Case Blog

This past weekend lived up to my expectations, with the U.S. Ryder Cup team pulling off a surprise upset of their European rivals.  The U.S. captain Paul Azinger created a team, while European captain Nick Faldo seemed to remain aloof,  and there appeared to be a lack of camaraderie on his side, in spite of his most controversial pick, Ian Poulter, winning 4 points, more than any other player.  On the U.S. side we continued to see the rising star of Anthony Kim.  This son of Korean immigrants was a proud American, and with his outstanding play Kim took center stage. Sergio Garcia, one of my current favorites on the PGA tour, was overshadowed by him.  Finally, Boo Weekley led the good ol’ boy contingent, while Kim led the rookies. They were deceptive with their approach, but they played outstanding golf and are to be congratulated as a team.

Dallas went into Green Bay and finally won at Lambeau. The NFL East with the Cowboys, Giants, Eagles and Redskins certainly looks, at this point, as the NFL’s strongest division. They will clearly beat up on each other as the season progresses, but the next Super Bowl champion could well emerge, once again, from this division. Miami’s turnaround continued with a strong showing against the Patriots, who clearly miss Tom Brady. In the college ranks one of the surprise teams so far is the Colorado Buffaloes, who upset West Virginia to go 3-0. Their next three games are against Florida State, Texas and Kansas. We will know after these games if they belong in the top 20 and if this program has been turned around by Coach Hawkins and his son Cody, the Buffaloes’ quarterback.

The weekend also saw Treasury Secretary Hank Paulson make the rounds of the Sunday morning talk shows. In an exchange with Tom Brokaw on Meet The Press, Paulson was very clear that this was not about the stock markets, which had rallied on Thursday and Friday, but about the frozen credit markets. Will either presidential candidate be able to attract a talent like Paulson to their administration? The Fed Chairman Ben Bernanke  has studied and written about the causes of the Great Depression and clearly understands the need to take unprecedented actions. We are in uncharted waters and the Bush administration has taken a page from FDR’s playbook, as opposed to Hoover’s. There are times that the government needs to step in to restore confidence.

Many of us have been vocal about our opposition to government intervention into free markets, but at this point what are the alternatives? Are we prepared to have our financial markets unravel? Will we see more deals fall through, like the Informa (INF:L) acquisition in the United Kingdom, which failed because Providence, Carlyle & Blackstone (BX) could not raise their price in the current frozen credit markets? The price drop has been precipitous for shareholders. We also learned as the weekend ended that Goldman Sachs (GS) and Morgan Stanley (MS) would survive as bank holding companies, changing the landscape of investment banking in a very significant way. And we saw Warren Buffett reading a market bottom and making a $5B dollar investment in Goldman Sachs on very favorable terms. As I am writing this, GE (GE) cut its earnings guidance. To preserve capital in these challenged markets, GE has suspended their stock buyback and most likely will maintain their dividend, but not raise it for the first time since the ’70s. GE Capital has been a significant funding source for many of the B2B mid-market deals over the past several years.

It is time for both parties to work together on a solution and to put finger-pointing aside. The world is looking once again to America for leadership, and our leaders need to demonstrate that they understand what it means to operate in a bipartisan fashion. The presidential campaign needs to go forward and the American people deserve to have debates to better understand the fine distinctions between the candidates. But while we move forward the current administration and the Congress must move to fashion a solution that restores confidence.  There will be plenty of opportunity for history to assess blame for the subprime debacle.

When I wrote Autumn Crush on Saturday, I did not anticipate I would be writing the sequel on Wednesday, but so much has transpired over the past 48 hours that we are back with Autumn Crush II.

We have learned that the team of Hank Paulson and Ben Bernanke decided to let one of the independent investment banks go under and that Lehman Brothers was not going to be rescued.  I am surprised that we have not heard from Lehman CEO Dick Fuld, who was very vocal up until the end about their viability. Was it hubris last spring and summer when he turned down several reported deals?  It is clear that the hedge fund manager, David Einhorn, was correct and that Lehman’s former CFO Erin Callan was incorrect about the financial strength of their franchise. It was tragic to see 25,000 jobs lost on Monday morning. The human carnage and the loss of wealth rank right up there with the Enron debacle. Will the SEC introduce new regulations as they did with the Sarbanes-Oxley Act of 2002? As of late yesterday, Barclays Bank had petitioned the bankruptcy court to take over many of Lehman Brothers assets, but not the most risky ones that put them under pressure. It looks like the court will accept Robert Diamond’s offer of approximately $1.75B and that about 40% of the Lehman Brothers jobs will be saved.

In contrast to Lehman Brothers, we have seen “Mother Merrill” find a new corporate home with Bank of America. John Thain clearly saw over the weekend that there were limited options and managed to negotiate a sale with a significant premium from Friday’s closing price to the benefit of Merrill Lynch’s shareholders and employees. I trust that down the road we will realize that Ken Lewis negotiated two beneficial transactions for Bank of America’s shareholders over the past year: Countrywide and now Merrill Lynch.

We have also learned as of this morning that the “too big to fail” label was applied to AIG and that the federal government now controls it.  Hank Greenberg’s bid to return was not accepted. Hank Paulson informed the current CEO Robert Willumstad that he would have to exit as well, and Paulson replaced him with Edward Liddy, the former head of Allstate.

The amount of shareholder value that has been lost in the past 48 hours exceeds anything we have seen in recent memory. It is clear that the credit crunch will continue and that large private equity deals will continue to be challenging, under the current market conditions.

Goldman Sachs and Morgan Stanley are our last two large, independent investment banks. Will they remain independent, and will there be a role for some of the largest private equity firms to step into the void left by the demise of The Bear and Lehman Brothers?

The upcoming weekend’s football games will provide some welcome diversion from the drama on Wall Street. Will the Super Bowl champion Giants improve to 3-0 versus the Bengals? Will the Patriots, without their leader Tom Brady, go to 3-0 versus the revitalized Miami Dolphins? Brady, who is also the face of the NFL, along with Peyton Manning, is clearly missed.

Will Ohio State recover from their devastating loss against USC and beat up on Troy? Finally, BYU and their Heisman candidate quarterback, Max Hall, should continue to roll against Wyoming. Hall to the tight end Dennis Pitta has to be the best brother-in-law combination in football!

I have just returned from a week in London. Mary Claire joined me over the first weekend and we spent several days exploring our favorite London neighborhoods.  Our most memorable dinner was at Gordon Ramsay’s Maze Grill, in Grosvenor Square. The steaks were wonderful and complimented by an excellent wine list.

I also had an outstanding lunch with some colleagues from Quadrangle on Savile Row, at Sartoria, in the Mayfair section of London. The restaurant is very near their London office, which was opened by Gordon Holmes over one year ago. The cuisine is Italian.

In London, the private equity community is focused on the latest rejection by Informa PLC (INF:L) of an offer by Providence Equity Partners, the Carlyle Group and the Blackstone Group to take it private for 450 pence per share. In July there was an initial offer of 506 pence per share by a group that included Providence, Carlyle and Hellman & Friedman. During due diligence, Hellman & Friedman dropped out and was replaced by Blackstone. If the deal is completed, it will be the largest media deal since the start of the credit crunch. The value will exceed $3.5B. There is speculation that a bid of 475 pence will receive the endorsement of the Informa board.  The United Kingdom Takeover Panel has given the consortium until September 26th to submit a revised offer. If they do not meet this deadline they will not be able to submit another offer for at least six months.

Informa, which has over 2,000 trade publications and produces more than 10,000 conferences, was first put into play by United Business Media, which proposed a merger of equals with no premium. Their best-known property is Lloyd’s List Maritime Newspaper.

The title of this blog entry, Autumn Crush, was chosen with the fall harvest and crush in mind, which will take place during the month of September in the wine-producing regions in the northern hemisphere. We will take a slight detour, though, and first address the continued volatility in the U.S. financial markets. We have witnessed the bailing out of Fannie & Freddie over the past two weeks. The shareholders were left with very little value in the end, but the bondholders cheered the government’s direct intervention. We have now moved on to the venerable Lehman Brothers. As I write this on Saturday morning, we wait to see if there will be a deal before the world markets open on Monday morning. It is starting to sound more like a club deal, reminiscent of the deal to save Long Term Capital in the late ’90s, than the spring deal for Bear Stearns by JPMorgan Chase (JPM). After watching the Bear rescue, why did Lehman CEO Dick Fuld  wait so long to raise more capital? Have we reached the point where one of these investment banks will be allowed to fail, or will a deal be struck at the 11th hour?  Are Merrill Lynch & AIG next “in the barrel,” or will this be the last meltdown by a major financial institution?

Since I opened with restaurant recommendations in London, I will recommend several wines from Italian wineries. Several of you have mentioned to me that you would like some recommendations from beyond Napa & Sonoma Valleys in northern California.

Le Macchiole Paleo is from a small, high-end winery in the Bolgheri section of Tuscany. The 2005 Paleo is a Cabernet Franc, and their Scrio is a world-class Syrah. I have collected wines from this winery for over 10 years and I am always impressed by their quality.

My other recommendation is the Ca’Marcanda wines from the venerable Angelo Gaja, Italy’s best-known vinter. These wines are not from his home in the Piedmont, but are from the Maremma section of Tuscany. They are made from new world grapes and done in a style more reminiscent of a Bordeaux blend.  Two of their best-known releases are Promis and Magari.

At the end of my last blog, Drawing to a Close, I queried: “Any forecasts on the candidates vice presidential running mates?” I had several people suggest to me that Senator Obama would choose Senator Joseph Biden, particularly in light of the turmoil in Georgia.  They were proven correct when several days later Obama announced his choice prior to the start of the Democratic convention in Denver.  Selecting Biden demonstrated a leader’s ability to find complementary individuals for support in areas in which they are not perceived to be strong. Senator Obama demonstrated that he was not too proud to choose a former opponent or someone that clearly had built a resume of accomplishment and knowledge with regard to foreign affairs and diplomacy.  Senator Biden has built and polished his credentials during a career in the Senate that stretches out more than thirty-five years.

I received several suggestions that Senator McCain would turn to either Governors Pawlenty or Romney, or if he could stand down the base of the Republican Party, Senator Lieberman.  Mitt Romney had a distinguished and very successful business career at Bain Capital, and as a Republican Governor of Massachusetts Romney introduced the most successful universal health care plan for residents of his state.  His innovations in that regard may well serve as a model for other states.

Senator Lieberman would have been an inspired choice of a man who has stood by his principles, in spite of a strong challenge from within his own party in a primary fight two years ago. During this battle he was abandoned by the majority of his Democratic colleagues because of his support for the Iraq war and his strong and unwavering support for Israel’s strategic role in the Middle East.

In the end, Senator McCain decided to appeal to the conservative base of the Republican Party and announced this past week the selection of Governor Sarah Palin of Alaska.  In many respects this represented a Hail Mary pass, but by choosing someone who is clearly not prepared to lead, in the event that she must replace the President, he has demonstrated more of his maverick streak than his leadership ability.  Former President Ronald Reagan was a leader who was not afraid to surround himself with a strong and complementary team. Reagan chose George H.W. Bush, who was probably better prepared to take over, if necessary, than any vice presidential candidate since World War II, based on his career in the House of Representatives, as head of the CIA and Chief of the US Liaison Office to China.  Unfortunately, when he became President Bush, he chose Senator Dan Quayle as his vice president. In many ways, Senator McCain’s choice is most analogous to the choice of Senator Quayle.  It was not a demonstration of leadership, along the lines of President Reagan’s choice.

This round, with less than three months to go to the election, goes to Senator Obama.As business leaders responsible for building strong management teams that can deliver results in very challenged markets, the Obama example of selecting experienced individuals with complementary skills is a reminder that our leadership ability will be judged by those with whom we surround ourselves.