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Today's Top News1. Private equity's new tax issue
With the intense presidential race focus on private equity industry practices, one danger has always been that dubious industry practices might be exposed to the political machinery, which isn't exactly known for its subtly. The issue "du jour" in private equity is the revelation that Bain Capital, where Mitt Romney made the his fortune, employed techniques to effectively turn management fees into performance fees. The value of such conversion is the difference between the income tax rates and capital gains tax rate. There's little doubt Bain executives were able to lower their taxes even more using such techniques. It remains to be seen how potent this will be as political fodder. Some lawmakers will certainly demand reform at some point, but it may be seen as just another case of wealthy people working the tax code to their advantage. It's unclear how effective that will be as a message. Fortune takes a look at this issue and comes away with the same conclusion that others have reached: The tactics are aggressive but legal. It's anyone's guess if they would hold up in court or not. It might well depend on the judge. Fortune renders its own verdict: "Management fees are a fee for service. As such, they should be taxed as ordinary income. If Bain wants to eliminate management fees altogether, then move to a 0-and-32 structure." So we come full circle back to the tax fairness issue, which has been aired. We'll no doubt here more about all this as he negativity in the presidential campaign continues. For more: Read more about: management fees, Taxes 2. Bank consolidation may finally be on the way
The announcement that M&T Bank would buy Hudson City Bancorp for $3.7 billion set off a wave of speculation about whether more regional banks and thrifts would be pursue similar deals. The talk was welcome among bankers, as the banking industry has been one of the most disappointing merger markets over the past few years. Consolidation seemed inevitable a few years with so many banks ailing and in ostensible need of capital injections. Many private equity firms gave it a go, but the market was stymied by lots of conditions placed on buyers of TARP banks. In the end, mergers stalled, for better or worse. The volume of bank mergers is down nearly 30 percent year over year as of now, according to Dealogic data. But the M&T deal has revived hopes that more deals are in the works. Analysts at Sterne Agee have predicted that Citizens Republic Bancorp and Astoria Financial are possible targets. The analysts suggest a possible early indicator: Banks taking gains from their deferred tax assets. While people speculate about whether more banks are on the block, it's possible that there may be another bidder emerge for Hudson City. Breakingviews notes that, "The latest U.S. bank merger may be too good to be true. M&T Bank, based in Buffalo, New York, is set to pay $3.7 billion for New Jersey rival Hudson City Bancorp. It's just the kind of acquisition dealmakers have been waiting for. A local player still reeling from the financial crisis has found a safer home with a larger rival. It's almost the ideal bank merger. But that introduces the big risk of a rival offer." For more: Read more about: deals, mergers
Private equity deals have enjoyed a recent growth spurt. The latest news is that Carlyle Group has agreed to buy DuPont Performance Coatings for $4.9 billion in cash, in the process purchasing the business from DuPont. The group will likely generate about $4 billion in revenue in 2012. The near $5 billion deal is on the high side of the recent range of deals. The announcement also follows several others, including Clayton, Dubilier & Rice's deal to buy David's Bridal in a $1.05 billion deal. For Carlyle, the DuPont deal is the third in quick succession. It previously announced that it will buy Getty Images and TCW Group. We're starting to see more deals that do not amount to one private equity firm selling to another private equity firm, a type of deal that had become more common as the traditional exit market dried up a bit. In any case, the deals are a welcome trend. For Carlyle, the purchases have allowed it to deploy about 80 percent of the capital from its flagship fund, "bolstering its pitch for fresh capital as it markets a successor pool. The firm closed on $2 billion of commitments to that pool in the second quarter, co-CEO David Rubenstein said last week. The new fund, Carlyle Partners VI, is targeting $10 billion." All that said, the size of flagship funds will definitely fall. For more: Related articles:
Read more about: Private Equity, deals 4. Trustee war in MF Global fight
The fight for the carcass of the MF Global has taken a bitter and protracted turn, as big bankruptcy fights tend to do. But if Louis Freeh, who was hired as trustee of the holding company, has his way, a global settlement will bring the costly proceedings to a close. As reported by DealBook, Freeh argued in a court filing "that a nearly year-long legal battle was taking too long and draining precious resources. Mr. Freeh, a former director of the federal Bureau of Investigation, said he seeks to settle with both the trustee for MF Global's brokerage arm, James W. Giddens, and an overseas administrator tending to the firm's British unit. It is unclear, however, if a truce is realistic. Negotiations involving the British administrator could complicate the already-tense dynamic. Mr. Giddens is currently locked in a legal dispute with the administrator over $700 million trapped in London. Mr. Freeh and Mr. Giddens have also spent months feuding. The dispute only escalated on Wednesday when Mr. Freeh used the court filing to criticize Mr. Giddens for recently joining a lawsuit against MF Global's top executives." The trustees in this situation have been tasked with attaining different goals. As such, they were bound to lock horns. As of now, they are making the Bernard Madoff proceedings look tame. All in all, however, this is good news for the attorneys. For more: Related articles:
Read more about: Trustee, MFGlobal 5. Mutual funds sour on JPMorgan Chase
How significant was the London Whale "hedging" fiasco for JPMorgan Chase? According to a new report from Bernstein Research, at the end of the second quarter the 100 top mutual funds had just 79 percent "as many shares of JPMorgan as the benchmark Standard & Poor's 500 index." That compares with a 92 percent weighting at the end of March, and "was the lowest level in the seven years that the analysts have tracked the data," as reported by Reuters. Of 100 major mutual funds tracked, 34 reduced their stakes in JPMorgan in the second quarter, while 9 added to their holdings." The report noted that some big managers seemed to swap JPMorgan Chase for regional banks that are simpler to understand and model. Still, JPMorgan remains "the most popular big bank among the funds by one measure, namely the number of holders. It is owned by 71 funds, compared with 68 funds that own Wells Fargo & Co, 44 that own Citigroup Inc and 24 that own Bank of America Corp -- the other three of the biggest four U.S. banks by assets." The issue now is whether the bank can once again win over mutual fund managers, or whether the exit is permanent. This is a terrific IR challenge, one that the bank is no doubt working on tackling. For more: Related articles: Read more about: Mutual Funds, JPMorgan Chase Also NotedSPOTLIGHT ON... Morgan Stanley exec turns down E*Trade E*Trade has been looking for a new CEO since August, when then-CEO Steven Frieberg was pushed out by the firm's board. The board had hoped to land a big fish, and no doubt is reeling after Greg Fleming, who heads Morgan Stanley's brokerage division, has declined to take the job, reports Fortune. The board will now hire a CEO search firm to take the hunt for a new CEO to the next level. Article Company News: And Finally…Kindle Fire sold out? Article
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Friday, August 31, 2012
| 08.31.12 | Bank consolidation may finally be on the way
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