MacFadyen: Taking Notes
September 28, 2009
It must be fall, because all the big names in private equity seem to back in the headlines again. Guy Hands went on record with the New York Times to discuss the corpses lining PE portfolios; Glenn Hutchins talked to Reuters, saying PE as an asset class is nearing a new "golden age;" while John Castle, in a speech for the New York Chamber of Commerce, predicted that markets will continue to function and improve. If prognostication could be measured like porridge, you might label these cold, hot and just right.
Hands perhaps got the most attention with some quotes that pulled no punches, yet still failed to connect on anything that we didn't already know. GPs had too much money, they got fat on fees (that didn't go into building out additional capabilities), and portfolios are now sucking wind under the weight of too much debt and little capital left for growth.
The quote that stuck out -- at least to me -- was the one where Hands discusses Terra Firma's own disaster EMI, acquired just ahead of the financial collapse.
“If the EMI auction started two weeks later, it wouldn’t have occurred... We wouldn’t have bought it. We’d have 90 percent of our funds still to invest and we’d look like geniuses.”
Of all Hands' quotes, this one is the most damning since it perpetuates the idea that the asset class was merely lifted by the bubble, and subject to the whims of a fickle market. As an excuse, it comes off as the "the debt made me do it." As a nugget of truth, it's scary to think that investors are taking billions of dollars of pension money, leveraging it to the hilt on companies that employ thousands of people, and then admitting that the underwriting process consisted of calls to lenders.
A new stereotype for the asset class was probably born, but I think Hands is doing a disservice to his industry. I'll credit him for owning up to his own mistakes, but he uses his credibility -- which in hindsight may be undeserved -- to try to paint the industry as one huge game of craps that fell apart thanks only to bad timing. I know I would be peeved if Jayson Blair or Stephen Glass (two reporters caught fabricating articles and quotes) tried to imply that their own failures were endemic to journalism at large.
The middle market, of course, saw its share of greed during the bubble, but there are just as many examples in which firms turned away another billion for their funds or chose to walk away from a deal that throughout the auction may have turned from a growth opportunity to a leverage play. I can't imagine these men or women would want EMI representing how they go about their business.
But there is a reason people like John Castle and Glenn Hutchins are still around to discuss and help shape the future of the asset class, while Hands has been relegated to being a mere sideline observer.
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A lot of deal pros assume that when lender groups takeover control of a company it's just the first stage of a piecemail breakup of the business. Recent evidence, however, suggests that's not always the case. Cygnus Business Media, which was handed over to creditors earlier this month, provides an interesting example, as the company, earlier this week, brought in John French to serve as the company's new chief executive officer.
It's not uncommon for lender owned companies to bring in new management, but usually the C-suite is manned by CRO types who may come from one of the restructuring firms. French, meanwhile, was poached from Penton Media, where he previously served as CEO and a member of the board.
GE Capital leads the group of senior lenders that assumed control, while Barclays heads up a group of junior lenders. We'll be covering this trend more in depth in the October issue of Mergers & Acquisitions.
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Congratulations go out to Paul Schaye, M&A Journal's Deal Pro of the Year for 2008. He completed his 12th Pan-Mass Challenge this past August, and reported back on his blog that Paul's Posse emerged from the bike race, with "no broken bones, stitches, or road rash." His posse also collectively raised more than $100,000 for research at the Dana Farber Cancer Institute.
For the uninitiated, the Pan Mass Challenge is a two-day, 192 mile bike race that starts in Sturbridge, Mass. and extends all the way to Provincetown, Cape Cod. Most of us would probably need at least a stop or two if we made that trip in a car. Schaye, only 90 days removed from a major surgery, probably required less time to refuel.
You can read more about it at his blog, which is also still accepting donations for Dana Farber.
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Our mandate at Mergers & Acquisitions Journal is to maintain a laser focus on the middle market. Yet the recent $3.9 billion Dell deal for Perot Systems is a hard one to ignore considering it serves as the culmination -- or even perhaps the start -- of the battle between Dell and International Business Machines over David Johnson. When Johnson, IBM's former M&A chief defected to run Dell's corporate development efforts, IBM put up a huge fight to keep him. However, the tech giant lost a legal battle that had tried to invoke a non-compete clause.
At first glance, analysts noted that the Perot deal seems a bit expensive, using Hewlett Packard's EDS purchase as a comparable. At the same time, it's hard to ignore the breadth that Perot's services capabilities will add to Dell's business. And while Dell would not qualify as a seasoned acquirer, having Johnson on board will surely help the company execute on the integration. Dell, for instance, has already put together its retention plan for Perot Systems' staff.
Analysts are also anticipating more deals out of Dell, so perhaps IBM's fears are coming true.
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I recently made the move up to the Boston area. The best part, so far, has been the Senate ads trumpeting Steve Pagliuca's run for the late Ted Kennedy's seat. In the commercial, he speaks directly to the camera, talking about building businesses, being part of the community, and hits other political bullet points with relative ease. He even closes by confirming that he is in fact Steve Pagliuca and he approves his preceding message.
I can see why advisers might have candidates include the addendum when there is a voice-over or if the ads are coming from a third party. But when the candidate is relaying his own message and the camera stays fixed on him, isn't a little bit of overkill? I have to wonder if that's the sort of line that political aspirants say to themselves as they daydream about running for office.
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Thomson Reuters is reportedly in the hunt to acquire Breakingviews, according to the New York Times' "Dealbook" blog. In the spirit of the deal, I'll offer my own quick breaking view of the transaction.
I like it. From a content perspective it builds on what Thomson Reuters is trying to do with its blogs. The company actually brought in Breakingviews co-founder Jonathan Ford a few years back to spearhead the effort and create something similar. It's a way to offer news that can't be commoditized, so cheers to the company, which was among the first to outsource finance news to India.
At the same time, the fact that they're seeking to acquire the company seems to underscore how difficult it can be to create a blog from scratch. On paper, it looks easy. Just hire the best writers and eyeballs will follow. In reality, there's something to be said about buying a platform with a committed audience in tow.
We wrote about this last year, but as the media space continues to find its bearings, I think deals like this might be a more common sighting.
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Also, favorite headline of the week, courtesy of Clusterstock.com -- Michael Moore Debuts Anti-Capitalist Documentary to Room Full of Champagne Drinkers.
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