Archive for December, 2009

John Paulson – Hedge Fund Legend

Thursday, December 24th, 2009


Paulson earned billions betting against subprime mortgages as the founder of Paulson & Co., but many are not familiar with his unconventional route into the hedge fund world.

Paulson received his bachelor’s degree in finance from New York University’s College of Business and Public Administration, 1978, where he graduated first in his class, and a Master of Business Administration from Harvard Business School, where he was designated a Baker Scholar, the school’s top academic honor, for graduating in the top 5 percent.  Paulson began his career at Boston Consulting Group before leaving to join Odyssey Partners, working under Leon Levy.  He later worked in the mergers and acquisitions group at Bear Stearns.  Prior to founding his own firm, he was a partner at mergers arbitrage firm Gruss Partners LP. In 1994, he founded his own hedge fund with $2 million and two employees (himself and an assistant).

As of Dec. 14th, his largest fund, Paulson’s Advantage Fund is making returns of 15%, based on bets on big banks and gold, must less than its returns in 2008.  His first fund, Paulson Partners, made average returns of 16% per year, a very respectable return, but not enough to bring him the fame he has today.

Last year Paulson made bets against subprime mortgages, and his portfolio made 600%, while comparable hedge funds made 10%.  Today, Paulson oversees almost $30 billion.  Paulson & Co., Inc. had assets under management (as of June 1, 2007) of $12.5 billion (95% from institutions), which leapt to $36 billion as of November 2008.  Under his direction, Paulson & Co. has capitalized on the problems in the foreclosure and mortgage backed securities (MBS) markets.  In 2008 he decided to start a new fund that would capitalize on Wall Street’s capital problems by lending money to investment banks and other hedge funds currently feeling the pressure of the more than $345 billion of write downs resulting from under-performing assets linked to the housing market.   In early 2008, the firm hired former Federal Reserve Chairman Alan Greenspan.

In September 2008, Paulson has bet against four of the five biggest British banks. His positions included a £350m bet against shares in Barclays; £292m against Royal Bank of Scotland; and £260m against Lloyds TSB.  He eventually booked a profit of as much as £280m after reducing its short position in RBS in January 2009.   On August 12, 2009, Paulson purchased 2 million shares of Goldman Sachs as well as 35 million shares in Regions Financial.

In November Paulson doubled his stake in Kraft, a consumer foods giant that is making a hostile takeover attempt with Cadbury.  He is also trying to gain control of Idearc, the U.S. telephone book publisher that filed bankruptcy in the Spring.

Paulson has taken very large positions in Bank of America and Citigroup.  Paulson purchased shares in Bank of America expecting the stock to double by 2011.  At the same time he has sold his position in Goldman Sachs.  Paulson’s play on gold is based on the fact that the precious mineral will continue to be purchased by emerging central banks as the value of the dollar depreciates.


For more information, please refer to BusinessWeek…

For more information, please refer to Wikipedia…

Dollar General IPO: Back in Action

Thursday, December 24th, 2009


Dear Reader,

As an educated an knowledgeable follower of the equity markets, you have probably seen a sharp fall in successfully underwritten U.S. IPOs over the past two years.  This has been especially difficult for our beloved investment banks, who often make fees as high as 7-8% on initial public offerings (plus fees on follow ons)!

In Nov./Dec. of 2009, some of the only U.S. IPOs to be successful were the retail/value IPOs, which included the Dollar General offering, climbing 8% after its launch.  Dollar General and Rue21 both surged after their trading debuts.

Dollar General owns over 8,500 stores and priced at $21 and is now trading at $22.50.  Its sale of 34.1 million shares garnered proceeds of $716 million for KKR, which made a spectacular turnaround with the company after it took it private in 2007.

Rue21 priced 6.77 million shares at $19 each and is now trading at $28!  During the trading hours of the first day of its debut, the stock was trading as high as $24.30.  The company is a teen-oriented clothes retailer with 500 stores in the United States, mostly located in the South.  The business focuses on value pricing like Dollar General and shares lots with mega-discounters like Wal-Mart.

Both companies seem to have benefited from the recessionary “trade-down” effect.  When Vitamin Shoppe debuted on Oct. 28th, it was trading at $17 and is now trading at $22.36.  IPO activity may pick up for similar firms as companies take advantage of the robust market to raise capital.


For more information, please visit Investors Business Daily…

GM Delays European Restructuring

Wednesday, December 23rd, 2009


GM’s European restructuring plan with Opel and Vauxhall will now be delayed until 1Q 2010.  Nick Reilly, CEO of GM Europe, released the news last week.  He admitted that “While it is indeed exciting to see that things are coming together, bear in mind this is going to be one of the largest, most complex industrial reorganizations in European manufacturing in years.”  Thousands of European employee pay packages will be affected by the restructuring.  Last month, GM canceled the sale of a majority in Opel and Vauxhall to a consortium of Russian lender Sberbank and Canadian auto parts manufacturers Magna International, Inc.

GM has indicated it wants some 2.7 billion euros (3.9 billion dollars) in state aid from the various EU countries where it has factories in order to turn the carmaker around. Opel employs around 50,000 people in Europe, half of whom are in Germany.

For more information, refer to GM’s website…

New Securitization – ABS is BACK

Wednesday, December 23rd, 2009


It has taken two long years, but the securitization market is back and deals are being underwritten with and without government backing.  One of the biggest risks to date is the risk of over-regulation.  If this form of financing is no longer attractive to investors, it will have negative affects to consumer ABS performance.

New regulations include accounting rules that require off balance sheet transactions to move back onto a lender’s financial statements.  This will worsen on book leverage ratios and will lead to increased capital requirements.  One regulation in question will require at least 5% of performance risk in securitized loans to remain on a bank’s balance sheet, according to President Obama.

2009 saw $135 billion in issuances, sold with the help of the Federal Reserve’s emergency loan program.  In 2010, $100 billion of credit card securities will mature and companies will turn back to the market to refinance the debt.

Please refer to Reuters for more information…

Selling Volvo: Tough Times for Ford

Wednesday, December 23rd, 2009


Last year Ford put Volvo up for sale, a premier U.S. auto brand known for both its quality and dependability.  The sale was necessary to help Ford raise enough capital to pay down upcoming debt.  The attempted sale was part of a larger strategy to divest of non-core businesses (generating large and lucrative fees for investment bankers) and streamline operations.  At the same time, GM announced that it is abandoning its Swedish Saab unit, after selling some of its assets and intellectual property to another Chinese automaker, Beijing Automotives.  Construction machinery manufacturer Sichuan Tengzhong Heavy Industrial Machinery Corp. also acquired GM’s Hummer Brand this year.

Geely, a prominent Chinese automaker was named the preferred bidder for the franchise in November of 2009.  The deal is expected to close in the first half of 2010.  If the deal is completed, it would be the largest deal ever completed by a Chinese automotive firm.  Geely is rumored to be offering  between $1.8 and $2.3 billion for the firm, which is less than 30% of what Ford paid for Volvo in 1999, $6.45 billion.  The deal should help Geely break into the Western market, a possible turning point for Chinese auto manufacturers.  Already, Chinese annualized auto sales for 2009 have surpassed those in the United States.

The largest obstacle in the deal negotiations is disagreement about how to deal with intellectual property rights and controlling Geely’s use of U.S. technology and safety equipment.  Ford and Volvo have shared technology for over a decade and will continue to share IP in the future.  Much of Volvo’s production is rumored to be moving to China, while development and research will remain in Sweden.  One large question auto analysts have is whether or not Volvo can remain a leader in auto safety and environmental protection after the acquisition.  The Chinese have been looking to develop safety technology for years.  Geely is also looking for $1 billion in financing from the Chinese government before the transaction can get approval.

While losing Volvo could damage Ford’s long term growth potential, Ford itself has made a very impressive turnaround, recently making a $1 billion profit for the first time in years.

The first Volvo was manufactured in 1927.  Today the company employees 20,000 employees worldwide.  In 2008, sales fell by 18.3% to 374,297 units.

Geely was founded in 1986 and started as a refrigerator parts supplier.  It currently employees 12,000 and has an auto production capacity of 300,000 cars per year.  It is China’s largest automaker and is led by its charismatic founder Li Shu Fu, the equivalent of the Chinese Henry Ford.


For more information, please visit BBC news…

For more information, please visit CBC news…

Can you read Mandarin? Please visit Geely’s website…

Novartis to buy Corthera for $120mm

Wednesday, December 23rd, 2009

Swiss pharmaceutical giant Novartis announced on Dec. 23rd that it will buy San Francisco based Corthera for $120mm, giving it the right to develop drugs that prevent heart failure.  The acquisition is still subject to regulatory approval.

Corthera is a privately owned company that has been developing relaxin, a drug that prevents cardiac arrest in patients.  The drug is currently in its third trial phase and targets patients with acute decompensated heart failure.  Novartis wants to complete the development of the drug and plans to put it on the market in the U.S and Europe by 2013.  Corthera’s shareholders could receive additional payments if the drug is successful.  Analysts estimate that these payments could be as high as $500mm.

For those interested in biotech, according to Novartis, Phase II results of the drug relaxin show that it has “vasodilator effects (widens blood vessels), improves breathlessness, reduces cardiovascular morbidity and days in the hospital.”  Relaxin itself is a “recombinant version of a naturally occurring human peptide.  In its natural form, this peptide is responsible for relaxing the female reproductive tract as well as mediating the cardiovascular and renal changes during pregnancy.  In trials, relaxin is administered to hospitalized patients via a 48-hour infusion and has been shown to cause an increase in cardiac output, systemic and renal casodilation, which suggests potential benefits for patents with acute decompensated heart failure. ”

Further, Trevor Mundel, MD, Global Head of Development at Novartis AG claims that “despite a range of current treatment options, acute decompensated heart failure is the leading cause of hospitalization in people over age 65 and remains a major clinical challenge with a high and increasing incidence and substantial morbidity and mortality.  Acute decompensated heart failure, estimated to affect millions of people in the US and in Europe is a condition often associated with chronic heart disease where patients typically suffer from severe shortness of breath (dyspnea) and the heart’s ability to pump blood from the lungs is impaired.  As a result, the lungs become overfilled with fluid, which reduces oxygen uptake.  Diuretics and vasodilators are the current standard of care, but available agents from these classes have been associated with renal impairment, low blood pressure (hypotension) and adverse outcomes.”

Relaxin is expected to further strengthen the position of Novartis and its extensive range of cardiovascular medicines and development portfolio:

  • Diovan (valsartan) – an angiotensin receptor blocker (ARB), is the number one selling hypertension medication worldwide[1], and is indicated in chronic heart failure (NHYA class II – IV). Diovan has been shown to significantly reduce hospitalizations for heart failure.
  • Tekturna/Rasilez (aliskiren) – a first-in-class direct renin inhibitor approved for treatment of hypertension that is also currently in Phase III studies for use in chronic heart failure.
  • LCZ696 - a single molecule dual-acting angiotensin receptor blocker / neprilysin inhibitor (ARNI) that entered Phase III development in late 2009 for systolic heart failure.
  • LCI699 – a Phase II and first-in-class aldosterone synthase inhibitor (ASI) being explored as a potential treatment for heart failure.

Relaxin also further complements the Novartis strategy to expand in acute cardiology care that includes elinogrel, an anti-platelet agent in Phase II development with potential to reduce the risk of heart attack and stroke. Novartis has hospital-based specialty sales forces in place to maximize the commercial potential of this development portfolio.


For more information, please visit the Novartis website….

Reminiscing with the Buyout Industry and EBW: Slowest Summer Ever, Class of ’09

Wednesday, December 23rd, 2009

Everything But Water

As the year 2009 comes to a close, I wanted to take some time to reminisce on some of the more troubling times in the world of buyouts, leveraged finance, and restructuring.

The summer of 2009 was probably one of the slowest in the past decade for leveraged lending and buyout activity.  What we did see was about $12 trillion in government aid since 2008, and a number of quasi-public attempts at purchasing illiquid securities and clearing the market.   The United States saw a wave of bankruptcies, as the corporate bond default rate pushed past 10%, and investors balked, throwing more money at the junk bond (high yield) market in search of returns.   And slowly, but surely, the high yield market began to show signs of life, but not enough to bring back the mega-buyout.  It may be years until we see that type of glorious transaction again.

One interesting deal I encountered sitting on my desk at work at 7:30 in the morning, ice cold Snapple in hand, was the bankruptcy of ‘Everything But Water, LLC,’ the largest U.S. retailer of women’s swimwear.  The company was seeking Ch.11 protection, after being acquired by Bear Growth Capital Partners (the fundless subsidiary of Bear Stearns Merchant Banking, shout out to LA, LLC’s partner from Bear).   Bear Growth Capital Partners acquired a majority stake in EBW in April of 2006, at the height of the private equity bubble.  This was two years after the retailer received its first investment from investment bank Broadsword Partners.   Bear’s acquisition led to the roll up of Water Water Everywhere and Just Add Water, two businesses in the same industry that helped EBW double the size of its operations.  *BSMB is now a part of JPMorgan.

Since September of 2008, Everything But Water had seen a 23% decline in gross sales and had been operating at a loss.  The company had assets of about $58 million and debt of $35 million.   In its prime, EBW operated 70 stores and had over 360 employees selling swimsuits in the $50-200 price segment from Anne Cole and Michael Kors.  Despite layoffs, spending cuts, and tighter inventory controls, the company was not able to improve its free cash flows enough to appease lenders.   EBW tried closing individual stores based on year over year performance and also hired Hilco Real Estate, LLC to help it negotiate rent reductions and lease modifications with its landlords, all to no avail.

Lender D.B. Zwirn insisted that it would accelerate into covenant default if EBW did not enter a comprehensive restructuring that addressed structural issues.

Other higher end consumer retailers backed by LBO shops that filed for bankruptcy included Fortunoff, which was backed by NRDC Equity Partners and Blue Tulip Corp., a Highland Capital Partners backed retailer of gifts.  Bankruptcy after bankruptcy made it very difficult for LBO firms like BSMB to raise and deploy capital.


For more information, please purchase the March 2009 copy of Buyouts Magazine….

What is Antitrust?

Monday, December 7th, 2009

FTC - Federal Trade Commission

Laws governing competition in the United States are known as Antitrust laws, governed by the Sherman and Clayton Acts.

Sherman Act:

“Section 1. Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine….

Section 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine….”

Clayton Act:

The Clayton Act of 1914 was passed to supplement the Sherman Act, since the Sherman Act alone was not effective. Specific categories of abusive corporate conduct were listed, including price discrimination (section 2), exclusive (section 3) and mergers that substantially lessen competition (section 7).  Section 6 specifically exempted trade unions from the law’s operation. Both the Sherman and Clayton acts are now codified under Title 15 of the United States Code. Since the mid-1970s, courts and enforcement officials generally have supported view that antitrust law policy should not follow social and political aims that undermine economic efficiency.

The antitrust laws were minimalized in the mid-1980s under influence of the Chicago School of Economics and blamed for the loss of economic supremacy in the world. However, antitrust laws are still essential to understand for any M&A Banker or Lawyer.  Most transactions are required to be disclosed to the United States government.  The Federal Trade Commission is usually the agency that handles these issues.

Antitrust Laws are known to have three major elements:

  • Banning agreements or practices that restrict free trading and competition between business.  Examples of this include cartels (OPEC is international, it does not count!).
  • Banning aggressive and abusive behavior by a firm dominating a market, or anti-competitive practices that tend to lead to such a dominant position.  Examples of practices controlled in this way may include Tying, Price Gouging, Predatory Pricing, and Refusal to Deal.
  • Governing M&A transactions of large corporations, including Joint Ventures in certain cases.  Transactions that are considered to threaten the competitive process can be prohibited altogether, or approved subject to “remedies” such as an obligation to divest part of the merged business or to offer licenses or access to facilities to enable other businesses to continue competing.


JDA Software $250M Debt Offering

Sunday, December 6th, 2009


JDA Software has issued $250M in a private offering (qualified institutional buyers) in Sr. Notes.   The company plans to use the proceeds in order to fund a $434M acquisition of i2 Technologies (NASDAQ: ITWO).

JDA provides inventory management software for retailers. i2 technologies is in the business of supply chain management and offers software applications and SaaS.

This will be JDA’s second attempt to acquire i2 technologies after a failure in financing this past November. JDA had entered a $346M deal which provided special provisions to allow the buyer (JDA) to terminate the agreement in case of inability to raise financing.  In most cases in the past, the use of this provision leads into further negotiation of the purchase price.  However, when JDA attempted to lower the price, i2 refused, and instead JDA was forced to pay a $20M termination fee.

In addition to JDA’s debt offering, the company will fund their acquisition with a $120M loan and a $20M revolver from Wells Fargo.


De Beer’s Shareholders Provide Another $1B in Principal

Sunday, December 6th, 2009

De Beers

De Beers is tapping into the funds of their 3 largest shareholders, the Oppenheimer family, Anglo-American, and the government of Botswana, in order to pay down upcoming debt.  De Beers will raise $1B in order to help pay a $1.5B debt facility due this coming march.  The 3 shareholders will contribute 40%, 45%, and 15% respectively.

This $1B in principal collection follows $500M that was collected from the same 3 shareholders earlier this year.  Beyond a $1.5B obligation this upcoming March, De Beers will face a $1.7B debt facility due in 2012.

Lynette Gould, a De Beer’s spokesperson commented that this raise in capital will “lower De Beers’ level of external debt, improve the company’s capital structure, and place it in a position to take advantage of any new opportunities that might arise, as the diamond market moved out of recession and into recovery mode” (Source: Mining Weekly).

De Beers has certainly felt the impacts of the recession with a 99% drop in profits over the past year from $316M to $3M. Production has already been cut in South Africa, Botswana, and Canada.