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2. Private equity returns still tumbling

The special committee formed by the Dell board to evaluate strategic alternatives to unlock shareholder value might have suspected that the leveraged buyout they ended up recommending would be controversial.

One pre-emptive move was designed to heavily incentivize an unconflicted investment bank to aggressively pursue a superior deal in the go-shop period. According to the board, Evercore is "actively soliciting" potential alternative proposals now and has until March 22 to make its conclusions known to the committee. The committee says that it will "continue negotiations past that date if a potentially superior proposal emerges. As an added layer of protection, the committee "also insisted on a requirement that holders of a majority of the shares not held by Mr. (Michael) Dell or members of management approve the transaction before it can be completed."

You can't fault the committee for wanting to take no chances that it might be accused of being a storefront committee only, whose real purpose was to rubber stamp a deal on behalf of the company founder and largest shareholder.

Critics of deal, however, are leveling such charges anyway, led by Southeastern Asset Management, which has maintained that the deal grossly undervalues the company and favors management.

The best chance at this point for a superior deal may rest more with Evercore than with angry shareholders. Evercore may be a good choice for this assignment. It has been on a tear this year, riding the resurgence in deals. The boutique had previously staffed up aggressively in anticipation of an improved deal climate, and that has paid off handsomely, as the bank continues to carve out market share. Its stock recently hit an all-time high. We'll wait and see if it can find some magic and produce a better Dell deal in a short amount of time.

My sense is that it will come up empty, which will be a relief for the Dell special committee.

For more:
- here's the statement

Read more about: lbo, deals
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By Jim Kim

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3. Bank analyst Mayo buys stocks to gain influence over banks

I noted recently that the stock market's surge has led private equity portfolio managers to start mulling public market exits again. Follow-on offerings have been all the rage so far this year, and more are expected. At the same time, if the strong market continues, more PE-backed companies are likely to go public.

But such a spike in activity masks a larger concern. Reuters notes that, "investment returns have shrunk and are unlikely to go back to their peak levels."

Another executive was quoted saying, "It's just too hard to see, with the level of capital out there, the baseline rates and the lack of growth globally, that you will be able to generate the kind of returns that were available in points of time in the past."

That said, the industry will be quick to point out that the returns, while lower than in the glory years of the LBO, have held up relatively well. I previously noted a new study by the HEC School of Management in Paris and German fund-of-funds manager Golding Capital Partners that suggests that private equity deals done between 2006 and 2008 actually outperformed public equity investments over the same time period. The absolute return through the end of 2011 was 5.1 percent vs. -15.4 percent for the public market.

To underscore the point, Reuters notes that the U.S. private equity index compiled by advisory firm Cambridge Associates shows a net internal rate of return of 13.7 percent in the 10 years through September 30, 2012, compared with an 8 percent return by the S&P 500 Index.

As for more recent performance, "the top-performing 25 percent of U.S. fund managers whose fund launched in 2001 have delivered a net IRR of 36.5 percent; by comparison the net IRR of the top-performing 25 percent of funds launched in 2004, when 66 funds were raised as opposed to 24 funds in 2001, is 13.9 percent."

The point for limited partners here is that they need to be realistic about what future investments will being. Many are continuing to make outsized bets on this asset class. Pension managers have to at least ponder the possibility that such bets will come back to haunt them, just as pension obligations start to spike.

For more:
- here's the article

By Jim Kim

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Would esteemed, albeit perpetually controversial, bank analyst Mike Mayo be better suited to a job on the buy-side?

He has made a name for himself as a tough analyst unafraid to speak his mind and who certainly will not be cowed by top executives. He is anything but intimidated by power. He loves to tweak CEOs on analysts' calls for all to hear, and he has used the press adroitly to get what he wanted. He once felt shutout by then Citigroup CEO Vikram Pandit and CFO John Gerspach Citigroup management and went public with what should have been a quiet dispute, no matter how heated. He later ended up in a dispute with then-chairman Richard Parsons.

In some respects, he's every IR manager's nightmare. And some shareholders love him for that fact.

Mayo has now seized upon a new way to gain access to top executives. After feeling shunned by management at some banks, CNBC reports, "He's now trying to get back in—by buying up shares in bank stocks, an effort to gain entre to key investor meetings usually closed off to analysts. The practice of analysts getting intimately familiar with companies in their coverage isn't entirely uncommon: Financials analysts have long opened multiple checking accounts or certificates of deposit across all banks, in order to test out the product."

This suggests that perhaps he is seeking a new avenue to influence management: as a shareholder. His spokesperson did not rule out the idea that he might seek change via proxy action.

That would certainly make for interesting meetings. You can bet he won't hold back at the podium. The press will lap it up. Whether he'll succeed in effecting real change, however, remains to be seen.

For more:
- here's the article

Read more about: Mike Mayo, Stock Research
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4. Deal resurgence on the way

By Jim Kim

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5. Carl Icahn may shake up Dell's LBO plans

Every year since the financial crisis ended, it seems that bankers put out the word that good times may be just around the corner. But so far, we have yet to turn that mythic corner. The result is that the past five years have been tough on deal advisors.

"M&A deal volume fell off a cliff after peaking at $4.1 trillion in 2007," according to Bloomberg Markets. "Last year, it dropped 8.7 percent to $2.2 trillion after an early resurgence fizzled along with projected growth rates in emerging economies."

Right now, we appear to be in one of those moments of optimism, albeit tempered, as a spate of large deals have led to lots of talk about rising stock values and relatively easier financing activity. The Dell LBO was certainly a signature event, not to mention the $11 billion merger of AMR US Airways, Liberty Global's deal to buy Virgin Media and Berkshire Hathaway's deal for Heinz. Total announced deals through Feb. 15 have hit $288.2 billion, just ahead of $246.6 billion announced in the same period a year ago.

While this is obviously good news, bankers themselves are being cautious in public. One banker wisely told the magazine: "I hesitate to be the one that says 2013 will be the year, because invariably it may not. But I think that we're pretty close to it changing."

We've heard that before.

To be sure, right now there is one big event that looms as another big reason for boards to pause. The effects of the on-going sequester cannot be ignored as a source of economic stagnation. The longer it continues, the more risk it injects into the deal process.

For more:
- here's the article

Read more about: mergers, Advisory Fees
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By Jim Kim

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