The Capital Markets March
November 30, 2009
Traditionally, the middle market M&A space hasn't had a lot to do with capital markets. Few companies below $200 million in size can even access high yield, and those same companies would have little luck with public equity offerings.
Mid-market M&A advisors, however, seem to be taking the approach that if you build it they will come.
Houlihan Lokey, last month, recruited a team from Libra Securities -- headed by Jess Ravich -- to launch a new capital markets division. As Mergers & Acquisitions earlier reported, the new group will be offering private placements of equity and debt, and new issuances of high yield bonds, bank debt and investment grade securities.
Firms such as Piper Jaffray, Jefferies & Co. and RW Baird are probably bristling a bit at the prospect of the new entrants. Since 2007, a steady march of advisors have added financing capabilities -- either organically or through M&A. Gleacher Partners, which merged with Broadpoint Securities earlier this year, comes to mind as do plenty of others that have made similar efforts.
I've heard complaints from deal pros in the past that whenever mid-market shops bring on capital markets capabilities, it reflects a desire to move on to bigger fish. The fear their traditional $250 million enterprise value clients may have is that they'll suddenly take a back seat to bigger mandates who offer more than one income stream.
It's an interesting theory, and probably true in some cases. I'm guessing, though, that this most recent push into capital markets has less to do with complementing the deal teams as it does with capturing non-M&A business.
If you look at Houlihan Lokey, for instance, they have a strong restructuring presence, which seems like a better fit today for the former Libra team.
The recent initiatiatives aren't so much about preparing for the next leverage cycle, as they are a response to the deleveraging that is necessary. In this regard, middle market companies have as much of a need as larger, publicly held entities.
As if 2009 hasn't been bad enough for the deal market, the space lost another legend as Fred Joseph, former CEO of Drexel Burnham Lambert and co-founder of Morgan Joseph, passed away earlier this week after a struggle with cancer. His death follows the October passing of former Lazard chief Bruce Wasserstein.
Contributing editor Aleks Rozens profiled Joseph in an article that appeared in the April edition of the Magazine. Most already recognize his contributions to the middle market. Some other key takeaways were that he was champion boxer in college, he could rebuild an engine, and he served in the Navy.
He was quoted in the article, saying, "I intend to do deals as long as my brain will allow it and I hope I know when that changes."
Joseph, a true professional, only stopped working last month.
When my former publisher broached the subject of Twitter a while back, I wasn't convinced. I'm far too longwinded to contain any thought to 140 characters. Then -- six months later -- I actually tried it out.
What I discovered is that Twitter is the perfect outlet for those nerdy M&A musings that draw blank stares at the dinner table and parties.
For instance, I was at Friendly's the other day reminiscing about their old crinkle cut french fries and bemoaning Hershey's sale of the company in the 80s. I have no idea if that if that was the precursor to the switch, but that was my theory. Strangely enough, it turned out to be a conversation killer.
I think I was just talking to the wrong audience. You can follow Mergers & Acquisitions on twitter at: http://twitter.com/TheMiddleMarket .
Dubai's distancing of itself from Dubai World signals that the impact of the credit crisis can take out much larger targets than just a few domestic investment banks.
There are so many angles to this story -- in which the United Arab Emirates city/state abandoned its so-called sovereign wealth fund -- that it's hard to get them all into one post.
First, and probably foremost, is that that money won't be coming back to US shores. I think a lot people have been holding out hope that sovereign wealth fund money would be returning. While Dubai has been adamant about drawing a line between the state and Dubai World, the collapse shows that even Middle Eastern money has a tipping point.
The second angle is that an awful lot of trophy properties are going to be returning the market, such as retailers Barney's and Loehmann's and stakes in MGM Mirage and Cirque Du Soleil, which could all probably be had on the cheap.
The asset sales spawn even more angles, as DP World is also rumored to be in negotiations to sell off a stake. Regulators in the US, and the UAE I imagine, will probably stay mum if a domestic entity were to assume control. Of course, this will contrast pretty sharply with the reaction from US lawmakers when the situation was reversed.
Another point that's worth noting is that Moelis & Co. won the mandate to oversee the restructuring of Dubai World alongside Rothschild. Perella Weinberg, meanwhile, was nowhere to be found. I wonder what that says about Dubai World's $100 million investment in the firm. I would guess that conflicts of interest were probably cited. With that said, Perella Weinberg has served as advisor on other restructuring mandates for Dubai World, such as Barney's and MGM, so it's still a curious omission.
It will also be interesting to see if regulators here in the US are going to use the news as evidence that private equity firms can create systemic risk. Dubai World, of course, dwarfs any US PE fund and the company was funded on the basis that it had Dubai's backing, but it's not beyond our lawmakers to invent skewed parallels.
Conversely, we may also see what happens when a state is content to stand on the sidelines as its largest and most prominent company sinks into the abyss. I spent a good portion of Thanksgiving discussing the Obama administration's largesse. We can agree that AIG may not deserve to survive, but we can also probably admit that it has to -- whether we like it or not.
As a final thought, coupled with that Al Jazeera story from last week about China's brand new ghost town Ordos City, Dubai World's troubles seem to underscore that some of the hope dealmakers and investors are placing overseas could be based on a facade.
Anyone else sensing a subtle push from Netflix to get their customers to use their streaming product? I used to be amazed by the fact that I'd never get a DVD that skipped. Yet my last few orders have either arrived broken -- literally in half -- or skipped during crucial scenes in the movies or throughout disc.
My first instinct was that they were preparing for a sale, shifting capital away from replenishing their DVD supply over to marketing to boost subscriptions ahead of an auction. With a P/E above 32 that seems a bit far fetched for this market. My other guess is that they're simply losing interest in the DVD-by-mail model.
Of course it could all be a string of bad luck or reflect my bad taste in movies. Either way, in case I'm on to something, I'd caution Netflix not to lose interest before their consumers do. I'm personally giving them one more chance before canceling my subscription.
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