Case Blog

Two weeks ago in my posting, $1 Trillion Dollar Rescue Plan & a Changing of the Guard, I closed with: “This was clearly a historic week on the continent and in the United Kingdom. There is a new determination to deal with the structural issues that have left most of the countries with debt loads that the global bond markets can not support in the long run, and there is a new a resolve by these countries to put themselves on a course that will support sustainable long-term growth. The Obama administration will need to start addressing deficit reduction as well as we approach the November mid-term elections. Those of us in the private equity business will be closely watching the impact of government actions on recovering credit markets.”

Since I wrote that, Treasury Secretary Geithner visited England and Germany on his way back from China and advised them to take action to put the $1 trillion dollar rescue plan into effect. “After two years in which an historic financial crisis seemed to deprive the U.S. of its self-confident global economic leadership, Mr. Geithner signaled a newfound willingness to reassert American authority on the future of the world economy… ‘What Europe should do is implement the program they laid out,’ Mr. Geithner said Wednesday. The basic lesson of financial crises is that you have to come in and act quickly and with force.” (WSJ: May 26, 2010) Then on the 27th China denied it was reviewing its holding of Eurozone debt. “The denial—which followed a Financial Times report Wednesday about the State Administration of Foreign Exchange, an agency that rarely answers questions from the media—highlights China’s awareness of how volatile financial markets have become increasingly sensitive to even hints about how Beijing deploys its enormous foreign reserves.” (WSJ: May 27, 2010)

In spite of all of these efforts, the global equity markets were pummeled in May. “Between the ‘Flash Crash’ and angst over the worsening crisis in Europe, stocks suffered a dismal May, posting their worst decline for the month since Franklin Roosevelt was in the White House.” (WSJ: May 29, 2010) To further contribute to the slide, Fitch announced that they were downgrading Spain’s credit rating. (FT: May 28, 2010) What does this new religion about reducing deficits as a percentage of GDP mean going forward? I turned to Bill Gross’ June Investment Outlook letter, “Three Will Get You Two (or) Two Will Get You Three.” (Pimco) “So the developing predicament is becoming more obvious to Shakespeare’s ‘lenders and borrowers be,’ ” Gross writes. “Fiscal tightening and budget conservatism may have come too late for Greece and its global lookalikes. Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that likely face New Normal growth rates and a continued bumpy journey toward that destination. Investors must respect this rather tortuous journey in the months and years ahead for what it is: A deleveraging process based upon too much debt and too little growth to service it. No longer will ‘two get you three’ in the investment world. Not 1,000%, but 4-6% annualized returns for a diversified portfolio of stocks and bonds is the likely outcome. And be careful — sometimes ‘three gets you two.’ ”

On a more positive industry note, the conference and exhibition business is showing signs of life after a very difficult ‘09. Informa, which derives almost 50% of its global revenues from events and training business, is a candidate “for promotion in next month’s Footsie index reshuffle.” (FT: May 25, 2010)

We are also enjoying a strong recovery in our events business at Asset International. On May 20th and 21st, ai5000 Editor-in-Chief Kip McDaniel produced our first Chief Investment Officer Summit (CIOS) in New York City. The event received high marks from all the attendees and sponsors. Our featured dinner speaker was Nassim Nicholas Taleb, best-selling author of The Black Swan, which has just been released in a second edition with a new section, “On Robustness and Fragility.” I highly recommend that this book gets added to your summer reading list.

We will hold our second CIOS event of the year in London on October 7th and 8th and once again Nassim Taleb will be the featured speaker and will explain how Black Swan events result in the market volatility we are experiencing.

As we headed to JFK early on Monday morning for our BA flight to London, we learned that over the weekend the Eurozone leaders had fashioned a rescue plan that went well beyond Greece and assured the world that Spain and Portugal would not be the next dominoes to fall. Shortly thereafter both countries announced new austerity moves to further assure the world debt markets that they were serious about bringing down their debt levels as a percentage of GDP. The I.M.F. and the U.S. Federal Reserve contributed in their own way to further assure the world markets. By the time we landed in London on Monday evening the world’s stock markets had rallied for their biggest one-day gain in over a year.  As the European leaders went home, the Euro remained under pressure and by the weekend had fallen to an 18-month low — below $1.25 to the EU €1. The world markets remained concerned that the new austerity measures imposed on the PIIGS (Portugal, Ireland, Italy, Greece & Spain) could lead to another recession in Europe while the world slowly recovers from the Great Recession. (NY Times: May 14, 2010)

Against this backdrop, when we retired on Monday evening Prime Minister Gordon Brown was still clinging to the hope that he could derail the discussions between the Liberal Democrats and the Conservatives by entering into discussions with the Liberal Democrats on forming a Labour-led coalition.  While Mary Claire and I were out to dinner with friends late on Tuesday evening, it became clear that Labour’s 13-year run had come to an end. The next day Gordon Brown tendered his resignation to the Queen and a swift transition began with David Cameron meeting with the Queen and then quickly moving into 10 Downing Street as the new prime minister. The Conservatives and their new allies, the Liberal Democrats led by Nick Clegg, quickly announced to the country that they had formed the first coalition government since Winston Churchill’s coalition government during the darkest hours of World War II.  Labour will have a new leader, but Gordon Brown will retain a seat in Parliament. Nick Clegg has become David Cameron’s deputy and at their first cabinet meeting announced their own set of austerity measures to deal with the large deficit that grew out of the Great Recession. The Pound Sterling strengthened versus the Euro as the week unfolded.

This was clearly a historic week on the continent and in the United Kingdom. There is a new determination to deal with the structural issues that have left most of the countries with debt loads that the global bond markets can not support in the long run, and there is a new a resolve by these countries to put themselves on a course that will support sustainable long-term growth. The Obama administration will need to start addressing deficit reduction as well as we approach the November mid-term elections. Those of us in the private equity business will be closely watching the impact of government actions on recovering credit markets.

Mary Claire and I have flown to Dublin for the weekend and will return to New York on Monday evening.

Last week Michigan Senator Carl Levin, Chairman of the Senate Subcommittee on Permanent Investigations, brought Goldman Sachs’ (GS) Chairman and CEO Lloyd Blankfein and a number of his colleagues to Washington, D.C. to hold a hearing on the fabled Abacus derivative deal. The cast from the Goldman side included Fabrice Tourre — Tourre is also known as “Fabulous Fab” in the press — who structured the transaction with input from John Paulson. (Paulson is no relation to Hank Paulson, the former Treasury Secretary in the Bush administration and Blankfein’s predecessor at Goldman Sachs. John Paulson is the founder of the hedge fund Paulson & Co.) The 11 hours of hearings provided countless news clips on broadcast newscasts and across numerous websites, along with cute headlines for the tabloid press. In the end it amounted to political theatre, with the Goldman Sachs team, led by Blankfein, vigorously defending their transactions. While many of us may prefer the old image of the sage investment banker providing advice and counsel to their clients, it is clear that the current leadership team at Goldman Sachs is led by former traders that view deals that have counter-parties as the normal course of business.

In the end I find myself joining with former President Bill Clinton and the Sage of Omaha, Warren Buffett, chairman and CEO of Berkshire Hathaway (BRKA). Speaking at a conference on April 28th, Bill Clinton raised the question: did the Abacus transaction  break any law? Clinton did this in the context of the current civil suit against Goldman Sachs and the possibility that had been raised of criminal charges. (CNN: April 28, 2010) Buffett came to the staunch defense of both Goldman Sachs and Lloyd Blankfein at Berkshire Hathaway’s annual shareholders event in Omaha, Nebraska over the weekend. While the press and hearings have provided political theatre, it has not gotten us any closer to a solution on how to avoid another subprime mortgage debacle in the future.

The primary focus of this blog has always been to offer my perspective on specific deals and the overall deal climate in the B2B space. However, the events of the past year required most of my commentary to focus on the terrible economic climate we found ourselves in, with very few significant deals taking place. Yesterday, before the market opened, Pearson (PSON.LN) announced that they were selling their stake in Interactive Data Corporation (IDC) to two private equity firms. Pearson had stated in mid-January that they were exploring strategic options for IDC, a financial market data provider in which they hold a controlling interest of 61 percent.  Silver Lake & Warburg Pincus will be paying $33.86 per share, which represents a 33% premium over IDC’s January 14 share price, which is the day before they announced their strategic review. (WSJ: May 4, 2010)  When a financial services firm is once again in demand, it’s clear that the deal climate has improved dramatically.

Another such deal is Salesforce.com’s (CRM) announcement on April 21st of a definitive agreement to acquire Jigsaw Data, the cloud-based data services company in Silicon Valley. Jigsaw was backed by El Dorado Ventures, Norwest Ventures and Austin Ventures. I am pleased to note that I had the privilege of serving on the Jigsaw Board over the past 3 years and working closely with the other board members and Jim Fowler, the founder of Jigsaw. Together with Jigsaw senior vice president and COO Kevin Akeroyd, Jim built a compelling crowd-sourced data company that grew significantly right through the Great Recession and exceeded every growth metric the board established. I cannot think of a better outcome than Jigsaw joining Salesforce.com. This acquisition was exceptional for all involved and I applaud the entrepreneurship displayed by the Jigsaw team.

Mary Claire and I are off to London next week and I trust that I will have some special insights to share with you on tomorrow’s U.K. election upon my return.