On Tuesday, the Securities and Exchange Commission threw a brushback pitch at those who are betting on the further collapse of our big financial institutions. Instead of suggesting better oversight of the companies, the SEC is going after short sellers.
For 30 days starting Monday, short-selling will be restricted on 19 financial companies. Financial regulators are also cracking down on "sensational rumors." To put the short-selling rule in perspective, consider that even when the market re-opened after the September 11th attacks, the SEC considered, but didn't implement, short sale restrictions.
Since Bear Steans collapsed and Vanity Fair bought the company's story that short-sellers did them in, everyone is worried that short sellers are bringing the market down. And I'm sure they are, but short-selling, after all, is legal. The SEC just loosened rules on it last year.
Yesterday, SEC chair Steven Cox testified that he's worried about short-selling in connection with spreading false rumors to manipulate the market. OK, that's not legal, but as Cox pointed out, the SEC brought its first case -- EVER -- for this sort of deception this year. And it still hasn't gone after anyone for spreading false positive rumors about a company.
FT.com reports that spreading a false rumor and selling short ahead of that rumor can get you into trouble. Paul Berliner is one such short-seller charged with spreading false stories about the Blackstone Group (NYSE: BX)'s acquisition of Alliance Data Systems (NYSE: ADS) while selling ADS shares short. If the SEC is serious, this could lead to other indictments since this practice appears rampant.
In this case, the SEC had evidence. On November 29 Berliner sent instant messages to traders at brokerage firms and hedge funds suggesting that Blackstone's deal to acquire ADS for $81.75 was being renegotiated at $70 a share. The rumor was picked up by the media and caused ADS's shares to fall 17%. Berliner agreed to settle the charges to disgorge $26,129 in profits, pay a $130,000 fine, and is banned from working for any broker or dealer.
As I posted last month, I received reports that hedge funds went a step further than Berliner. In that case, hedge funds may have caused the collapse of The Bear Stearns Companies (NYSE: BSC) and profited from its fall. A hedge fund manager in that post said: "Bear's collapse didn't surprise me. We've been short Bear for five days. All the hedge funds have been pulling their prime brokerage business from Bear."
If that hedge fund manager was telling the truth, does that make what he did legal?
MOST NOTEWORTHY: National City, Syntax Brillian and Medco Health were today's noteworthy upgrades:
Deutsche Bank upgraded shares of National City (NYSE: NCC) to Buy from Sell on valuation as they believe their $9.00 target is in-line with the company's franchise value.
Baird upgraded Syntax Brillian (NASDAQ: BRLC) to Outperform from Neutral based on recently announced strategic initiatives and valuation.
Jefferies upgraded shares of Medco Health (NYSE: MHS) to Buy from Hold as they believe the company's renewed PBM contract with United Healthcare (NYSE: UNH) removes a major overhang.
OTHER UPGRADES:
Friedman Billings raised Downey Financial (NYSE: DSL) to Market Perform from Underperform.
Volterra (VNASDAQ: LTR) was raised to Buy from Neutral at Piper.
Alliance Data (NYSE: ADS) was raised at JP Morgan to Overweight from Neutral.
Alliance Data Systems (NYSE: ADS) seems ready to fight its buy-out dispute with Blackstone Group (NYSE: BX) all they way to the Supreme Count. But, it gave up the ghost, perhaps thinking that, even if it won the action, it would takes years and cause management distractions.
The original buy-out deal was for $6.76 billion or $81.75 a share. The stock now trades at $52.84. According to Reuters, ADS has now sued Blackstone for a much more modest "$170 million business interruption payment." The two companies had looked at compromises to keep the deal on track, but nothing works.
The news is not only a victory for Blackstone. It shows that private equity firms can walk away from many of the deals that they made in early 2006. Weak credit markets are the cause of breaking the deals because they have driven higher interest rates and an economy that could hurt profits at the businesses they planned to buy.
None of that states the core of the new reality, which is that financial buyers can take whatever promises they made and throw them out the window. No matter what they said, they can claim no obligations. It is an ethical collapse just as much as it is a financial one.
Douglas A. McIntyre is an editor at 247wallst.com.
However, things got a little easier today (according to a piece in the Wall Street Journal, which is a paid publication). That is, the Office of the Comptroller of the Currency said it will place a cap on the liability for Blackstone if ADS's credit card segment implodes (up to $400 million). Hey, in light of the turbulence in the financial markets, this is certainly a material issue and should be a relief for Blackstone.
Of course, there are still other issues, such as the credit crunch and the slowing economy. Such things make it difficult to justify a deal for ADS.
Yet, in today's trading, ADS's shares spiked 17% to $52.22. Then again, the buyout offer is still at a hefty $81.75. In other words, the Street thinks that -- if this deal gets done -- expect a much lower price.
Now that private equity is nearly dead due to lack of capital, most of the disputes between firms which tried to take public companies private are over. But, as a reminder that the boom years left some wreckage, Alliance Data (NYSE:ADS) has notified Blackstone (NYSE:BX) that it is in breach of closing a buy-out deal.
According to The Wall Street Journal "ADS said Blackstone is attempting to "run out the clock" on the deal, which has a drop-dead date of April 17." The original buy-out offer was at $81.75. Problems with the deal have taken ADS shares down to $44.
ADS has a credit-card bank and Blackstone argues that the Office of the Comptroller of Currency would put tough financial restrictions on the buy-out. The two companies have gone back and forth on whether the regulations involved are meaningful.
Blackstone may not like the government's terms for it to close the deal. But, it is just as likely that the private equity firm simply wants out because the credit environment is so bad. Blackstone's own shares have lost almost two-thirds of their value since the company's own IPO.
A suit for damages is the last thing that Blackstone needs. It is likely to take the company's shares down even further. But, Blackstone should not have started what it could not finish. It should have seen the issues facing the deal when it did its due diligence. That is why private equity people are supposed to be smarter than everyone else.
Douglas A. McIntyre is an editor at 247wallst.com.
So, in this environment, it's understandable that Wall Street is jittery with buyout deals. Just look at the pending buyout of Clear Channel Communications (NYSE: CCU).
Over the past few months, investors were curious about the deal spread -- the difference between the acquisition offer and the market price -- of Blackstone (NYSE: BX)'s proposed buyout deal for Alliance Data Systems (NYSE: ADS). This was a tell-tale sign that the deal was in trouble.
Despite all this, there was still lots of talk that the deal would close. After all, ADS is a strong company (even if there are some issues with the economy). Besides, the merger agreement was airtight.
Well, investors failed to consider something important: regulatory hurdles. Basically, it seems that the Office of the Comptroller of Currency (OCC) wants Blackstone to be an unlimited source of financial support if there are troubles at ADS (this is perhaps based on the recent turbulence in the financial markets).
For a savvy firm like Blackstone, this was certainly a dealbreaker.
The recourse for ADS? Of course, the company may pursue litigation. However, this will be time-consuming and ugly.
Investors are making their own judgment: the stock price of ADS is down $23.87 to $41.73 in today's trading.
The newspaper is stating the obvious. The market already knows the deals are unlikely to close. BCE shares trade at $34, down from a 52-week high of $44.59.
The by-products of these problems are two-fold. The first is that LBO firms have obligations to close some of these deals. That means that break-up fees or lawsuits may be on the way. Boards at these companies may have little choice if their shareholders are billions of dollars underwater.
The other factor is that trust in LBO firms will probably fall to all-time lows with public companies. Whatever happened to the "our word is our bond" stuff?
Douglas A. McIntyre is an editor at 247wallst.com.
Italian clothing retailer Benetton Group (NYSE: BNG) gained more than 8% yesterday, closing up $2.58 at $33.23 on news that Deutsche Bank upped BNG to Buy. While good news, this is not the biggest Benetton news. The Board of Directors of the company recently announced the company will voluntarily deregister and delist from the NYSE and will no longer offer American Depositary Shares (ADS) on the NYSE. The decision is not an indication that Benetton Group, known as much for its provocative advertising as for its fashions, is in any financial trouble. Far from it. The company recently issued first-half 2007 results that were positive all the way through the numbers. Revenues are up 10%, volume of sales is up 13% to 74 million garments. The company has benefited from a good product mix in its stores and the dollar's continued weakness against the euro.
What drove Benetton's Board of Directors to deregister and delist was the fact that the company simply does not do enough business in ADS to justify the expense of keeping a full set of books in compliance with the Sarbanes-Oxley Act. As Italian stock exchanges, particularly Milan, have grown more international in their offerings, American shareholders have begun to trade directly rather than through ADS. Benetton indicated it will still provide financial information and press releases in English, but will keep its books according to international standards.
Benetton senior management does not think delisting from the NYSE will have any adverse impact on the company's growth or earnings, which it forecasts to be in the 7-9% range.
The most troublesome aspect of Benetton's decision to delist may be the idea that foreign companies feel they do not need access to U.S. equity markets, still the biggest in the world. Perhaps the trading floor is leveling internationally. How many other foreign-registered companies are going to take a look at Benetton's decision and begin to do their own cost/benefit analysis on continued NYSE or Nasdaq listings?
In spite of the trend in the advertising industry to multi-platform ad buys, mixed between TV, the Internet and mobile, the majority of the ad sales for the fall have been slated for TV, with minimal digital ads on the Internet sold separately. With 80% of ad time already spent for the upcoming television season during the "upfront" time period, the Internet looks forgotten. Why?
"We didn't push them," Mike Shaw, president of sales and marketing at The Walt Disney Company's (NYSE: DIS) ABC TV told USA Today, because supply is flexible, "digital offerings aren't as demand-based."
Broadcasters took in a total $9.3 billion, up nearly 5% from last year, after most analysts expected a flat season.
Despite the expectations for Internet ad spending to hit double digits by 2011, according to a forecast released last month, current results aren't indicative of that. It could be due to Nielsen improving the TV advertising market by creating new TV ad ratings, called "Live-Plus-Three," which is now accepted as the standard.
The real question though, is when will the TV advertising bubble pop? It could be sooner than you think. Publishing 2.0 believes that once online video providers create industry standards similar to what Nielson has done for the TV industry, ad dollars will vanish from traditional markets like television as quick as you can click your mouse. Is this likely to happen? Stay tuned, so to speak.
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: Tenet Healthcare Corp (THC), Furniture Brands International, Inc (FBN), Sepracor Inc (SEPR), ValueClick, Inc (VCLK) and Altria Group, Inc (MO) were today's noteworthy downgrades:
Bear Stearns downgraded shares of Tenet Healthcare (NYSE: THC) to Underperform from Peer Peform citing difficulties in California and weak margins.
Stifel downgraded Furniture Brands (NYSE: FBN) to Sell from Hold citing concerns regarding continued weakness in the housing industry.
Summer Street downgraded Sepracor (NASDAQ: SEPR) to Sell from Neutral after the HCPCS website indicated Xopenex and Albuterol will have the same code as of July 1.The firm believes this eliminates the optimistic scenarios that Sepracor can garner a minimal-or-no-reimbursement cut.
RBC downgraded shares of ValueClick (NASDAQ: VCLK) to Underperform from Sector Perform as the firm believes the FTC letter poses a risk to earnings and that the company is unlikely to be acquired.
Matrix downgraded Altria Group (NYSE: MO) to Buy from Strong Buy to reflect decreasing cigarette sales and increasing valuation...
OTHER DOWNGRADES:
American Technology cut Autodesk, Inc (NASDAQ: ADSK) to Neutral from Buy.
Matrix downgraded Fluor Corp (NYSE: FLR) to Sell from Buy.
Over the past year, the activist hedge fund ValueAct Capital Partners waged a proxy fight against Acxiom Corp. (NYSE: ACXM) and ultimately got a board seat. By having a board seat, not only did ValueAct have some leverage, but I'm sure had a much better understanding of the company.
Well, now for the payoff: Acxiom has agreed to a $2.25 billion buyout.
Acxiom has extensive databases and analytics to help companies with their marketing programs. In fact, it's similar to Alliance Data Systems (NYSE: ADS), which agreed to a $7.8 billion buyout today from the Blackstone Group.
These types of companies tend to have long-term contracts and cater to necessary business functions. Thus, it makes it easier to pile on debt and do leveraged buyouts.
On news of the deal, Acxiom's stock price spiked 15.29% to $27.29 per share. Although, the buyout offer is for $27.10. Thus, it looks like the Street thinks another bidder may come to the table.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
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