bloggingbuyouts

2008 was one of the worst years for private equity deal volume in awhile -- an abrupt end to the boom years marked by the high-profile bankruptcies of companies like Linens n' Things.

But that could be changing: sort of. The number of bad deals of the past few years has led to a growth in "loan to own" deals: vulture private equity firms that lend money to companies struggling under the weight of earlier buyouts with the goal of gaining control over the equity.

The Wall Street Journal reports (subscription required) that buyout flops like Real Mex Restaurants and Bally Fitness are finding themselves under the ownership of new private equity firms after the original deals go south.

But 2009 could also represent a comeback for private equity in the traditional sense if credit markets loosen up. Interest rates are at historic lows and the stock market has taken a pounding leaving a number of profitable companies trading at valuations that make them extremely attractive takeover targets.

If the credit markets return to normal levels of activity, private equity could be a major catalyst for the market's rebound over the next few years by taking private many of the undervalued companies that are driving the market down.

Cerberus, the fund that owns the majority of Chrysler and has made other investments in Detroit, is blocking year-end withdrawals from one of its funds. According to Reuters, "Cerberus plans to suspend year-end withdrawals for up to one year, founder Stephen Feinberg said in a letter to the investors of the fund." The firm will allow investors to take 20% of their year-end withdrawals out in cash, but that's it.

Obviously, Cerberus is being badly hurt by its investment in Chrysler and may get none of that money back if the company goes bankrupt or a government investment wipes out the car firm's obligations to its parent.

That raises the question of how much trouble Cerberus is really in. It has $27 billion in assets under management but it has put money into GMAC which is having trouble due to car and home loans. It could lose part of that money as well.

Cutting withdrawals from its funds may be a signal that other Cerberus investments have gone south. If matters get worse, it may end up being one of those fund groups that simply ends up liquidating itself and sending investors cents on a dollar. In this environment that is happening a lot. The Cerberus investments in Detroit may turn out to be its undoing.

Douglas A. McIntyre is an editor at 24/7 Wall St.

If you look at major private equity firms, they have huge amounts of capital ready for investment. So, when the credit crunch subsides, there should be a revival of buyout activity, right?

Not necessarily. Keep in mind that the amounts of capital available may be much lower. The reason: private equity firms usually have so-called capital calls. That means, over time they notify investors to pony up the required amounts of capital.

True, private equity firms are legally required to make the disbursements. But, if there is resistance, will private equity firms actually sue their investors?

Well, this is a big dilemma right now. Just look at TPG Capital. That is, according to The Wall Street Journal, the firm is paring back the capital requirements on its $20 billion fund. In all, it comes to about 10% of the total amount.

Something else: TPG will cut its management fees by 10%.

Of course, TPG has suffered some black eyes this year, such as its disastrous investment in Washington Mutual as well as big bets on bank debt.

Of course, the firm is not alone. Other tier-1 players are also sitting on some busted deals.

TPG's actions are certainly precedent setting – and are likely to be followed by its peers as we go into 2009. And, as a result, expect continued tepidness for deal-making.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

Not much more than a year ago, private equity firms were the masters of the universe. Graduates of the top business schools who once wouldn't have dreamed of anything other than investments banking were beating down their doors for a chance at seven-figure bonuses.

Now the private equity bubble -- along with the housing and credit ones -- is deflating. A new report from Heinrich Liechtenstein, a professor at Spain's IESE Business School, and Heino Meerkatt, a Munich-based senior partner and private-equity expert at Boston Consulting Group predicts that a astonishing 20-40% of private equity firms will go under. Thirty percent will survive and have a shot at prospering over the long-term. The remaining 30-50% will "hang in the balance" -- not shuttering just yet but not exactly the influence-peddlers they once were.

The role that private equity firms have played in the stock market over the past few years has been hugely important. By making bids for undervalued companies, buyout shops provided activist investors with an outlet for activating value at companies that had underperformed. Without the benefit of private equity firms, activist hedge funds will have a new challenge: Can they create alpha through more long-term oriented approaches like management changes, seats on the board of directors, and operational insight? It will be interesting to watch.

KKR is one of the oldest and most successful private equities firms in the U.S. The "successful" part may be changing, which puts it in the same boat as a lot of its peers. Shares in Blackstone (NYSE: BX) now trade just above $6, compared to a 52-week high of almost $23 and $35 less than two years ago.

KKR Financial (NYSE: KFN), a spin-out of part of KKR, replaced its CEO and another top officer. According to Reuters, "Last month, KKR Financial suspended its third-quarter dividend as it arranged for more time to pay off its borrowings." Rarely a good sign. Shares of KFN have done much worse than those of Blackstone. The stock has dropped to $0.72 this morning from a 52-week high of $16.78. On the NYSE, that makes it a candidate for delisting.

Firing the CEO at KFN is like putting a band-aid on a mortal wound. Nothing will come of it. The fault of what has happened at the firm is based on the dead market for LBOs and the rapidly falling value of LBOs done over the last three years. KKR may think it looks good to dump the CEO of the unit, but it won't make a difference.

Trying to turn around private equity operations is like trying to turn around big banks. It is not going to work for a year or more, no matter what is done. The cracks in the foundation of the credit world are too systemic. Companies like KKR will have to hope that they can ride it out until there is some recovery in the value of the companies in which they invested.

KFN trades below $1 because the premise that was at the core of taking it public is flawed. The stock will not recover.

Douglas A. McIntyre is an editor at 247wallst.com.

It's been the key question for Huntsman Corporation (NYSE: HUN): Deal or no deal?

Now we know. This week, the company reached an agreement with its private equity sponsor, Apollo Management, to end its $6.5 billion buyout transaction.

For the past six months, the parties have been embroiled in heated litigation with Huntsman getting the edge as the Delaware court ruled that Apollo had to use best efforts to close the deal . As a result, Apollo's settlement is not cheap. The fees come to about $1 billion.

Although, it's a good deal for both parties. Apollo could have lost even more money if the merger agreement had been enforced. As seen with the collapse of the BCE (NYSE: BCE) deal, there is no appetite for multi-billion-dollar deals. And since Huntsman is in a highly cyclical business – specialty chemicals -- it would have likely made it difficult to justify a buyout.

The dispute is far from over, though. Huntsman is still pursuing a lawsuit with its bankers -- Credit Suisse and Deutsche Bank -- on the deal. In other words, Huntsman may even snag even more money from the broken deal.

Still, Wall Street isn't too thrilled. In today's session, Huntsman's shares are down 44% to $3.27 by midday trading.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

With the massive decline in equities, it would seem that M&A would be robust – as solid buyers find compelling deals. But, if you look at the history of M&A, recessionary environments tend to result in lower activity.

And yes, according to analysis from Bernstein Research, it looks like 2009 will remain a slow time for M&A. If anything, there won't be a comeback until 2010.

No doubt, this is bad news for deal shops like Goldman Sachs (NYSE: GS) and Greenhill (NYSE: GHL). Then again, the investment banking industry is undergoing lots of change right now (as top-tier firms becoming bank holding companies).

Essentially, Bernstein forecasts that M&A activity will be off by a quarter next year. If this happens, then the fall-off will be 45% from 2007 to 2010.

Sounds bad, huh? Well, this is actually normal stuff in the feast-or-famine M&A game.

Why? For the most part, companies do not want to take major risks during slow economic times. After all, how long will the recession last? If it continues for several more years, then making a commitment on a major deal could be harmful.

However, Bernstein still sees some positives. For example, counter-cyclical industries, such as healthcare, should still see strength in M&A. Oh, and expect distressed deals (where sellers have no choice but to sell out) as well as activity in the financial sector (as the federal government pumps up the sector with fresh cash).

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

Just a few years ago, Leon Black, the leader of private equity operator Apollo Group, was a master of the universe. In fact, he got his start by working with the master of the universe of the 1980s, Mike Milken.

Interestingly enough, Black made a fortune when the junk bond market imploded in the early 1990s. He knew what investments were good -- and scooped them up. So, with his penchant for distressed investments, it seems that the current environment would be ideal for Black?

Maybe not.

Today's New York Times includes a detailed piece on Black's many missteps. For example, one of Apollo's investments, Linens 'n Things, has gone bust. Moreover, it looks like there is trouble with other portfolio holdings, such as Harrah's, Claire's, and Realogy.

There are even lawsuits. For example, the buyout of Huntsman (NYSE: HUN) went to court and now Apollo is required to do the deal. Something else: Black's long-time friend, Carl Icahn, is suing over a deal.

As layoffs have spread across banking, investment banks and hedge funds, things have been fairly quiet for private equity firms. Then again, these operators tend to have small employee bases.

But, interestingly enough, we may be finally seeing some pink slips for the private equity folks. According to The Wall Street Journal, 3i will announce a 15% cut in its staff and that there will be a 19% cut at American Capital.

And now it looks like the tier-1 firms are not immune. The Carlyle Group is gutting 10% of its staff this week (which comes to about 100 people). There's not much deal-making to do right now. Besides, it looks like it will be tougher for private equity firms to raise new capital. If anything, the focus will be on trying to manage the existing portfolios.

What's more, Carlyle has had a variety of blunders. There was the implosion of its mortgage fund (Carlyle Capital) and the recent bankruptcy of its Hawaiian Telecom holding.

Of course, Carlyle is not alone. So, it's a good bet we'll start seeing more layoffs in the private equity world.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

Last night, I was at the Bloblive event in Philly where people go on stage and talk about their cool business ideas. Interestingly enough, the event organizers used Facebook to invite people. And, at the event, there was a live Twitter feed, where users could make comments.

It was cool stuff, which shows the effective use of integrating social media.

Well, speaking of integrating things, it looks like Facebook has had some serious discussions to buy Twitter. In light of the slowing economy, I'm sure that these discussions are popping up among many social media companies.

The proposed price tag? A cool $500 million.

However, it was not for cash; instead, it was for Facebook stock. With the fall in equities, it's a good bet that the stock is worth much less than its previous valuation of $15 billion. Twitter wasn't impressed.

Indeed, Twitter still has lots of momentum and appears to be the next dot-com darling. With its growing user base, there should be opportunities to monetize things, which could help bolster the valuation.

If Twitter really wants to sell out, its best alternative is probably to go to an established player that has a solid stock value and cash in the bank such as a Microsoft (NASDAQ: MSFT) or Google (NASDAQ: GOOG).

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

Harvard is an easy target for the woes of our economy. Its business school produced George W. Bush, the fellow who's presided over the current economic catastrophe, and Rick Wagoner, the CEO of the largest automobile maker who's led its stock down 95% in the last eight years and now wants $25 billion worth of taxpayer money to keep the millions rolling into his bank account. But Harvard had these folks for just two years, so it's tough to blame the school for the current predicament.

However, with $36.9 billion in assets (as of June 30), Harvard also has the largest endowment of any university. And thanks to its big exposure to very illiquid interests in venture capital (VC) and private equity (PE) firms, Harvard leads a growing list of limited partners (LPs) which are selling stocks and those very illiquid interests in order to come up with the cash needed to fulfill their capital calls to these partnerships.

This requires some explaining. VC firms raise money from limited partners such as wealthy individuals, foundations, pension funds, and endowments. But the LPs don't write checks up front -- instead they hold onto their cash and must write a check when the VC calls and asks for the money when the VC is on the verge of making an investment. The problem for many LPs like Harvard is that much of their stock portfolio is locked up in hedge funds and these illiquid VC and PE interests.

This week, some of the top veterans in private equity -- TPG's David Bonderman, Carlyle's David Rubenstein, and KKR's George Roberts -- got together at a conference in Hong Kong. And, all in all, it was fairly depressing (hey, I guess that's what happens when you lose billions and billions of dollars).

Take Bonderman. He thinks the downturn will be protracted, calling it an L-shaped recession (the more common description is a V-shaped recession, which means there is a strong snapback). In fact, he thinks U.S. unemployment will hit 10% or so.

Then again, keep in mind that Bonderman lost about $1.3 billion on his six month investment in Washington Mutual.

Despite all this, Bonderman still has an appetite for investments. For example, he's focusing on the debt securities from hedge funds. Because of massive redemptions, the prices are at distressed levels.

Rubenstein also gave a grim presentation (he thinks the downturn can last several years). But, he is still bullish on some opportunities, especially in Asia. For example, he thinks China offers some compelling valuations and that the country may become more open to outside investments.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

Like just about all other private equity firms, Blackstone Group LP (NYSE: BX) reported a horrible Q3, with losses of $502.5 million, or $0.44 per share. However, the firm was fairly optimistic on the overall value of its sprawling portfolio of companies. That is, the writedown was only about 7%.

As a result, some investors were naturally skeptical – and the stock price of Blackstone continued to slide.

Well, this week, the CEO of Blackstone, Stephen Schwarzman, opined on the matter at a Merrill Lynch investor conference. Basically, he was mostly rosy and thinks there are good valuations in the marketplace. But, paradoxically, he said the Blackstone equity portfolio is in good shape.

And, in general, he has a point. If you take a look at the history of private equity, the best investment periods are in tough times (such as the early 1990s and 2001).

KKR Financial (NYSE: KFN), the publicly traded arm of the famous private equity firm, is doing extremely well. The company's net rose to $49 million from $38 million in the same quarter a year ago. It dropped its provisions for loan loss reserves, a sign that its portfolio should be doing well.

It also cut its dividend to zero. The FT says that it is "a sign that the company is husbanding cash amid continuing market turmoil." Put another way, firms that are doing well may cut dividends just in case the economy and their businesses get worse next year.

That is remarkably troubling news, because it puts payouts at risk even at some large companies, especially those with financial divisions or balance sheets with some portion of their assets in risky securities. It also could hurt the chances dividends will be paid at firms with falling cash flows and substantial debt due next year. On the financial unit count GE (NYSE: GE) comes to mind. On the falling cash flow metric, The New York Times (NYSE: NYT) presents a risk.

Being among America's great companies may not count much any more, especially when it comes to sending cash to shareholders every quarter.

Douglas A. McIntyre is an editor at 247wallst.com.

When the global markets entered the credit crunch, sovereign wealth funds (SWFs) funneled billions of dollars into a variety of struggling companies, especially financial institutions like Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER).

Alas, the transactions have shown tremendous losses.

True, SWFs are focused on the long-term, which may extend into decades. But the extent of the losses were certainly jarring.

So are SWFs backing off? Perhaps not. In fact, these funds are starting to write checks again. For example, the Qatar Investment Authority structured a $8.83 billion dollar capital infusion into Credit Suisse Group (this is according to the Wall Street Journal, a paid publication).

Interestingly enough, China Investment Corp. may even pony up more money into the Blackstone Group LP (NYSE: BX), even though it has sustained losses of more than 70%. The SWF now has the right to boost its equity stake from 9.9% to 12.5%.

While it's true that SWFs tend to invest early, the recent activity is nonetheless encouraging – and another sign that major investors are getting more and more confidence.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.