends, did ye so often puff me up, telling me that I was fortunate? For he that is fallen low did never firmly stand."

— Boethius, The Consolation of Philosophy

© 2007 The Epicurean Dealmaker. All rights reserved.

Friday, October 19, 2007

Recipe for Success

For your reading pleasure this weekend, O Faithful Acolytes, I have decided to pen a little riff inspired by the scandalette du jour now working its way through the twinned pythons of New York Society and the Oprah Winfrey Show audience. I do not speak of the minor éclat caused by news that un-French French President Nicolas Sarkozy and his wife of 11 years have finally divorced—"How quaint! How ... American!" No, I refer to that titillating mini-saga emerging from the seething cesspool known as childrens' cookbook publishing, what many are coming to call "L'affaire Seinfeld."

I will not bore you with the tawdry details of this dust-up, which you can read for yourselves in the Times article by Motoko Rich. (Now there's a name for you!) Suffice it to say that Jessica Seinfeld (pictured above), wife of the eponymously named comedian Jerry Seinfeld (how do they tell their bathroom towels apart?), and her publisher Harper Collins have been not-quite accused of not-quite stealing the ideas and several recipes in her book from a disturbingly similar ankle-biter cooking compendium composed by one Missy Chase Lapine. (Seriously: I'm not clever enough to make this stuff up.) It seems the basic idea of both books is to sneak healthy foods into the cotton candy dreck most children prefer, like spinach into brownies. Apparently, dastardly matriarchs have been betraying their progeny in like manner from time immemorial.

Anyway, I draw this little drama to your overextended attention not to discuss the wiles and deceptions of faithless Womankind (as I might), but rather to illustrate how similar the story of these books' publication is to the creation of an M&A deal. The parallels are striking, and the substitution of a few pinstripe suits and a few investment banking institutions for the frilly aprons and publishing houses of the original yields a story which matches several dealmaking experiences of my own and others almost exactly.

For those of you with a conference call to join or a client meeting to attend, the basic story is this: As for the dueling cookbooks described above, it is not the quality or content of the ideas that matter in a potential M&A deal, it is their timing and packaging. An essential corollary to this is that the attractiveness, broadly defined, of the promoter of the idea is important, too. Let me explain.

I do not know about cooking strategies to cope with picky eaters, but I can guarantee you from over twenty years experience that there is virtually no such thing as a completely new, original idea in M&A. Sure, investment bankers constantly wheedle their clients to allow them to pitch some "really interesting ideas," but the clients never take the meetings in the hope they will be shown something they have not already considered, and they are almost never disappointed in their expectations. Indeed, if I were a corporate executive who lives and breathes my business, and has worked in my industry for decades, I would be mighty worried if some wet-behind-the-ears Harvard Business School tyro from Goldman Sachs or Morgan Stanley showed me a good acquisition, merger, or divestiture idea that I had not already thought about exhaustively. So should my Board of Directors. Take it from me: if your idea is not completely stupid, the client has already seen it. Likewise, it is clear that neither author in our ink-stained story above came up with a tot feeding strategy not already discovered by generations of crafty mothers.

In contrast, timing is critical in M&A. The best acquisition idea in the world doesn't do you a bit of good if you can't get the attention of the object of your desire. The target has to be ready, hair washed, teeth brushed, and packing protection before she'll agree to meet you out behind the football field bleachers late at night. And she won't want to go to dinner with you if you are between paychecks and can only afford Arby's takeout. Timing is so important, in fact, it even trumps the quality of a deal idea. When the stars are aligned, even a lousy deal can—and will—get done. Think AOL-Time Warner. From the Age of Dinosaurs forward, good M&A bankers have always closed the sale not based on the Who or the Why of a deal, but on the When and the How.

Packaging is also critical, at least to the M&A banker who wants the assignment. Presentation matters to a CEO, if only to make sure the banker he or she chooses does not embarrass him or her in front of the Board of Directors. As we have discussed before, it is practically impossible for a client to evaluate the quality of a particular M&A banker's advice before a deal closes, and often quite difficult thereafter. Therefore, in order to pick an M&A banker from among the legions of identical-looking graduates from the same business schools pestering him for the assignment, a CEO must rely on reputation plus the appearance of plausible reliability. Reputation is what it is, so personal appearance, plausibility, and chemistry with the client—packaging—usually decides which banker gets the nod.

Try this little experiment at your next Manhattan cocktail party. When you meet someone who tells you they work in finance, try to determine whether he or she is in corporate finance or M&A before they tell you. If they are well- and expensively dressed, vaguely handsome (but not too attractive), are a smooth and persuasive conversationalist, and exude so much quiet confidence that you can't decide whether they are arrogant or not, six times out of ten that person will be a corp fin or M&A banker. (If they are disshevelled, unkempt, unattractive, slightly hostile or dismissive, and totally arrogant, on the other hand, you can bet good money that they are in a hedge fund. They are also probably worth a lot more money than the M&A banker.)

Now I do not know how Missy Chase Lapine stacks up against Jessica Seinfeld in the appearance and personality department, but I can tell from the article that she is not lacking in publishing experience, and her book idea is no worse than—in fact, is indistinguishable from—the one Ms Seinfeld pitched Harper Collins two weeks later. Nevertheless, Harper Collins chose Ms Seinfeld to do the deal, based, we can imagine, largely on the same criteria her agent used when she described her as “smart, stunning, and infinitely promotable.” Like I said, packaging matters.

There is one final wrinkle to our sorry little tale that seals its instructiveness for the student of investment banking and M&A. For, at the end of the day, a client trying to decide between two bankers for an M&A assignment is often stumped. As far as the client can tell, the finalists are completely indistinguishable, equally talented, and equally plausible—both perfectly acceptable candidates for the final nod. At that point, the client often makes the decision based on the name on each banker's card. No, not that name, silly. The name of his or her investment bank.

Not that infrequently, which firm the banker belongs to becomes the primary deciding factor, winning out over even superior talent and better personal chemistry. "Goldman Sachs" almost always trumps "NoName Capital Markets LLC," regardless of how superior the NoName banker may be. For there is an old saying circulating in the boardrooms of Corporate America and among D&O insurers everywhere:
No Director ever got sued for picking Goldman Sachs to execute his shitty, half-baked M&A deal.

I imagine the firm of Missy, Chase & Lapine lost to Seinfeld LLC for the very same reason.

© 2007 The Epicurean Dealmaker. All rights reserved.

Saturday, October 13, 2007


I have been much too busy, Dear Readers, raping and pillaging making hay while the sun shines these past weeks to entertain you with any pearls of wisdom, and for that I do apologize. There seems to be a mad sort of Morris Dance taking place in the capital and M&A markets right now, with the storms and alarums of August faded to but a distant memory in the minds of many market participants. Accordingly, my services as mercenary consigliere have been in high demand. I fear it will all end in tears, but as I am not paid ridiculous amounts of money to salt away Kleenex for the bleary morning after, I must soldier on and do my duty by helping various consenting adults do the nasty.

One recent bit of news has tempted me to stick my head up from my spider hole, however, if only briefly. I write, of course, of the recent management reshuffles at Citigroup. I will not rehash the endless commentary, both professional and amateur, that has been lavished on this little soap opera, but I will offer a couple of remarks, since I do have some passing acquaintance with a few of the players.

I do not know Vikram Pandit, who seems to have been anointed Chuck Prince's chief lieutenant and bodyguard, so I cannot comment on his New York Times personality profile:
A calm, dispassionate man with a professorial bent and a Ph.D. in finance from Columbia, Mr. Pandit’s selfless disposition has caused him to stand out from his banking peers.

His administrative and technical skills, plus an ability to make himself indispensable to bosses like John J. Mack and Phillip J. Purcell, fueled his career at Morgan Stanley, where he became president.

But he is also a retiring man, not prone to ruthless acts, with a natural hesitancy about taking risks, both professional and personal.

However, I will note that The Wall Street Journal's stock dot portrait of Mr. Pandit, which seems to portray him as somewhat of a genial old elf, sets my PLF1 radar buzzing. I do not know of too many selfless, retiring, and non-ruthless individuals who have risen much beyond the level of First Year Analyst at any major investment bank, much less to President of the poisonous nest of vipers that was Morgan Stanley under Phillip Purcell. I suspect he has many hidden qualities as yet undiscovered by our redoubtable financial press.

He will certainly need them, given that his direct reports include the formidable Michael Klein, whom the Times describes as "a smooth investment banker ... who has shown a keen instinct for survival." Uh, yeah, that's one way to describe him. Others might point to the fact that Mr. Klein pins the Scary Investment Banker-o-Meter at "Run. Run away now," or that he is the perfect person to have with you at a knife fight on the Manila waterfront, as long as you keep him in front of you. His co-head, Equities' Jim Forese, should prove a genial Stepin Fetchit to Klein's Simon Legree, but he may yet have a trick or two of his own up his sleeve which could come around to haunt either Pandit, Klein, or both.

Meanwhile, exeunt stage right, on a cloud of fragrant encomia, the Three Musketeers of Fixed Income, Tom Maheras, Randy Barker, and Geoff Coley. Barker has taken the bullet for spearheading Citi's promiscuous lending spree, Maheras has swanned off the trading floor after refusing to report to Pandit, and Coley has been "reassigned," no doubt whither all disgraced ex-Salomon Brothers bond traders go to nurse their pride and plot revenge, equities in Dallas.

Little Tommy M. is now free to fritter away his time handicapping his chances of elevation to the pantheon of saints of Our Mother Church of Mammon while he considers the flood of employment and hedge fund offers no doubt winging their way to his inbox. Apparently, he received the same sort of standing ovation on the Citi trading floor when he left that Jamie Dimon did after Sandy Weill pulled the rug out from under him. Traders. Always the cheap and obvious gesture, then back to work until the next firm gives them a better offer. Sure, Maheras was a personable guy, and he inspired a lot of loyalty in his troops, but that and three ninety-five will buy you a latte at Starbucks. Heinrich Himmler himself could have pulled the loaves and fishes trick if he had been in charge of a universal bank's fixed income division these past few years, so making money for Citi is not proof that Maheras is God, or even "a very good banker."

* * *

Notwithstanding its justified reputation as an oxymoron worthy of inclusion with classics such as jumbo shrimp and military intelligence, there is in fact such a thing as investment banking management. (For one thing, it is a never-ending source of revenues for management consulting firms like McKinsey, in part because the problems are never fixed and arguably unfixable.) The higher up the management hierarchy a banker travels, the further removed he or she becomes from the actual making of money, and the more important it becomes for him or her to stake claims to money. This is known colloquially as politics.

Normally, or when times are good and the money is flowing, the political situation among top management of an investment bank resembles a logjam, or the Western Front: lots of strains and pressures under the surface, but very little movement on the surface. When crisis hits, however, the logjam breaks, and the long knives and artillery come out in earnest. Those are the times senior IB managers live for, since it is open season on your friends and enemies, time to settle scores and pay back prior injuries, and often your one big chance to leap to the top of the heap over the dead and falling bodies of your foes and allies. At times like these, the backbiting, backstabbing, and betrayals in the executive suite would make Machiavelli blush.

What I find interesting in the Citigroup process is that Chuck Prince apparently tried to formalize this fingerpointing exercise into a formal report on sources of the bank's problems. Usually, top management power struggles take place in the shadows, supported by whisper campaigns and off-the-record remarks, which can preserve the illusion of professionalism and statesmanship amidst the carnage. Here, causes and blame must have been assigned—and attributed—on paper, which as we all know is a very dangerous thing nowadays. Is it too much of a stretch to believe that Prince did this in part to cover his own ass, and to have a documented record of the nasty little maneuverings of his subordinates that he could use against them in the future? I think not.

So, Dear Readers, fret not. The winners and losers in this little brouhaha all look pretty much the same, notwithstanding what their publicists tell us, and the losers will no doubt land on their well-shod feet quite nicely. Besides, no-one I know gets really upset when the sharks start attacking each other in a feeding frenzy.

What I will say is that I feel for the poor junior slobs who took on the task of interviewing senior management and compiling this report. Let's hope for their sake that it was a well-written report, since their future chances of getting a job on Wall Street are probably limited to reporting for the New York Times.

1 Poisonous Little Fuck. As opposed to, say, other hallowed senior IB management types like the GSB (Genial Son of a Bitch) or the HTB (Heartless Technocratic Bastard). Some particularly skillful inside players are adept at donning and doffing many such disguises at will, depending on the dictates of circumstance.
© 2007 The Epicurean Dealmaker. All rights reserved.

Sunday, September 30, 2007

Aw, Shucks

Apparently TED has been anointed a charter member of the "Econoblogosphere." Thanks, Felix.

It is certainly flattering to be included in such eminent company, and I suppose I should not look a gift horse in the mouth, but I worry a little for some of Felix's readers who come to this site with no preparation other than his brief characterization. After all, he lumps your Tetchy Correspondent in with "The Finance Geeks," whom he describes as "translating Wall Street gobbledegook into English." Faithful Readers of this site know rather that my aim and design is to translate Wall Street gobbledegook into English gobbledegook. Besides, I think it would be much more fun to be sitting in the back row throwing spitballs with "The Snickerers." If only they could learn how to spell.

Oh, well. Do not despair, Dear Readers: the newbies will soon leave, bedazzled and befuddled, and we will have our limited-distribution blogo-nicheo-microsphere back to ourselves. Just remember our watchwords: turbid and orotund. Pass them on.

© 2007 The Epicurean Dealmaker. All rights reserved.

Friday, September 28, 2007

Confidence Game

Is it just me, or is the sound of whistling getting louder in here?

Helen Thomas from FT Alphaville told us earlier this week that the market mavens at UBS have declared the imminent health of the mergers and acquisitions market. Apparently, these Pollyannas took a gander at previous disruptions to the global financial markets—like the US savings and loan crisis and the implosion of Long-Term Capital Management—and have concluded there is no reason to speculate that this time things will be other than just peachy.

Sure, the sudden freeze in the credit markets has put the kibosh on free money masquerading as "covenant lite" debt, and the maximum feasible deal size for prospective LBOs has plunged over 80% to seven billion smacke(u)roos, but all else is for the best in this best of all possible worlds, according to our lederhosen-wearing pals. To what is their optimism due? Well, to the faithful corporate M&A buyer, of course, who they are sure is even now sprinting up to take the baton on the next leg of the global M&A steeplechase.

Now of course it is true that corporate buyers continue to account for the substantial majority of the M&A deal volume, as they have done from time immemorial. There was a time, not too long ago, when private equity accounted for less than 10% of the annual deal volume in the market, and it has only been over the past several years that it has peeked noticeably into double digits. A casual reader of the financial press might be forgiven for believing—based upon the column inches devoted to chronicling in nauseating detail the deal making, compensation, and social peccadillos of various and sundry PE plutocrats—that corporations have been taking a very long nap in the M&A coma ward over the past few years, but it is not true.

That being said, long experience and personal knowledge of many corporate dealmakers has left me with little reason to suppose that hordes of the same are chomping at the bit to preserve the frenzied dealmaking pace witnessed earlier this year. A little sober reflection on your part, Dear Reader, will surely lead you to the same conclusion. For what CEO, CFO, or even corporate development officer would feel compelled to leap into action and start spewing above-market bids left and right simply because a few drunken sailors (PE firms, natch) have left the field?

While it transpired, the credit market love fest which turned every second year Associate at Carlyle and KKR into Genghis Khan Jr. had little effect on the dealmaking proclivities of Corporate America or Europe, other than making them shake their wooly heads in wonder at the insane multiples said Associates and their betters committed to pay the delighted sellers. Now that the ersatz financial wunderkinder have toddled off to the nursery to play with smaller companies—or with none at all—your average workaday CEO is trying to calculate a decent interval of mourning before he or she launches a substantially lower offer for the juicy little acquisition target he or she has been eyeing these many moons.

But here we come to the crux of the matter. In order for M&A nooky to take place, there must be an agreement between consenting adults, and most of the potential sellers I am aware of are claiming to suffer from nasty headaches. Pourquoi? Well, wouldn't you have second thoughts, Dear Reader, about giving up the good thing if your paramour suddenly changed the dinner venue for your date from Le Cirque to Applebee's? Sure you would. The dramatic recent compression of valuation multiples offered has had a distinct chilling effect on the ardor of most potential sellers, for the simple fact that most potential sellers do not have to sell. For the average CEO, it is much better to remain in the C-suite, collecting juicy option reloads and undemanding performance bonuses than to settle for a golden parachute calculated on a less than stratospheric takeout multiple.

There is a similar and well documented "seller strike" syndrome in the residential housing market, where sellers refuse to acknowledge a market-wide reduction in the price level and insist on listing their property at the value implied by what their neighbor Bob realized three months ago. The effect in the housing and the M&A market is the same: the property languishes on the market indefinitely, until the seller pulls the listing in disgust or capitulates to offer it at the new, lower market price.

I would that it were not so, but we investment bankers as a class do little to dissuade potential sellers from behaving in this fashion. In order to win the assignment to sell a business, an investment banker must usually be exceedingly optimistic about both the potential value achievable in a sale and the speed with which the potential buyers can line the seller's pockets with moolah. (While most sellers give the pitching i-bankers some rigamarole about the importance of certain "soft" factors, like preserving jobs and such, there are only three things a potential seller is really concerned about in awarding a sale mandate: value, value, and value.)

After he has won the assignment, the investment banker's job largely consists of (1) persuading potential buyers against all contrary evidence that this property above all others is truly worth a king's ransom and (2) reassuring the seller that an unhinged buyer is mere days away from lobbing in an offer priced at the highest multiple ever recorded in M&A history. Once the final bids are in—usually falling pathetically short of the target value the i-banker told his client was in the bag—said intermediary must switch rapidly to spin and close mode, in which he simultaneously staves off both buyer's and seller's remorse until the final check changes hands in the closing ceremony. In short, a successful sell-side investment banker must have the patience of Job, the constitution of an ox, the self-delusion of a real estate broker, and the cast-iron cheer of a Frank Capra movie.

It is hard to fake such a persona, and unwise to turn it off in public, which is why we are now getting treated with articles like the one published today in the FT. After describing the ineluctable evidence of a dramatic slowdown in deal activity, the reporters regale us with a veritable parade of M&A honchos who tell anyone who will listen that the good times are coming back, in spades. As an industry insider, I tell you in confidence that they do this in part to preserve as much of the M&A department's bonus pool as possible against the inevitable cuts coming down from the executive suites of Wall Street. But they also do it because they realize that—unlike private equity, which depends on the ready availability of attractive debt finance to make their buyouts work—for corporate buyers confidence is the lifeblood and driver of strategic M&A activity. No confidence, no deals. No deals, no Testarossa.

So now you understand. The M&A market is subject to the same relentless march of progress as the rest of society.

In Ancient Egypt, there was only one Cleopatra. Nowadays, Wall Street is full of Queens o' de Nile.

© 2007 The Epicurean Dealmaker. All rights reserved.

Thursday, September 20, 2007

Moral Fiber

I saw a really promising article about hedge fund managers and real estate in The New York Times yesterday, and I thought, "Goody! Now we can see how the hedgies are adjusting to the new market realities."

I settled in with my coffee and roll for a nice helping of Sturm und Drang, a great wailing and gnashing of teeth, and a clash of Titans as the Irresistible Force of Hedge Fund Ego smashed against the Immovable Object of New York Real Estate. Instead, I got Woody Allen and Alan Alda bickering over the script of The Four Seasons.
So the pressure begins to build, and eventually, said Andy Kessler, a former hedge fund manager, “you stop spending.” Why? Fear, mostly.

“You worry about redemptions,” Mr. Kessler said, “you worry about margin calls, and you worry about working for free. Down 7 percent may be no big deal, but when your investors say, ‘Get me out,’ you have to sell everything.”

After years of eye-popping returns, sudden losses can be wrenching. Aware of the psychological impact that high-pressure trading can have, several funds have retained psychologists to counsel stressed managers.

“It has been a very challenging period for these people,” said Jonathan F. Katz, a psychologist who works with large hedge funds. “I have seen people shaken, their confidence eroded. They are upset and depressed.”

"Upset and depressed?" You're effin' kidding me, right?

Unfortunately not. The article continues:

Such distress can result in what some call a social contagion, as hedge fund executives let their woes at work affect their personal lives. Investors have said that their golf scores soar, that they lose their appetites and wake up in the middle of the night in a cold sweat.

To be sure, many investors are cool headed enough to not let inevitable setbacks derail them. But others find it hard to keep their sense of self insulated from losses.

“Some people are debilitated by it,” said Ari Kiev, a psychiatrist who works principally for SAC Capital, the hedge fund founded by Steven A. Cohen. “You can’t sleep; you can’t eat; you have catastrophic thoughts about losing your house.”

A prominent hedge fund investor, who like the other executives who discussed their anxieties asked not to be identified, spoke of a crisis of confidence. “It’s an intellectual destabilization,” he said. “All of a sudden, your funds are down 5 percent and the S.& P. is down 1 percent. Once you were master of the universe, but the market makes you humble.”

What?! These assholes suffer a 4% relative underperformance over one month and all of a sudden they're feeling humbled? The next thing you know we'll be reading about how they're suffering from hives and erectile dysfunction. Sheesh.

* * *

I don't know about you, Dear Readers, but I like to have my heroes and villains a little larger than life, with hair on their chest and balls a size or two too large for their britches. (You too, girls.) I don't want to read about some pussy who can't even maintain the conviction of his own Napoleon complex when he suffers a couple of slings and arrows. Where's the ranting and raving, the breaking of crockery? Instead, we get a gelded Tony Soprano with his thumb up his ass.

It occurred to me as I read on that this is what has bothered me most about all the column inches offered up by hedge fund apologists in the media these past years. Instead of J.P. Morgan thrashing a photographer with the temerity to photograph his ugly great schnozz, we get a pudgy, fleece-wearing Steve Cohen whinging about how all the money-making opportunities have disappeared and giving photo ops at his local Greenwich sandwich stand. Instead of Andrew Carnegie and Henry Frick crushing a steelworker's strike with hired thugs, we get Daniel Loeb picking lopsided fights with deer-in-the-headlights corporate managers who can't get out of their own way, much less his. Butterballs instead of titans; playground bullies in place of forces of nature. For cripes sake, I'd take even Dennis Kozlowski over James Simons any day. Simons may be smarter than Stephen Hawking and Albert Einstein combined, but the man's personality makes soggy melba toast look downright scintillating.

Where's the brio? Where's the chutzpah? Where's the moxie?

Who knows? There may be some interesting personalities out there in hedge fund land, but I can't for the life of me remember reading about them. Ken and Anne Griffin slobbering over each other's "passion" in Portfolio magazine? Puh-leeze. These people need a serious personality makeover.

Get some grace. Get some style. Get some class. It's not like you can't afford it.

If you need an example of how not to behave, just reread the NYT article. Word to the wise: don't send your bejewelled crack whore girlfriend to check out a $48 million Southampton estate so she can ask whether JetSkis are allowed on Lake Agawam. Putz. And if you're really suffering from severe depression and performance anxiety, don't take a full page confessional ad out in the Times. Go buy yourself a really nice English shotgun and go out in style, à la Ernest Hemingway.

This one should do nicely. It's efficient, and your heirs will appreciate that you left them a really fine piece of hardware.

You do want to leave a legacy, don't you?

© 2007 The Epicurean Dealmaker. All rights reserved.