Deal of the Day

missvictoria.JPGHey all you sad Bears—this ought to cheer you up: Manhattan’s preeminent dominatrix, Mistress Victoria X is slashing prices! The S&M professional is offering a session discount of $10/hour (originally $2/hour but she increased the markdown after JPMorgan increased their bid) for a variety of scenarios sure to get your minds off the week you took it up the tailpipe (‘cause MVX is not proffering anal). On the menu: domestic service training, spanking combined with verbal chastising, cane stroking, interrogation and master/slave roleplay. Added value: Miss X knows a little bit about subprime. You might actually learn something!
In which I give back to the community [Miss Victoria X]
Surprise, Bear Stearns guys like it up the ass [ValleyWag]

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Merrill Lynch has come to a final agreement to sell Merrill Lynch Capital to GE. An announcement will be made tomorrow.

Aristotle_Plato_Sm1.gifToday’s buyout of student loan lending kind Sallie Mae sheds light on one of the most stubborn mysteries in finance: source of private equity success.
Like hedge fund managers, the heads of private equity firms have become fantastically wealthy in recent years. And as private equity firms sell equity into the capital markets, the private equity guys stand to become even wealthier. One magazine recently pronounced Blackstone Group founder Steve Schwarzman the “king of finance.”
But why are these guys making so much money? The simplest reason is that they have demonstrated a knack for buying companies from public shareholders, holding them for a few years and then selling them back to the capital markets for much more than they paid. Exactly how this increase in value is accomplished is the real puzzle. Some folks regard this as something of a scandal—the shareholders who sold out to the private equity firms must have been cheated, they reason. In this view, the value realized by private equity is simply value expropriated or alientated from the public shareholder.
Others regard it as almost miraculous. Or at least magical. The usually erudite Michael Lewis once described the process by which private equity firms increase the value of their portfolio companies as “Abracadabra.”
But magic isn’t a very satisfactory answer. Despite talk of dealmaking as an “out of body experience” from some private equity big-wigs, they aren’t pulling value out of the astral plane. Often what they are doing is discovering sources of market ignorance—situations or events that make it more difficult to understand a company’s value—and attempting to overcome that ignorance. While the variety of firms and personalities involved in private equity make it dangerous to speak in generalities, what many private equity firms specialize is the identification of companies subject to unusual concentrations of market ignorance and the acquisition of information that gives rise to a unique appreciation of a company’s value.
We can see this in the Sallie Mae deal. The student loan business is heavily regulated by the government, and those regulations create a kind of calculational chaos that makes it difficult to determine or realize the value of the company. The banks and private equity firms involved in the buyout of Sallie Mae identified the regulations as a source of market ignorance and overcame that ignorance by closely studying the opportunities of the company.
Government regulations are just one source of market ignorance. There are many others, and private equity firms are growing increasingly sophisticated at identifying them. But what’s important to realize about this activity is that it begins with this identification of ignorance—figuring out what is not widely known. And once a source of the ignorance is identified, it opens up new sectors for private equity.
The key to this idea is that that the source of private equity success is not because private equity guys smarter than everyone else. The key is that they are acquiring knowledge of our ignorance. Private equity isn’t magic. It’s philosophy.
Earlier: Levering Up: What The Sallie Mae Deal Tells Us About The Financial Sector [DealBreaker]

If we were ever diligent to keep up with our long promised “Deal of the Day” feature, today’s deal would obviously have been the Blackstone buyout of Equity Office Properties Trust. It’s been news for a while, of course. But last night it finally got, well, finalized.
EOP was a giant real-estate trust. Basically a real-estate vulture fund that snapped up properties when owners found themselves in trouble with their debt. Many thought that it was too big to get bought, at least in one piece. If there was an exit strategy for EOP, it would be a break-up. But then came the buyout build-up of 2006, when the price tags on going private deals started showing numbers that once would have been implausible. (See this WSJ chart for the explosion of huge deals in the past year.) Suddenly, EOP was in play.
Blackstone was always the favored bidder. It had the money and the desire. The initial papers carried a no-shop provision and a break-up fee. But the break-up fee wasn’t high enough to dissuade a competing group of bidders from jumping into the deal, offering a larger package of cash and equity.
Now “no-shop” provisions—which bar sellers from seeking higher bids from other buyers—are one of the few contractual provisions (as opposed to price points and asset valuations) that business people seem to care about in deals (at least in our experience). But it’s not clear they actually provide much value, especially if the deal is big enough to grab headlines. The seller doesn’t need to shop the deal if it’s terms are spelled out on the front page of the Wall Street Journal.
But break-up fees—the amount a seller pays to a buyer who gets outbid after the deal is signed—do matter. Bankers and private equity folks will give you all sorts of reasons they want break-up fees—to pay for work already done, as a sign of good faith and fair play and a promise that the would-be buyers won’t walk-away totally empty handed. But most of that is gum-flapping. What break-up fees really do is place a floor on the next highest bid. Every subsequent bid has to beat the last bid plus the fee to attract the sellers. As the Blackstone people pushed up their bid during negotiations, they also pushed up the break-up fee. In the end, the EOP-Blackstone break-up fee reached $720 million.
(Lawyers, by the way, hate break-up fees. Especially big ones. Or, rather, corporate lawyers hate them. Mostly because the plaintiff’s bar loves to sue over these things, claiming that they discourage competing bids. A claim which has the unfortunate character of being largely true and the entire reason the break-up fees exist. But you didn’t hear that from us.)
But what really won the day for Blackstone was the fact that their bid was cash. And cash is king. For a variety of reasons, current market conditions tend to favor bidders with money (what the industry calls “financial bidders”) rather than bidders with experience (what the industry calls “strategic bidders”). Here Blackstone was offering EOP a mountain of cash, in part because they were already lining up follow-up deals to sell-off assets and recoup part of the cash. The competing group were real-estate guys and were offering cash and equity in an on-going business. But it quickly became clear that the EOP shareholders weren’t interested in owning part of a business run by some other real-estate guys. They wanted the money, and Blackstone were the guys showing it to them.
‘Course, you’ve got to be careful drawing any lessons from bid deals. Their very size alone means they aren’t “typical” and rules that apply to them might not apply to the broader markets. Except that everyone else will be looking for lessons, and this deal will quickly become a “reference deal” against which others are measured. So might as well get a bit reckless with us. Everyone’s doing it.
Update: More thoughts on no-shop provisions, break-up fees and the EOP deal from Larry Ribstein here. As always, very clear, very concise and worth reading. (Also, he pretty much anticipates a lot of our arguments above so what’s not to like?)

How Blackstone Won a Prize
[Wall Street Journal]