Back in late September, KKR closed one of the largest buyouts in history – the $29 billion transaction for First Data, which is a leading payments processing operator.

Even though the company is private, it is still publishing its financials and is having quarterly conference calls. So how are things going?

For the first nine months of 2007, revenues increased 15% to $5.9 billion and adjusted EBITDA was $1.8 billion (up 7%).

In fact, First Data's new CEO, Michael Capellas, also provided his go-to-market strategy – shedding some light on what happens in post-buyout environments.

First of all, he wants to find ways to increase organic growth. To this end, there will be more emphasis on bolstering the sales force – as well as finding ways to cross-sell offerings.

Next, the company wants to bring new product innovations to market (hey, it means more cross-selling, right?) Some of the areas include mobile ecommerce, analytics, and fraud detection.

Another big opportunity is the growth in emerging markets. Interestingly enough, Capellas is not looking for acquisitions to bulk things up on this front.

Finally, Capellas will try to cut lots of costs. Going into 2008, he thinks he can slash $200 million in annual costs.

And, this means layoffs – about 6% of the workforce. Yes, some things never change.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

You may think the subprime mortgage mess is huge. Well just around the corner a larger elephant is looming and its impact may be even more devastating than the current credit crisis.

While it sounded like good news when banks sold $30 billion of loans for leveraged buyouts last week -- $26.4 billion of that was for the First Data buyout. That sale came with a big price tag -- banks agreed to sell the debt at 96 cents on the dollar, which means they locked in losses after their fees.

And then there was the problem of what to do with the other 90% of LBO loans in the pipeline.

The Wall Street Journal (subscription required) reported today that Citigroup Inc. (NYSE: C), Credit Suisse Group and J.P. Morgan Chase & Co. (NYSE: JPM) hold $400 billion in debt they promised for financing purchases private equity firms have in the works globally. If they can't sell the debt, they're left holding the bag, which means a lot less money for other loans. If the economy slows as expected and corporate profits weaken, the only way the banks will be able to unload the debt they're holding will be a fire sale on that debt at even deeper discounts then the First Data deal.

First Data, the first of the large PE deals seeking financing following the meltdown of the credit markets, placed $9.4 billion in loans yesterday. Supposedly, the amount of debt sold was nearly double the $5 billion banks targeted.

Also, Oaktree Capital Management, BlackRock and Eaton Vance are forming funds to buy up some of this debt. The 400 bps banks have had to add on to yields are beginning to pique investor's interest.

What should also begin to be seen is that the amount of debt that needs to be placed should start coming down. News reports cite as much as $330 to $370 billion in loans need to be placed. However, this number seemed to grow as the credit-market meltdown fears hit the markets. Prior to the panic hitting a crescendo, $200 billion in leveraged loans and some $75 to $100 billion of high yield bonds were the target that needed to be sold.

However, take away First Data and TXU Corporation (NYSE: TXU), the two large deals being financed, and add to that Harman International Industries Incorporated (NYSE: HAR) and Sallie Mae that look like they might not get financed, and this number drops rather quickly. Plus add all the smaller deals that are not household names that will not get done and next thing you know this problem is being resolved.

Once again, free markets are correcting the problem that they created.

KKR is known as a tough negotiator. After all, the firm walked from its $8 billion deal for Harman International (NYSE: HAR), which crushed the stock by 24% on Friday.

But, as for the First Data Corp. (NYSE: FDC) transaction, KKR is certainly jazzed. Despite talk that financing had dried up, it now looks like the debt offering is oversubscribed -- at least for a $5 billion tranche (this is according to a story in Bloomberg.com). Although, to generate more demand, there was a 4% discount on the notes.

But for the most part, it looks like things should pan out and based on the stock price of First Data, Wall Street also agrees.

Does this mean things will get easier for other deals? To some degree, I think the answer is yes. Liquidity is coming back into the system and fear is dissipating.

However, I think there will still be some carnage, especially for those deals that may not have the strong fundamentals of First Data or that were aggressively priced and structured.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

At mid-summer, it would have been hard to imagine any of the large private equity deals like First Data Corp. (NYSE: FDC) and Harman International (NYSE: HAR). Harman is hardly an unknown entity. It was started more than 50 years ago. It built the first car radio in 1948. The company has a large customer base that includes most of the major car companies.

In the fiscal year ending June 30, Harman's revenue rose 9% to $3.55 billion. Net income was up 23% to $314 million. Not bad. But, in the fourth quarter of the fiscal, operating income was down, as cost of sales and expenses both rose.

Yesterday. KKR and Goldman Sachs (NYSE: GS) said that they were pulling the plug on the $8 billion deal to take Harman private. The said that Harman had breached the "material adverse effect" clause of the buyout agreement. In other words, Harman's business had gotten much worse.

Maybe. What the court will ask, and this is almost certainly going to court, is whether Harman's financial situation took a significant turn for the worse. Or, did they buyers simply believe that the credit markets had turned against them by making capital unusually expensive. Better to face,and perhaps lose a lawsuit than to default on billions of dollars worth of bonds.

MAJOR PAPERS:

• Barron's Online's (subscription required) "Weekday Trader Extra" reported that Wall Street is eyeing the negotiations of the First Data Corp (NYSE: FDC) buyout, as there has been talk that Kravis Roberts might be willing to make some concessions to a bank group arranging financing for the purchase.
• The Wall Street Journal (subscription required) reported that General Motors Corp (NYSE: GM) has sent the UAW two proposals as their negotiations are nearing the deadline.
• With near record high oil prices, there are signs that OPEC may increase crude output 2%, or 500,000 barrels a day, as a gesture to comfort oil markets, according to the Wall Street Journal.

OTHER PAPERS:

• The Associated Press reported that EPR, a leftist guerrilla group, said they caused a number of explosions yesterday aimed at about six Mexican oil and gas pipelines, resulting in millions of dollars in lost production and unsettling financial markets.
• Countrywide Financial Corporation (NYSE: CFC) is reportedly working with Goldman Sachs Group (NYSE: GS) and a law firm to put together another multi-billion dollar bailout plan for Countrywide, the nation's largest home lender, reported the New York Post.
• Sir Martin Sorrell believes that WPP Group (NASDAQ: WPPGY), the company he has built and is currently the CEO of, is likely to appoint his successor from within the company, reported the Telegraph.

The Wall Street Journal [subscription required] reports that Kohlberg, Kravis and Roberts (KKR) is negotiating with banks to lend it $24 billion for its $26.4 billion deal to buy payment processor, First Data Corp. (NYSE: FDC). What's at stake here is whether last month's pause in the private equity fueled takeover market is temporarily on hold or dead for a decade.

There is a $400 billion backlog of such debt deals in the pipeline. Prior to the August pause, banks had no trouble selling the debt to hedge funds and others. But the terms -- or covenants -- of that debt were so loose that the banks were creating loans that demanded very little in the way of performance.

These so-called covenant-lite loans may soon become a thing of the past. If the Journal's reporting is correct, KKR may agree to a covenant requiring it to maintain a minimum level of earnings before interest taxes depreciation and amortization (EBITDA). Such terms used to be common in debt offerings, but the fact that there is even any debate about it, indicates how much covenant-lite debt risk is currently out in the market for which debt buyers have no protection at all.

MAJOR PAPERS:

• In an effort to stem the flow of weaponry into Iraq, the Pentagon is planning to build its first base near the Iraq-Iran border, reported the Wall Street Journal (subscription required).
• Kohlberg Kravis Roberts & Co. is expected to make concessions with the investment banks putting together $24B in debt for its purchase of First Data Corporation (NYSE: FDC), something it had previously been unwilling to do, reported the Wall Street Journal.
• The Bush administration wants to limit the role of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) in the home mortgage crisis, but a number of Democrats, led by New York Senator Schumer, want to increase the authority of both firms by loosening growth constraints, and increase the size of mortgages they can buy in high cost areas, reported the Wall Street Journal.
• While the Nasdaq Stock Market Inc (NASDAQ: NDAQ) said it extended the deadline earlier this week, the "self-imposed deadline" for an LSE bid passed without a single firm bid, reported the Financial Times (subscription required).

OTHER PAPERS:

• The U.K. Times reported that Russian state-controlled energy company Gazprom (OTC: GZPFY) considered making a rival $5B offer for business news company Dow Jones and Company Inc (NYSE: DJ), according to a source.
• The New York Times reported that after three separate recalls of Mattel Inc (NYSE: MAT) toys, Disney (NYSE: DIS) said it would begin testing toys featuring Disney characters, including ones already on store shelves.

The 18% haircut on Home Depot's (NYSE: HD) sale of its supply unit was not much of a surprise. Real estate continues to ail and the credit crunch added to the pressures. But the big test for private equity is the upcoming $29 billion buyout of First Data Corp (NYSE: FDC).

Well, Barron's [a paid publication] has an excellent analysis on the deal, which will require a whopping $24 billion in debt financing and is expected to close at the end of the month.

So, will there be pushback from the lenders -- which include Citigroup (NYSE: C), Credit Suisse (NYSE: CS), Lehman Brothers (NYSE: LEH) and Merrill Lynch (NYSE: MER)?

Keep in mind that First Data already has a sizable debt load. The pricing on the new debt could sustain a material discount. If so, the lenders may need to take a write off or sell loans at a loss.

For example, First Data's interest payments may eat up most of its free cash flows. And, if the growth slows down, there could be negative cash flows.

In a restrained credit environment, this is not what lenders want to hear. In other words, I think we could see some fighting from the lenders to try to get a lower price on this deal.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements.

According to The Wall Street Journal, another battle is beginning between private equity and the banks that loan money for big buyouts. KKR and its lenders are heatedly debating the terms of the purchase of First Data (NYSE: FDC). As the paper writes (subscription required): "They (KKR) are standing by their commitment to a public company on a certain price, which was based on the commitments from Wall Street on financing terms."

The First Data deal is worth $24 billion. Banks do not want to take a bath if they have to hold some of the debt on their own balance sheets. A default would force them to write down the loans.

The press views that growing unpleasantness between private equity firms and their banks as a sign that greed pushed the parties to do deals that would not all work. The premiums paid for many public companies were simply too high.

But, the problem is a bit more complex than that. Why the banks let private equity put so little money into most deals will also be a source of wonder. While the banks did get fees for their work, the lion's share of the upside belongs to firms like KKR. And, the imbalance is beginning to show as credit markets for these transactions disappear.

Douglas A. McIntyre is a partner at 24/7 Wall St.

If you take a look at KKR's prospectus, the firm spends quite a bit of time hiring top-notch talent. And, as private equity deals get huge, it's now a necessity. So, this week, First Data Corporation (NYSE: FDC) said it has retained Michael D. Capellas as its CEO. The company is currently undergoing a $27 billion buyout and the suitor is KKR.

Capellas is a seasoned tech executive. Some of his prior gigs include the CEO of MCI, which he sold to Verizon Communications Inc. (NYSE: VZ). He also was the CEO of Compaq and went through the process of selling the company to Hewlett-Packard Company (NYSE: HPQ). Oh, and he serves on the board of Cisco Systems, Inc. (NASDAQ: CSCO).

In other words, Capellas certainly knows how to prep companies for exits. He also has a strong background with selling complex technologies – and that will be a big help at First Data.

Interestingly enough, he has spent some time as a senior advisor to Silver Lake Partners, which is a top-tier private equity firm.

For more information on the First Data deal, click here.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

The expanding credit spreads between corporate bonds and treasuries, and in particular between junk bonds and treasuries, have also led arbitrage spreads to widen. Deals that will be financed and closed have spreads that warrant investors' attention. There may be some easy money to be made as a result.

Deals worth looking at, according to Barron's , include:

• Alltel Corporation (NYSE: AT) trading for $67.80 with take-out price of $71.50-12% annualized rate of return.
• Clear Channel Communications (NYSE: CCU) trading for $37.70 with take-out price of $39.20-10% annualized rate of return.
• First Data Corporation (NYSE: FDC) is selling for $32.65 and has a take-out price of $34-for an 18% annualized return.
• Harrah's Entertainment Inc (NYSE: HET) is selling for $85.25 and has a take offer of $90-14% annualized rate of return.
• Tribune Company (NYSE: TRB) is trading at $29.50 with a take-price at $34-30% annualized return.
  
• The most attractive arb play from a return perspective is Tribune but that deal also carries the most risk. Tribune already has a considerable amount of debt and is attempting to add more debt and use the company's ESOP plan to close the deal. In addition, the fundamentals of the newspaper industry continue to remain not very good.

Use the widening arb spreads to make some nice money. Cash available to finance these deals is still aplenty. Lending terms are simply coming back to the planet earth, as sensible lending covenants are re-introduced.

The Washington Post thinks the recently announced deal by Silver Lake Partners and Texas Pacific Group to take telecommunications equipment maker, Avaya, Inc. (NYSE: AV), private indicates a perilous decline in credit standards. And the Post thinks this decline will contribute to the end of the takeover boom.

I always feel a bit skeptical when I read these kinds of articles. It's not so much that the logic is flawed, but the timing is often hard to pin down. I am guilty of doing the same thing myself since I wrote something similar last August. And yet the takeover boom refuses to bend to the will of the pundits.

The Post believes there are three reasons why the takeover boom has peaked:

Jim Cramer came onto MAD MONEY tonight saying he thinks that Total Systems Services Inc. (NYSE: TSS) is one that can be taken over next in a sector and $40 would be a fair price based on Alliance Data prices. Synovus Financial Corp. (NYSE: SNV) is the parent and Third Point is now being an activist investor. The earnings growth of 18% is reason enough to own this. Cramer did note that he is concerned that Automatic Data Processing Inc. (NYSE: ADP) might be acquired first.

Before you trust Cramer, there are some other instances to look at: Alliance Data Systems (NYSE: ADS) was just acquired, First Data Corp. (NYSE: FDC) is going private, and even Bisys Group Inc. (NYSE: BSG) got gobbled up. Keep in mind that some of the premiums in this sector have been small. ADS was nearly a 20% stock jump, but BSG was a horrible low-premium buyout. In making any "buyout projections" you really need to make sure that these stocks are ones you want to own on your own. Picking a company for a buyout just "for the speculation of a buyout" is a strategy that can be more than painful regardless of how nutty private equity deals get.

MOST NOTEWORTHY: First Data Corp (FDC), Pinnacle Entertainment, Inc (PNK), Cephalon, Inc (CEPH) and Verint Systems Inc (VRNT) were some of today's downgrades:

• UBS downgraded First Data Corp (NYSE: FDC) to Neutral from Buy following the acquisition by KKR.

• Pinnacle Entertainment (NYSE: PNK) was cut to Hold from Buy at Matrix USA, as the firm believes post-hurricane reconstruction efforts are leading to significant capital expenditures, which limits upside.

• Cephalon Inc (NASDAQ: CEPH) was removed from American Technology's Focus List with shares up 15% in three weeks as the approval of Nuvigil without a Black Box warning has passed.

• JP Morgan cut shares of Verint Systems (NASDAQ: VRNT) to Underweight from Neutral, citing risks and costs associated from the Witness Systems' (WITS) acquisition.

OTHER DOWNGRADES:

• Labor Ready, Inc (NYSE: LRW) was downgraded to Sell from Neutral at Goldman based on the slowdown in U.S. residential construction activity.

• Citigroup downgraded International Paper Co (NYSE: IP) to Hold from Buy with a $39 target.

• Bernstein cut MedImmune, Inc (NASDAQ: MEDI) to Market Perform from Outperform.

• Sanders Morris downgraded Dreamworks Animation SKG, Inc (NYSE: DWA) to Neutral from Buy on valuation.

• JP Morgan downgraded Icagen, Inc (NASDAQ: ICGN) to Neutral from Overweight.

• Friedman Billings cut CompuDyne Corp (NASDAQ: CDCY) to Market Perform from Outperform following Q4 results.

• Roth Capital cut LivePerson, Inc (NASDAQ: LPSN) to Sell from Hold.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).