Case Blog

For those of us in the media business who focus on M&A and disappeared several weeks ago, our world was changed while we were enjoying our favorite recreational pursuits. Once or twice on each nine on the golf course, my Blackberry would deliver the financial scorecard, which had even more volatility than my golf round!

It seems that when things should have been quiet, with most of America and Europe enjoying the final month of summer, the financial markets were turned upside down by a perfect storm. This pattern has happened before, back in August of 1997 and again in August of 1998. In 1997, Long-Term Capital Management collapsed in a spectacular spiral after its quantitative models led to significant leveraged bets that moved against them. To calm the world markets, the Federal Reserve and leading Wall Street firms moved toward an orderly liquidation.

In August of 1998, the collapse of the Russian economy, as it was transitioning to more of a market economy, once again spread concern around the globe and once again the major economic powers had to act in concert to calm the markets.

This time the U.S. subprime mortgage contagion spread and confidence was once again lost. The European Central Bank and the Federal Reserve, now led by Ben Bernanke, moved to provide liquidity to the major money center banks to insure that confidence was restored. Finally, last week the Fed cut its Discount Rate and our four largest banks, Bank of America (BAC), Citigroup (C), JPMorgan Chase & Co. (JPM) and Wachovia (WB) moved to provide liquidity to the hardest pressed sectors. Bank of America (BAC) stepped in, for example, to make a $2B investment in preferred shares of Countrywide Financial Corporation (CFC) that steadied CFC’s balance sheet and convinced everyone that the largest mortgage lender in the country was not on its way into bankruptcy. By most accounts this will turn out, as it should, to be a very profitable investment for Bank of America, particularly for the calming effect it has had on both the credit and stock markets. Many of us are expecting a federal funds rate cut in mid-September now that the Federal Reserve seeks to stave off a recession. There is also a sense that the Fed Chairman passed his first real test.

In all of the discussions about the subprime meltdown, I have not read anywhere how this category of mortgages came into existence. President Clinton’s administration (Bill’s not Hillary’s) had a stated goal to expand home ownership and the financial community was able to develop new products to make this goal a reality. As we move toward the ‘08 election, we should remember that stated goals, no matter how well intentioned, often conflict with market dynamics, and over time there will be a correction, which most likely will be painful.

As I said earlier, our world has changed. And as we continue to prepare bids for companies this fall, the amount of leverage available to everyone will be reduced, most likely in the 4X-6X range. We will not see stapled financing packages so readily available to guide us to expected price ranges. Finally, this combination will result in sellers having to reset their price expectations. It will also result in fewer mega deals than we have seen over the past 18 months. I believe that this will be healthier for the media M&A market both in the near term and as we look further out.

Once again, we went away to recharge our batteries and enjoy our families and friends, and our world was changed by the global markets. As we are preparing to return after Labor Day, we will all be back at work in this new world, looking for that special deal that meets our newly revised criteria.

Here we are in the early “dog days” of August & New York City is starting to empty for the month. We seem to have taken on the European approach of everyone heading out of town for the month. Prior to leaving though, Rupert Murdoch won his prize, The Wall Street Journal/Dow Jones, once the Bancroft family realized that there was no alternative to his “bear hug” premium and he agreed to pay their various fees, which had become substantial. Once this deal closes, the fascinating work of brand extension will begin!

The stock market remains volatile and those who “went away in May & will come back in September” are probably feeling very good about that decision. Liquidity concerns remain an issue, but deals continue to get done, although, the confidence level regarding the degree of leverage does not seem very strong, as the major banks sit with deals that they cannot syndicate and KKR refuses to re-negotiate. We will see what September brings forth, but I believe that the amount of leverage we saw in deals for the 1st half of ‘07, will be a distant memory in the fall. I for one sense that this will be healthy and although it will impact returns, it will keep the private equity business healthier for the long term.

As we pack-up to depart, Senator Schumer has stopped the “piling on”, with regards to how to “tax the carry”. With his powerful positions on the banking and finance committees & as the chief fund raiser for the Democrat’s Senate campaigns, everyone needed to listen when he raised the issue of treating everyone fairly and questioned real estate and energy interests. This has left the leading Democratic presidential contenders, Senators Clinton and Obama, in a somewhat uncomfortable position. Will we find a compromise in the fall, with the long term capital gains tax rising from 15% to 20%? Perhaps, we should also ban all fall birthday parties for PE moguls?

Well that’s it for the next several weeks…I am joining the exodus, out of the city. I have packed the car and we are off to Sea Pines, on Hilton Head Island, for the next several weeks. We have been spending August vacations in Sea Pines for almost 3o years and are looking forward to visiting with family and friends. The golf clubs are packed & I hope Harbour Town Golf Links will be kind!