As we noted in Opening Bell this morning, another big buyout has gone the way of all mortal things. Today’s entry into the deal graveyard is the $8 billion Kohlberg Kravis Roberts and Goldman Sachs buyout of Harman International. According to most news stories on the deal, Goldman and KKR are forking over $400 million in exchange for convertible notes, Harman’s using the money for a stock buy-back, and everyone’s amicable, honky-dory, smiles and handshakes about the new deal.
But when we squint at the fine text, we’re not sure that Harman should be smiling so widely. According to the acquisition agreement, the company was due to collect a $225 million break-up fee if KKR and Goldman walked. So what’s seems to be happening is that they are selling $400 million of notes to the balking buyers for $175 million. Let’s call that a 57% discount. So Harman will now owe $400 million of principal to KKR and Goldman in exchange for just $175 million beyond what they were arguably already due according to the agreement.
But Goldman and KKR are getting more than just the notes. They are getting an option to buy the stock. Typically, a convertible note is linked to a share price that places the option currently out of the money. But if we follow through on the idea that Goldman and KKR are buying the notes at a discount, we can see that these are actually currently in the money. The $104 a share translates into 3.8 million shares for $400 million of notes. Those shares are now trading at $85, which means that the buyers have entitled themselves to $326 million of shares for just $175 million dollars.
To put it even differently, after the discount, the deal prices the shares at $59. We’re not sure that’s exactly the “vote of confidence” in Harmon that its executives are touting. Harman may now have an additional $175 million for a buyback but this seems a steep price to pay for that money.
Of course, if you figure that break-up fees are not sunk costs for dead deals because the buyers aren’t ever going to pay them anyway—a growing trend from private equity buyers, to be sure—then we guess it does sound like great deal for Harman. It’s probably just our short-sighted stinginess that makes us think in terms of additional, incremental dollars in the deal rather than the complete $400 million package.
KKR and GS Capital Partners to Invest in Harman International [Press release via Market Watch]
Goldman Sachs
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Another One Bites The Dust: KKR and Goldman Kill Harman Deal And Walk Away With Treasure Chest Of Convertible Notes
By John CarneyThe news on Friday that a court had issued an order allowing Cheyne Finance, the London based SIV, shiv it’s creditors by ceasing payment on its commercial paper is, somehow, good news. At least, it’s good news for Goldman’s prime brokerage business, according to the Telegraph.
How’s that work? If it’s too early in the day for you to read about the sordid tales of Wall Street conflicts of interest, you may want to skip this item. Here’s how it starts: last month Goldman set up a private equity arm to invest in hedge funds, a move that is widely seen as a way of giving a boost to its already fabulously successful prime brokerage business. If the hedge fund investments earn great returns, they’ll make money. And if they don’t, the fund managers may be grateful enough for the new fund injections that they’ll give Goldman their prime brokerage business. And if that doesn’t work—if the fund managers don’t make Goldman the broker for their funds—well, Goldman can always threaten to send in a couple of redemption notices. They’ll get the message pretty quick.
It’s a standard Goldman move, the kind of thing that makes you slap your forehead in wonder that you hadn’t thought of such an obvious strategy yourself. If only you had a more devious mind.
Now hedge funds that had invested in Cheyne’s commercial paper are panicking at the SIV’s insolvency. And who is riding to their rescue? Well, that very same Goldman Sachs, of course.
Deloitte, which is administering Cheyne, has been holding talks with banks interested in rescuing the fund with new money. According to the Times, Deloitte is expected to narrow these rescue talks down to a single bidder within days. Goldman is widely thought to be the lead bidder, although the Royal Bank of Scotland is also said to be a contender. There’s also talk of a strong third bidder but we have no idea who that might be and the Telegraph isn’t naming them either.
This brings about the mind-boggling possibility that Goldman has invested in hedge funds that have invested in commercial paper issued by an entity which may soon be owned by Goldman Sachs. And you thought that KKR borrowing money from Citigroup to buy Citigroup loans to KKR was spinning things right round like a record baby, right round.
Goldman takes lead in race for Cheyne [Telegraph]
Update, 9:47 AM: It looks like even Goldman couldn’t get around to spinning things that fast. The latest word is that RBS is now in exclusive talks to buy the assets of Cheyne. “If the deal goes ahead, it will mark the first known sale of an SIV’s entire book of assets, and would be an encouraging sign for other troubled SIVs that are trying to refinance or restructure their portfolios,” Market Watch notes.
RBS in exclusive talks on Cheyne SIV assets: sources [MarketWatch]
As if we didn’t live in a sick, fucked up enough city, where you can’t smoke in a bar, eat Trans fats or be rude to tourists, now people are saying that it’s no longer acceptable to mess with accounting so that actual losses plus paper gains equal a 79 percent increase in net income. Yes, the rules police has a problem with the fact that Goldman Sachs, because it is resourceful, was able to make (make money) money in the third quarter, when everyone else wrote down billions in losses, through trading profits that were unrealized and came from financial instruments whose value was determined by…Goldman. (“Goldman reaped huge gains within the level 3 pot in the third quarter. For example, it made a net gain of $2.94 billion from level 3 derivatives, financial instruments whose value is based on the value of underlying securities. And get this: $2.62 billion of that gain was unrealized.”)
A. What happened to Wall Street being a place that rewarded financial engineering and B. Incidentally, while walking home last evening I happened to pass Lloyd Blankfein outside his building, talking to a bunch of what I’m going to ballpark at ten years-old boys about what sounded like scooters. He was wearing a fleece vest, maybe an Old Navy Performance one, I don’t know. Let me ask you this—does that sound like the garb of a man who lie just to make a buck?
Questions arise about Goldman’s blowout quarter [Fortune]
Real estate blog Curbed recently sat down with an investor in the field to discuss whether or not Andre Balazs’ High Line-squatting Standard Hotel is symptomatic of a developmentification of Manhattan that’s turning the island into a place where only utterly lame (but sufficiently rich) people will live. A simple ‘yes’ would’ve sufficed, but the expert, perhaps going through some sort of personal problem or maybe having had the unfortunate pleasure of drinking at Joshua Tree last night, took it one step further.
Fuck it, I say. Manhattan is one big joke. I think they should let highrises go up anywhere at this point. What’s the point of communities on the island anymore?
Everyone’s so priced out, does it matter anymore?
If you want a neighborhood/community, move to Brooklyn.
Let Manhattan be just one big bullshit skyscraper. Tower of Motherfuckin’ Babel. But for douchebags.
And the Lord spoke and said, “Let us make sure these douchebags do not understand each other, less they build a Tower of Douchieness. Let one douchebag not understand the other.” And thus the languages of Goldman, Lehman, and Morgan were formed and the Lord saw it and it was good.
First of all, this tower already exists, and its name is Windsor Court (and on the UES, Dormandy). Second of all, and we’re just passing this along, analysts from Merrill Lynch and Bear Stearns would like to know, “Hey, why weren’t we included on that list?”
Investor Rant: ‘Manhattan is One Big Joke’ [Curbed]
And it seems to be, roughly:
- Don’t monumentally fuck up–> get a nice bonus.
- Screw things up beyond all of our wildest hopes and dreams–> don’t get a nice bonus.
Reuters reports that Bear Stearns’s nine-month compensation fell 6 percent to $3.10 billion ($199,730/employee). Payout for all of last year was $4.34 billion. Anyone who can correctly identify the event that may have imparted losses on BSC’s trading, financing and hedge fund businesses is in for a treat.
On the other side of James Cayne’s golf game: Morgan Stanley, which set aside $13.4 billion for the first 9 months, up 25 percent and set to match or exceed last year’s $14.4 billion ($280,000/employee) and Lehman Brothers, which set aside $7.33 billion for the first 9, up 14 percent and about $255,000 per employee.
Goldman, because John Carney predicted it would, is also set to increase bonuses ($565,000 per employee), though this would be the case even if Lloyd Blankfein’s top secret hair restoration project went over budget. GS said it reserved $16.9 billion in the first nine months, up 21 percent from last year’s period and already exceeding the $16.5 billion set aside for all of 2006.
Goldman 3rd quarter shows bonuses poised to rise [Reuters]
One of the stunning things that Goldman Sachs said yesterday was that they had offset losses arising from this summer’s credit crunch by shorting mortgages. With hindsight that seems like such an obvious bet that you want to kick yourself for not thinking of it first. But one thing we’ve been trying to understand is what exactly Goldman means when it says it was “short mortgages” in the third quarter. What asset classes was it shorting?
We can think of a few obvious ways to short mortgages by going short assets that are correlated with the mortgage market. Short the common stock of mortgage companies. Short ABX. Buy protection on correlated bonds. But these are just guesses. We want to know more. How do you think Goldman minted the kind of money they say they did by “shorting mortgages?”
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