About a year ago, the rage in private equity was the so-called megabuyout. It seemed like no company was immune. There was even talk of $100 billion dollar deals.
Of course, the credit crunch ended the megabuyout. In fact, it ended most of the activity for private equity folks.
Yet, according to the co-founder of the Carlyle Group, David Rubenstein, things are perking up [subscription required]. His firm – like other veterans, such as The Blackstone Group (NYSE: BX) – understands market cycles. After all, these players have dealt with variety of credit crunches, such as in 1991-1992, 1998 and 2001-2002.
So, Rubenstein predicts we'll see a pick-up in deals over the next few months. Although, the deals are likely to range from $2 billion to $4 billion -- with less debt. And expect more foreign deals.
Funny enough, Rubenstein seems to be leading the charge with its recently announced a $2.54 billion deal for a majority stake in Booz Allen Hamilton.
The Carlyle Group, which is a top private equity firm, got its start by making deals in the government and defense sectors (back in the 1980s). In fact, its co-founders have extensive federal government experience.
Well, the firm is going back to the future. That is, Carlyle announced a $2.54 billion purchase of Booz Allen's government consultancy (for a majority stake). Apparently, both sides have been working on the transaction since the beginning of the year.
The Booz Allen unit has roughly 18,000 employees and has mega clients, such as the NSA, Department of Homeland Security, the World Bank and the Department of Defense. Essentially, the unit had little synergy with the core business of Booz Allen, which is focused on commercial management consulting. But, of course, there should be lots of strategic value for Carlyle's portfolio of businesses.
And, the Booz Allen government unit has been a strong business, especially in light of the rise of global terrorism.
Something else: this is yet another sign that the buyout market is beginning to improve.
Stock futures were lower early morning, ahead of inflation data coming out an hour before the opening bell. It is likely that futures will continue to drift this way and that until the data is reported and only then will we see a clear direction of the session ahead. A speech from Federal Reserve Chairman Ben Bernanke could affect sentiment as well.
On Thursday, stocks started their journey with deep losses due to Carlyle Capital fund announcing it's near collapse, but later changed direction to finish the day on the positive side. The Dow industrials ended Thursday up 35 points, or 0.29%, the Nasdaq Composite rose 19 points, or 0.88%, and the S&P 500 advanced 6 points, or 0.51%.
The economic calendar today is not busy, but it is meaningful.
At 8:30 a.m. EDT, February consumer price index will be reported. This closely watched inflation indicator is expected to show inflation rose 0.3% in February, lower that the 0.4% rise in January. Similarly, core CPI, which excludes the more volatile food and energy prices, likely increased by 0.2%, down from January's 0.3%. Any big surprises that may show inflation at the consumer level is much higher than expected (it is already higher than the Fed's "comfort zone") could put a crimp on the Fed's ability to cut interest rates when it meets next Tuesday. The markets could then have a strong reaction as such rate cuts have been widely expected.
Then, at 10:00 a.m., the March preliminary University of Michigan's consumer confidence index is set to be released. Economists expect the to drop to 69.5 from 70.8, according to Briefing.com.
At 12:30 p.m., Fed chief Bernanke is to speak on sustainable homeownership in Washington, and investors will likely tune in hoping to hear more about the economy and the growing threat of inflation.
TheStreet.com's Jim Cramer says we have to see when the buyers return.
Can't get your arms around these fears. The Carlyle fear -- that's the "too much leverage in the system ... who knows what people are really borrowing" fear; the Bear (NYSE: BSC) (Cramer's Take) fear -- the "legitimate worry about counterparty risk that can't be stopped until Bear sells itself or goes and gets a 20% investor so it has cash" fear; and the dollar decline fear -- the "who is still stupid enough to have on big trades that lever that currency?" fear.
All of these, in the end, are about the same thing: leverage. The reckless way that hedge funds borrowed and brokers lent in order to make up for low interest rates and the insatiable desire to have a seemingly low-risk way to make money on a monthly basis.
What's discouraging is that the Fed's actions on Monday were actually meant to address some of these problems, but the actions are oblique, meaning that they don't get to the heart of things -- to put money in and take bad paper out. Not borrow bad paper but take it out.
U.S. stock futures were significantly lower this morning, indicating U.S. stock market could start the day with declines. Following the plummet of global markets, the record high prices for oil with record low dollar, investors seemed nervous when hearing that Carlye fund is close to collapse. If Wall Street got a recent boost from the Federal Reserve's actions to improve liquidity, that too now seems to have a limited impact.
U.S. stocks couldn't hold on to Tuesday's rally and dropped on Wednesday. The Dow Jones Industrial Average fell 46 points, or 0.38%, the S&P 500 lost 11 points, or 0.90%, and the Nasdaq Composite lost 11 points, or 0.53%.
Data on several economic indicators will be reported today.
At 8:30 a.m. EDT, data on weekly jobless claims, February import and export prices and February retail sales will all be released. Retail sales in the U.S. likely cooled in February and increased a paltry 0.2% according to Bloomberg due to rising fuel bills and a slump in hiring, which means claims probably rose. Excluding autos, retails sales are estimates to have risen 0.2% as well. It will also be interesting to see the impact of the dollar on the cost of imported goods. Economists predict a 0.8% rise in February.
Then, at 10:00 a.m., January business inventories data are due.
Meanwhile, RealtyTrac Inc. reported that nearly 60% more U.S. homes faced foreclosure in February than in the same month last year, with Nevada, California and Florida showing the highest foreclosure rates.
It's a rough day for private equity. Carlyle is having a "crisis talk" with its investors because of the implosion of one of its debt funds.
Oh, and the Blackstone Group LP (NYSE: BX) announced its earnings report. There was a net loss of $170 million, which compares to a net gain of $1.18 billion in the same period a year ago. Unfortunately, the firm has little visibility as to when things will improve.
Simply put, Wall Street is not only concerned about the credit crunch – which means that fewer deals will get done – but also the stability of prior transactions. In other words, will some of them unwind and plunge into bankruptcy?
TheStreet.com's Jim Cramer says this default should send shudders through every institution with a credit line.
Sure I was hoping it wouldn't come to this, but right now we don't even have enough money in the system to buy one asset and sell another and take advantage of the differences.
I know you could argue that who cares, people shouldn't be levering up like that anyway. All people should be able to do is borrow a little bit against their collateral and do nothing else.
But we have trillions of dollars invested in a system where we own one asset and we bet another asset against it, either as an arbitrage or a way to pick up extra interest. A lot of the mortgage REITs that you see going under, and have gone under, were companies that existed to exploit differences in residential mortgage prices. They took on some credit risk, meaning that the assets they bought weren't rock solid but had been as long as housing didn't depreciate too much, but they had good steady businesses.
One of the pioneers of private equity is The Carlyle Group. The firm has minted billions and is a major force in finance, managing about $76 billion.
But lately things have cooled off. For example, Carlyle's Blue Wave hedge fund is down 9.3% for the year (this is according to a piece on Bloomberg.com). The problem was exposure to pesky mortgage investments.
So it should be no surprise that Carlyle's co-founder, David Rubenstein, is kind of glum. He recently commiserated for the folks at the American Enterprise Institute (there was also coverage in TheDeal.com, which is a paid publication).
Rubenstein thinks that private equity may be facing some tough times, and looks at the parallels of the conglomerates of the 1960s.
It's a pretty apt analogy. After all, as private equity firms get bigger and bigger, they look like bloated entities of disparate business units. In other words, might there be lots of complications in managing all this?
I think so.
Besides, the other big issue is finding liquidity for these private companies. Keep in mind that the IPO market has yet to recover from its boom days of the 1990s. And, M&A appears to be tailing off. Oh, and with the credit crunch, how will private equity funds get financing for deals?
So far, there aren't many clear answers. Or, at least Rubenstein isn't giving us any ideas so far.
While driving on LA freeways, I sometimes wonder: how strong are these structures? Were they meant to handle the huge amounts of traffic?
I hope so. But I also realize that throughout the US the infrastructure is getting old and needs replacement.
Well, the private equity folks are seeing opportunity. For example, this week, The Carlyle Groupannounced its Carlyle Infrastructure Partners fund, which has about $1.15 billion under management.
The geographic focus will be on the US as well as Canada, and Carlyle will look to invest in projects for transportation and water.
Actually, this is kind of a new area for private equity and as a result, Carlyle has hired 14 professionals to manage the fund.
More importantly, the opportunity looks vast. After all, Carlyle projects that the US will need to spend $1 trillion on infrastructure over the next five years.
As private equity firms get bigger and bigger, there is a need to expand into foreign markets. But this is never easy and requires lots of resources and political savvy. So, to help things along, why not buy a foreign bank?
That's the thinking of Carlyle's latest deal: a $655.9 investment in Ta Chong Bank, which is based in Taiwan. Due to Taiwanese laws, Carlyle's equity stake is likely to be no more than 25%. As a result, Carlyle will bring along a variety of other financial backers.
The Taiwanese banking sector has been hit hard by a credit crunch. But it looks like things are improving. And it appears that the Taiwanese banking sector is ripe for consolidation. So, by investing in Ta Chong, Carlyle should be poised to be one of the consolidators.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Manor Care Inc. (NYSE: HCR) is a major operator of short-term post-acute and long-term care facilities. It has more than 60,000 employees and 500 skilled nursing/rehabilitation centers, outpatient rehabilitation clinics, and hospice and home health care offices.
Well, now the company wants some privacy -- and has agreed to a $6.3 billion buyout. The suitor is the The Carlyle Group.
In the fiscal Q1 quarter, Manor posted a 10% increase in revenues to $959 million and net income was $30 million, or $0.39 per share. Something else that's important -- the company is a cash cow. In Q1, operating cash flows were a juicy $94 million.
The deal wasn't really a surprise though. Back in April, Manor retained JP Morgan Chase & Co. (NYSE: JPM) to review "strategic alternatives." In fact, on the news of the deal, Manor's stock price fell 1.21% to $64.50. The buyout offer is $67 per share. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Not that long ago, a deal from private equity firm The Carlyle Group would be a no-brainer. But things can change fast in high finance.
Carlyle is in the process of taking a mortgage bond fund public in Europe. But, as seen with the troubles with The Bear Stearns Companies, Inc. (NYSE: BSC), investors are getting skittish. Another issue is the rise in interest rates.
For a firm that is known for timing, it looks like Carlyle has flubbed.
Instead of raising $400 million, Carlyle will have to settle for about $300 million or so. This is according to Bloomberg.
In light of the recent volatility, it is still impressive that Carlyle can get this deal done. And, with better pricing, it looks like investors may actually get a good deal on this one. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Well, according to a piece in the Wall Street Journal [a paid service], the deal may show the inherent risks of the new approaches to private equity. That is, Freescale has posted weak financials lately. A big problem as been the slowdown from its major customer, Motorola, Inc. (NYSE: MOT).
Of course, the private equity sponsors understood the volatile nature of the semiconductor industry. They also realized that the debt markets were carefree with lending money. As a result, there is about $1.5 billion in Freescale debt that is variable. This means that the company can defer payments (kind of nice, huh?).
This is fine so long as the company eventually comes back. But, history is not so kind to semiconductor companies and there is certainly a good amount of competition. Another nice feature: Freescale can call on $750 million in new loans at any moment.
No doubt, it's good to be in the private equity business. Although, as for those holding debt in these deals, it does look fairly risky.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
It's called the GS Capital Partners VI fund (the first fund started in 1991). In fact, about $9 billion of the proceeds came from Goldman Sachs and its wealthy employees.
The industry focus? Well, for a fund like GS Capital, there's really nothing off-limits.
Over the years, GS Capital has invested in firms like ARAMARK, Burger King Holdings, Inc. (NYSE: BKC), Executive Jet, Kinder Morgan Inc. (NYSE: KMI), Sanyo Electric, SunGard Data Systems and on and on.
The $20 billion level is a record. But with other mega firms – like Blackstone, Carlyle and tier-1 investment banks -- gunning for private equity, the record will probably be a fleeting one.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Since the mid 1980s, The Carlyle Group has posted some of the strongest returns in the private equity space. Part of it is from picking good companies. Another key element is the firm's discipline on pricing.
Actually, Carlyle bumped up the price a bit; that is, about 1.2%. But, it was not enough to get ASE shareholders excited (I wouldn't be either).
Based in Taiwan, ASE is the largest semiconductor tester and packager in the world. And, with the growth in electronics – such as cell phones, Apples's (Nasdaq: AAPL) iPods and so on – the growth potential looks good. But, of course, the industry can be volatile, which can make it difficult when piling debt on a company.
Although, Carlyle's still appears to have ambitions in the semiconductor industry, as well as markets in Asia. For example, the firm may be looking to Japan for chip companies.
But, to get deals done, Carlyle may have to change its tact – and pay up.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
About a year ago, the rage in private equity was the so-called megabuyout. It seemed like no company was immune. There was even talk of $100 billion dollar deals.
Stock futures were lower early morning, ahead of inflation data coming out an hour before the opening bell. It is likely that futures will continue to drift this way and that until the data is reported and only then will we see a clear direction of the session ahead. A speech from Federal Reserve Chairman Ben Bernanke could affect sentiment as well.
It's a rough day for private equity. Carlyle is having a "crisis talk" with its investors because of the implosion of one of its 
One of the pioneers of private equity is 
As private equity firms get bigger and bigger, there is a need to expand into foreign markets. But this is never easy and requires lots of resources and political savvy. So, to help things along, why not buy a foreign bank?
Not that long ago, a deal from 
Over the past few years, private equity firms have shown an appetite for mega deals -- and even riskier sectors, such as semiconductors.
The rumors were true. 
Since the mid 1980s, 
Stocks have their worst week in six years
Why haven't the Republicans said much about the economy?
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