I'm not sure how management at Lehman Brothers Holdings Inc. (NYSE: LEH) has time to run the business. What's more, with all the turbulence, I'm wondering if many of the employees are working mostly on parsing rumors and fine-tuning resumes.
Of course, this week Lehman got rid of its CFO, Erin Callan and president, Joseph Gregory. The company also raised $6 billion, which was quite dilutive. So from Monday to Friday, the stock price plunged from $33 to $25.81.
Yet, by Friday, things were perking up. The stock price shot up 13.7%. Maurice "Hank" Greenberg, the, who is the former CEO of AIG (NYSE: AIG), said he bought shares. This was also the case with BlackRock (NYSE: BLK) and Putnam Investments.
But there was something else: Wall Street was abuzz with buyout rumors.
In fact, according to a report from CNBC, it looks like the senior management team of Lehman is meeting this weekend (which is a rare thing). Are they talking to possible suitors? Or, is it to review the figures for Q2? Both?
Despite all this, the fact remains that Lehman's potential suitors are also distressed. So, even if there is a deal, the valuation is likely to be muted.
But there is an interesting scenario: Blackstone Group LLP (NYSE: BX) as a buyer or major investor. The firm is well capitalized and may want an investment banking platform. Moreover, the firm's cofounders -- Stephen Schwarzman (CEO) and Peter Peterson (Senior Chairman) -- were formerly with Lehman (back in the 1980s).
Former Barclaycard Marc Howells can relax a bit. Even though he was forced to quit on the last day of 2007, his comment that the company's results were "like Muslims - some were good, some were Shi'ite" is no longer the most offensive joke uttered by a corporate figure that ended up in the hands of the media in the past 6 months.
According to MarketWatch's David Weidner, Blackstone Group (NYSE: BX) head Stephen Schwarzman actually said the following in a speech to investors in Boca Raton: "Trying to buy a mortgage bank in the midst of the subprime crisis was the equivalent of being a noodle salesman in Nagasaki when the atomic bomb went off. Not a lot of noodles left or even a person -- and that's what happened to us on this deal."
Wow. Just wow. Making jokes about the atomic bomb in a speech to investors is ... ambitious? Weidner points out that "the analogy probably went over pretty well at Blackstone's brand-spanking new Tokyo office," and then proceeds to compare Schwarzman to Marie Antoinette. Ouch.
I'm sure he'll have to issue a tail-between-the-legs apology, but most Blackstone Group shareholders are probably more worried about the billions of dollars in market value that have evaporated since the company's IPO. After hitting a high of $38 on June 22nd, the stock has settled in at right around $19.
Last month, Stephen Schwarzman's Blackstone fund announced that its fourth-quarter earnings for 2007 had plunged a precipitous 89%. What was particularly galling was that this occurred in the same year that the fund released its IPO, for which it received top dollar. Of course, by the time this was announced, Schwarzman had already collected a $5.1 billion paycheck for 2007.
There has been some talk about how Blackstone's declining profits had led to a comparable decline in Schwarzman's fortunes. However, given his considerable 2007 salary, it doesn't seem like he's hurting all that much. In fact, he recently donated $100 million to the New York Public Library; while this is a very impressive gift, it comes with an equally impressive price: the main library building at 42nd Street and Fifth Avenue will now be named the Stephen Schwarzman Building. In return for his munificence, Schwarzman's name will be carved in five separate places on the white marble edifice: thrice on the front of the building and twice on the 42nd Street side. While this will, no doubt, be far more attractive than a graffiti "tag," one cannot escape the feeling that the concept is the same.
One Blackstone investor has recently sued the fund, claiming that, in its IPO documents, it failed to disclose key information about the unimpressive performance of some of its companies. Had this information been made available to investors, they presumably would have had lower expectations for Blackstone and would have paid considerably less for shares in it. In addition to being unethical, the suit avers that this is a violation of federal securities laws.
For me, one of the most interesting things about reading through the financial pages of the newspaper has been the realization that America's economic situation, both in good times and bad, is not a pre-ordained matter of fate. While economic processes, the intervention of various governmental organizations, and good old supply and demand all play their part in determining the direction of the nation, these forces are also not the whole story. A large chunk of the economy can also be tacked up to the personalities of its big players. For example, the failure of Silverado Savings and Loan in the late 1980's was due in no small part to Neil Bush (by the way, we're still paying for the bailout, which was estimated to have cost the American taxpayers $1 billion). Similarly, the Savings and Loan crisis was itself fueled by the amazing Michael Milken, whose ability to "restructure" debt made him the poster boy for 1980's greed. And, after all, who can deny the importance of Ivan Boesky when it comes to demonstrating the seductive nature of insider trading? While it is unreasonable to lay any economic boom or bust at a single person's door, there is no doubt that individuals can strongly influence the economy, both for good and for ill.
Warren Buffett
One person that I've been researching lately is Warren Buffett. The CEO and largest shareholder of Berkshire Hathaway, he is currently listed as the richest person in the world. On the surface, Buffett's business strategy is amazingly simple: he believes in so-called "value investing," in which he finds companies that are undervalued, purchases significant amounts of their stock, and holds on to it until the market comes to its senses and values the company more highly. Of course, while Buffett's strategy is simple in concept, it requires a great deal of financial knowledge and economic muscle to make it work.
What's really gotten to me about Buffett is his surprisingly egalitarian stances on pretty much everything. Although he is almost incalculably wealthy, he chooses to stay in Omaha, where he famously lives in the same house that he has occupied for almost fifty years. His salary is only $100,000, which is low for a senior executive in a holding company; for somebody with Buffett's skills and knowledge base, it borders on the ridiculous. In fact, as Buffett has repeatedly noted, under the current income tax system, he pays far less in taxes than many of his employees.
Stephen Schwarzman, CEO of Blackstone Group (NYSE: BX) is donating $100 million to the New York Public Library, according to the New York Times. After Blackstone CEO got some bad press last year about eating $400 worth of crab claws and complaining about the squeaky shoes of his waiters, Blackstone stock had an IPO at $31 -- but it's now trading over 50% below its offering price.
Last month, Schwarzman tried to improve his image in a New Yorker interview, but that just got him more grief. A New York Public Library board member commented that he was not giving to his capacity. Now, for a mere $100 million, Schwarzman will have his name emblazoned on the "venerable lion-guarded New York Public Library building on Fifth Avenue at 42nd Street ."
If there was ever a signal that Blackstone stock is going to sink further, this is it. That and the 89% decline in profits it reported for the final three months of 2007. Also, it is not good news that Blackstone warned that the deep freeze in the credit markets - and, by extension, in the private equity industry - is unlikely to thaw soon.
When talking about Blackstone (NYSE: BX), people usually refer to Stephen Schwarzman. However, there is actually a cofounder of the firm; that is, Peter Peterson.
Although, he's not a pure finance junkie. Some of his prior gigs include: Chairman of the Federal Reserve Bank of New York, the CEO of Lehman Brothers (NYSE: LEH), the CEO of Bell and Howell, and even the Secretary of Commerce (under President Richard Nixon).
And, of course, he's a very wealthy man. He cashed out $1.8 billion from the Blackstone IPO.
OK, so what's next? Well, he has formed the Peter G. Peterson Foundation. Basically, he wants to create a platform to deal with major issues, such as Social Security, budget deficits, education, energy, the environment, and the spread of nuclear weapons.
If anything, the foundation won't lack for resources. After all, Peterson has pumped a cool $1 billion into it. Apparently, he's prepared to pump more money into it.
Blackstone Group (NYSE: BX) head Stephen Schwarzman's 60th birthday party quickly became a symbol of the excesses of the private equity bubble, corporate greed, the frailty of man, etc., etc., etc.
Equally symbolic of the credit crunch, his 61st birthday -- which fell on Valentine's Day, another symbol of something -- was a more modest affair. True, he and his wife weren't exactly drinking store-brand apple juice out of plastic cups and smacking around dollar-store pinatas, but it was a definite let-down for observers looking forward to the private equity party of the year. He ate at a Four Seasons restaurant, drank pink champagne, and then had what Forbes called a "low-key gathering" with close friends and family at his home that night.
Perhaps he has good reason to scrimp: shares of Blackstone have declined more than 50% since the IPO, knocking billions off his net worth.
If things keep going like this, next year's birthday party could be at Chuck E. Cheese.
In the private equity world, Stephen Schwarzman -- who is the chief at the The Blackstone Group L.P. (NYSE: BX) -- is a legend. Because of the nature of his business, he really didn't have a high profile; that is, not until last year, when his firm went public.
And the PR was horrible: He took a huge slug of cash off the table. He even had a blow-out 60th b-day party. Oh, and he owns a variety of opulent homes, such as in St. Tropez and Jamaica.
But, as is usual, the real person is much more complicated. And, that's the take from a tremendous piece in The New Yorker. The author, James Stewart (who is also the author of the best-seller, The Den of Thieves), had a chance to interview Schwarzman as well as some of his colleagues. He has also done quite a bit of research.
Stephen Schwarzman -- the subject of my Napoleon-Watch feature -- had a mixed 2007. He got the public markets to buy Blackstone Group's (NYSE: BX) busted IPO -- it trades 27% below its $30 IPO price. And he reaped some really bad publicity.
I appeared on CNBC back in June and discussed some of the negatives of the Blackstone IPO. I thought it presented complex tax issues and no legal recourse. I said: "You're getting a massive tax headache and massive losses due to high compensation. I would not want to own this stock; I'd be running for the hills."
But Schwarzman did well on the IPO and his net worth was recently estimated at $7.8 billion. Nevertheless, along with the money came some less than flattering publicity:
At 5' 6" he is a "little man" who wants to "inflict pain" on and "kill off" his rivals;
He noticed that one of the servants at his 11,000-square-foot Palm Beach mansion wore squeaky rubber soled shoes; and
He ate $400 worth of stone crabs there during his 15 minute lunches.
Still, he's got plenty of money to soothe any hurt feelings. I'd say he's a true money winner.
This post is part of our Money Face-Offs feature. Let us know who you think comes out ahead in this head-to-head match-up, and check out our other Money Face-Off posts.
Stephen A. Schwarzman, co-founder of the Blackstone Group vs. Henry Kravis, co-founder of KKR. A showdown so delicious, it's already been immortalized on Page Six -- Schwarzman calls Kravis a "one-trick pony," Kravis calls Schwarzman "the poster boy for greed." Who is more arrogant? More eccentric? Richer? Only the planners of their lavish parties can tell ...
The two have been in a high-stakes tennis match of sorts for years in every financially-oriented aspect of their lives, starting with the companies they target, continuing through their more personal acquisitions and not even ending in their contributions to charity.
Nope. In the world of private equity, KKR had always been the hugest, the most storied, the most secret and powerful. KKR was responsible for the 1988 leveraged buyout of RJR Nabisco, inspiration for thousands of MBAs, as well as a book and a movie. Not many financial deals have inspired so much as a little sonnet, but this, this was the stuff of legend.
Blackstone Group LP (NYSE: BX) Chief Executive Stephen Schwarzman, who became a billionaire thanks to the firm's recent initial public offering, won't be able to stop the U.S. Congress from making his firms pay higher taxes particularly as the presidential election looms.
Legislation proposed by Sens. Max Baucus (D-MT) and Charles Grassley (R-IA) would TRIPLE the amount of taxes that the New York-based company would pay annually. The company is arguing that the Baucus-Grassley bill raising taxes on private equity and hedge funds would deprive the government of revenue because it would discourage companies from going public.
Blackstone won't win too many friends on Capitol Hill with that argument since hedge funds already get a huge break from the IRS because they pay taxes at the 15% rate of partnerships instead of the 35% corporate tax rate. To many people and quite a few economists this just doesn't seem fair.
Politically speaking this also is a losing issue for Blackstone. Americans believe in the Horatio Alger myth that by hard work and luck anyone can become rich. The public, though, has little sympathy for people who climb their way to the top by cutting corners or getting breaks that they don't seem to deserve.
The Democrats in Congress are well attuned to this reality. For them, there is no better industry to target than hedge funds and private equity firms. To most Americans, the industry is mysterious and scary. What possible downside could they have in targeting the likes of Blackstone.
Ok, if you bought shares of The Blackstone Group LP (NYSE: BX) for $38, you probably don't like the firm's leader, Stephen Schwarzman. Or, if you pay ordinary tax rates, you probably have some distaste for the man. Oh, what if you got a pink slip from a company that The Blackstone Group purchased?
I think it's a good bet that Schwarzman's popularity rating is dicey.
Yet, in the deal world, he should be in the Hall of Fame. In fact, in this Sunday's NY Times, Andrew Ross Sorkin has a piece that defends the controversial financier.
According to Sorkin, he thinks it was inevitable that we would learn about the shadowy world of private equity. So why not now?
What's more, Sorkin says that Schwarzman is not the only dealmaker who likes to spend money on luxury and parties. For example, he points to TPG's David Bonderman, who hired the Rolling Stones for his birthday bash.
Of course, Schwarzman was smart enough to realize that there was a big opportunity to take lots of money off the table – and, as a result, make it more difficult for his competitors to do the same.
More importantly, Schwarzman has assembled a top-notch team and racked up stellar returns.
Basically, he is no different from any other top financier, which is probably why he has lots and lots of detractors.
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
As I posted last month, Blackstone Group's CEO Stephen Schwarzman gave an interview to the Wall Street Journal with a compelling theme -- Schwarzman is the Napoleon of private equity. Napoleon-watch tracks his moves on the business battleground.
The New York Times reports that Blackstone Group LP (NYSE: BX) is making things tough for itself and its peers in the eyes of Congress. That's because Blackstone used a loophole to avoid paying tax on $3.7 billion -- most of which was raised in its IPO last month.
Although they will initially pay $553 million in taxes, Blackstone's partners will get that back, and $200 million more, from the government over the long term. In a nutshell, the partners used the writeoff of goodwill -- the difference between the book value and market value of an asset -- to shield their gain from tax.
The details are rather complex but fiendishly clever:
the Blackstone partners paid a 15% capital gains rate on the shares of Blackstone's management company they sold last month in the IPO
Blackstone then arranged to get deductions for itself for the $3.7 billion worth of goodwill at a 35% rate. They taxed low and deducted high.
The deductions must be spread out over 15 years. And the original Blackstone partners are getting just 85% of the tax savings, leaving the other 15% to outside investors. The deductions on the $3.7 billion to the partners are $1.1 billion over 15 years.
If these tax savings were paid as a lump sum this year, the partners would get $751 million, which is $198 million more than the taxes the partners will pay on the $3.7 billion of goodwill.
These guys didn't get to be billionaires for nothing. Meanwhile my proposal for putting half their pay in escrow for 10 years to cover the costs of bad deals is gaining tiny amounts of support.
Hilton (NYSE: HLT) volatility and volume elevated prior to Blackstone paying $26 billion. HLT announced Blackstone Group (NYSE: BX) will acquire all the outstanding common stock of HLT for $47.50 per share. HLT closed at $36.05. I reported near the close of trading on 7/3/07 "option volume & volatility Elevated as HLT rallies 6%." HLT total volume of 32,490 contracts and HLT July option implied volatility of 39 was aggressive, above its 26-week average of 31 according to Track Data, suggesting larger risk.
Daily Option Update is provided by Stock Options Specialist Paul Foster of theflyonthewall.com.
The elite of private equity travel in private jets, right? Of course. But, this may not be the best vehicle for dealmakers.
In fact, if you look at the Blackstone Groupprospectus, you will notice that the CEO, Stephen Schwarzman, and senior chairman, Peter Peterson, co-own a helicopter. Here's the disclosure:
"Mr. Schwarzman owns an airplane and Messrs. Schwarzman and Peterson jointly own a helicopter that we use for business purposes in the course of our operations. Messrs. Schwarzman and Peterson paid for the purchase of these aircraft themselves and bear all operating, personnel and maintenance costs associated with their operation. The hourly payments we made to Mr. Schwarzman and Mr. Peterson for such use were based on current market rates for chartering private aircraft. We paid $1,544,320, $1,037,925 and $1,032,170 to Mr. Schwarzman in 2006, 2005 and 2004, respectively, for the use of his airplane and we paid $158,500, $306,210 and $198,905 to Mr. Schwarzman and Mr. Peterson in 2006, 2005 and 2004, respectively, for the use of their jointly-owned helicopter."
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
I'm not sure how management at Lehman Brothers Holdings Inc. (NYSE: LEH) has time to run the business. What's more, with all the turbulence, I'm wondering if many of the employees are working mostly on parsing rumors and fine-tuning resumes.
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