When Lehman announced it was firing chief financial officer Erin Callan and president Joseph Gregory yesterday, there was a lot of speculation about whether investors in its recent $6 billion sale of common stock and preferred shares might try to pull out. Couldn’t these top level changes trigger some sort of material adverse change that would let investors back away?
Several big investors have now indicated that they are staying on a Lehman. BlackRock, former American International Group CEO Hank’ Greenberg and New Jersey’s pension fund have all indicated, either publicly or privately, that they are sticking with their investment commitments despite the fact that the share price has fallen well below the levels at which they agreed to buy. Blackrock has gone on record with comments supporting Lehman’s “leadership,” which these days basically means chief executive Dick Fuld.
But are these investors really backing Fuld and his newly announced team? The stock is up today by over 10% but at just over $25 per share it still has away to go before it climbs back to the $28 per share price investors in the $6 billion stock issuance paid. As a long-term investment, this might make sense. But perhaps what these investors are betting on is a buyout of Lehman.
“Lehman increasingly looks like it could be an acquisition bet,” one merger-arb investor told us today. “I’d say that’s the only short-term upside.”
BlackRock Bought Lehman Shares, Confident in Leaders [Bloomberg]
The Guy Who was Supposed to Save Merrill Lynch Will End Up Saving Citigroup
By John Carney
But It’s Not What You Think
So is this why Larry Fink, the chief executive of BlackRock, either passed up or was passed over for John Thain? Everyone absolutely knew Fink was the number one pick to run Merrill Lynch after Stan O’Neal’s ouster but some how the job went to New York Stock Exchange boss Thain. And know we
know are entertaining ourselves with the thought that this might have happened because Fink had a task far more important at hand.
Since you already read the headline you know that the task he is taking on is saving Citigroup, but not by becoming it’s chief executive. He’s already said to have passed up that job too. As it turns out, he’s taking a job that may even be more important—managing The Entity, the superfund being assembled in a secret laboratory by Citigroup, Bank of America and JP Morgan Chase.
Last night the Financial Times broke the news that BlackRock, the asset manager 49% owned by Merrill Lynch, is expected to be tapped by the banks to manage The Entity. Apparently Fink has become a strong advocate of the fund and has made BlackRock the leading candidate to manage the fund.
The super fund plans to bailout many of the world’s biggest financial institutions by buying up assets from faltering structured investment vehicles. It has come under fire from critics who argue that the super fund is just a way to get the SIV assets even further removed from the balance sheets of banks, so that when they eventually do have to be written down the banks don’t have to record the loss. Some have described the fund as a bailout of Citigroup, which is responsible for some of the world’s largest SIVs.
“Look. B of A is the Stupid Bank. Citi is the Incompetent Bank. JP Morgan is Villainous,” one fund manager affiliated with a large Wall Street firm told us. “The super SIV is Stupid, Incompetent and Villainous.”
While the Treasury department, which has backed the fund, and the banks behind it claim that it will be able to hold the SIV assets for long enough for the market to recover from the current credit crunch, many do not expect an appetite for those investments to return to the market anytime soon. In fact, some think the super fund may be designed to collapse after it has safely isolated the balance sheets of the banks that are investing in it.
“These things are worth what they are worth. Putting it in a super fund doesn’t change that,” the fund manager said. “Eventually the assets will have to be sold off at steep discounts, and the rest written down to nearly nothing at best. The banks know this, which is why they are trying to get this stuff as far away from their balance sheets as possible.”
Superfund lines up BlackRock [Financial Times]
Private equity executives make no secret that relatively plentiful credit is the fuel power the surge in giant leveraged buyout deals, allowing the buyout shops to make acquisitions on companies which might have been untouchable in earlier eras. So it comes as a bit of a surprise to hear so many of them seem to be warning us about rising debt coupled with looser lending standards. Carlyle founder William Conway has rang the alarm bells with a memo of his that was “leaked” to the press everywhere. Remarks of Leon Black and Steve Schwarzman also have been read as warnings.
The latest entrant is the chief executive of BlackRock, Larry Fink. BlackRock is not a private equity shop—it’s an asset management firm that was spun-off of the Blackstone Group way back in 1992. But Fink’s background is in debt and private equity. He was a bond-trader at Credit Suisse and worked at Blackstone before the spin-off. And now he’s telling the Financial Times that the leveraged debt fueling the buyouts may be the next subprime mortgage crisis.
“If I was the chairman of the Federal Reserve, I’d be paying more attention to that because, to me, this is going to be tomorrow’s problem,” Mr Fink said in an interview with the Financial Times. “Standards have deteriorated to levels that we never even dreamed that we would see.”
So has Larry gone over to the other side? Perhaps. His business does compete for investment dollars with private equity firms and hedge funds, and so he may have a vested interest in seeing the current golden age of private equity come to an end.
But there’s a more paranoid theory that was suggested to us by a source (who requested that we keep him anonymous) who works at a smaller private equity shop. His theory was that the big shots in private equity were beginning to worry that the loose credit standards were allowing others in the buyout market to make bids that might once have been exclusively within the reach of the Blackstone’s, Apollo’s and KKR’s of the world. The relatively easy access to credit was fostering competition in the once cozy world of private equity, and driving-up the prices of the companies they want to take private. So they want to talk investors out of getting involved in lending into the buyout market in order to make it harder for competitors to raise funds.
Of course, as even our source admitted, this theory is more than a bit paranoid. But just because you are paranoid doesn’t mean Henry Kravis isn’t thinking about how to crush you.
BlackRock chief warns on leveraged loans [Financial Times]
The war against Blackstone’s valuation continues. Yesterday we noticed that someone seemed to be suggesting to Reuters that Blackstone’s $40 billion valuation was what caused Goldman to walk away from the deal. (Incidentally, the consensus among our readers is that this story is completely implausible and was probably planted by Goldman itself.)
BreakingViews has another critique. Noting that the valuation would make each of Blackstone’s 770 employees $50 million, BreakingViews, wonders how Blackstone’s business can really command that kind of valuation.
Financial firms, which generally operate under more competitive conditions, tend to have lower valuations. The 27,000 heads at Goldman Sachs Group Inc. are priced at a modest $3.2 million on average. Businesses with cast-iron franchises can be worth more. For instance, Moody’s Corp., the credit-ratings business, has a market valuation per head of $5 million.
That sounds persuasive but keep in mind that this “per employee valuation” is only measuring half of the equation (at best). It is discounting additional productivity by, well, 100%. What about those enormous per-employee earnings we saw in the IPO? Measured on a per-employee basis, Blackstone made ten times as much as Goldman did last year. With $3 million in earning per employee, Blackstone’s is valuing its employees at only a 16.6 multiple. Put it that way and the Blackstone’s IPO doesn’t sound as outrageous.
Update: An anonymous reader proposes that this 16.6 multiple makes each and every one of Blackstone’s a candidate for a personal private equity buyout. “All a 16.6x valuation means is that Blackstone contains approximately 770 buyout opportunities. . .the only difference is that Blackstone isn’t getting the proceeds. Goldman could come in and buy almost any of their employees away,” the reader explains.
Too Valuable? Blackstone’s IPO Would Put a High Price on Staff [BreakingViews in Wall Street Journal]
Blackstone (Mumbling, Not Making Eye-Contact) to Goldman: Your Invite? To Our Party? It, Uh, Must’ve Gotten Lost In The Mail Or Something, I DunnoBy Bess Levin
No link to the clip yet, but CNBC’s Charlie “Man Candy” Gasparino just reported that Goldman Sachs is not in on the Blackstone IPO, despite reports by David Farber et al to the contrary. Gasparino noted that the absence of the fee-addicted bank may be because of a rivalry between firms and possibly even personal issues between Stephen Schwarzman and Hank Paulson (guess who wanted to be Treasury Secretary but got passed over for Hank?). This confirms the suspicions of a quasi-credible source we reported about on Friday and now upgrades said source to being semi or, what the heck, approaching-wholly credible!
Is it really true that there isn’t going to be any closing dinner for the Blackstone acquisition of Equity Office Properties? That’s what this profile of Blackstone hot shot Jon Gray suggests. We knew the team at Blackstone was already busy unloading some of the biggest properties but no celebration at all? There were lots of people doing a lot of work on that deal. And bonuses are a long way off. Things like deal dinners are usually a not bad way to keep the troops happy and make your people feel appreciated. Besides, at the tender age of thirty-seven, Gray seems a bit young to have totally foregone the pleasure of a good party. Maybe he’s just waiting to the sell-off to throw the party.
There’s a lot more of interest in the Bloomberg profile of Gray. First, he refused to comment for the article which (a) makes us feel better about the fact that nobody in his office returned our call and (b) makes us worry about him. Or, rather, it makes us worry about everyone else. If Gray can’t grow a giant ego by closing the Biggest Deal Ever, what hope is there for the rest of us?
Second, Gray’s background is almost sickeningly admirable. While he does come from finance blood and breeding—his father was an investment adviser and his step-father an executive at an investment bank, he majored in economics and English at Penn. Not finance. And that English degree means he actually went to Penn, not
Whartonjust Wharton. [Note: Several readers insist he did go to Wharton. So note the correction.]
So how did the lad do so well? Gray seems to have started very early at Blackstone. So that finance blood and breeding, plus the Econ degree, seemed to have paid off. His wedding announcement lists the private equity shop as his employer in 1995, when he was just 25. (Another sign of almost dangerous-sounding virtue: early and only marriage.) A mere five years later he was a senior managing director.
So, yes. Jon Gray is simply a better person than you are. Deal with it.
(As a sucker-prize, though, you may in fact know how to party better than Gray. You just have to do it with less money.)
Jon Gray Skips Party, Afraid Record Buyout Will Fail [Bloomberg]