Private Equity Funds for the Masses

ID NAME: NYTx,2004-05-16,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

3 7 15 25 50 75 85 93 97 ID NAME: NYTx,2004-05-16,BU,006,Bs-BW,E1ID NAME: NYTx,2004-05-16,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

3 7 15 25 50 75 85 93 97 ID NAME: NYTx,2004-05-16,BU,006,Bs-BW,E1THE NEW YORK TIMES, SUNDAY, MAY 16, 2004

DEALBOOK

ANDREW ROSS SORKIN Private Equity Funds For the Masses

ANTANT a piecepiece of HenryHenry R.R. prospectus, “You are not acquiring Kravis? Soon it may be an interest in T.H.L. private equity W yours for the asking. funds and our returns, if any, may be Kohlberg Kravis Roberts and substantially lower than those more than a dozen other buyout funds.” Blackstone’s prospectus firms are tripping over one another even includes a surprisingly explicit in a race to sell funds to the public, warning label: “There Are Signifi- opening up their once-exclusive in- cant Potential Conflicts of Interest.” vestment clubs. In the past month On the surface, the new funds may alone, blue-chip firms from Thomas seem a poor man’s version of the pri- H. Lee Partners to the Blackstone vate equity funds that have generat- Group to Gleacher Partners have an- ed double-digit returns since the nounced plans to create new invest- 1980’s. Hoping to capitalize on the ment funds and hope to sell more public’s appetite for better-than-av- than $6 billion in shares to the public. erage returns when interest rates are still low, the firms are creating Wall Street is aflutter, but buyer public closed-end funds to invest in beware: these new funds may carry the debt, and in some cases the equi- the cachet of “smart money,’’ but ties, used in leveraged buyouts. (In a they are more like expensive knock- closed-end fund, a finite number of offs, loaded with enormous risks, ex- shares are sold and can trade at val- tra costs and conflicts. ues considerably higher or lower Thomas H. Lee Partners, which than the underlying assets.) made its name buying Snapple in But the second-class status of the 1992 for $135 million and selling it new funds is obvious once you realize two years later for $1.7 billion, cau- that almost none will be invested tioned prospective investors in its alongside the private funds in the same companies. That may solve one conflict of interest, but it creates an even thornier issue: the public fund has the potential to become a wastebasket for investments that the private funds either passed on or erred on. The Kohlberg Kravis Roberts prospectus seems to say as much: “K.K.R. does not pursue numerous investment opportunities that come to its attention because they do not fit within the investment mandate of its

Minimum wage, in 2000 dollars.

$8 an hour Minimum wage, Minimum wage, in 2000 dollars. in 2000 dollars. 6 $8 an hour $8 an hour 4 Minimum wage, 6 in 2000 dollars. 6 2 $8 an hour 4 4 0 6 2 2 ’60’70 ’80 ’90 ’00 4 Source: Economy.com 0 0 ’60’70 ’80 ’90 ’002 ’60’70 ’80 ’90 ’00

Source: Economy.com Source: Economy.com 0 ’60’70 ’80 ’90 ’00

Source: Economy.com ID NAME: NYTx,2004-05-16,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

private equity funds. We expect that anything else than my money,” one the investment adviser will be able to prominent investor said — a senti- access these potential investment ment that has been echoed by others. opportunities” for the public fund. Why rush these funds to market? K.K.R. and others rationalize this The answer appears to be the payday by saying that their private funds that the firms and Wall Street invest- typically take majority positions in ment banks underwriting the offer- big companies. The public funds, ings stand to make. Both need to beat they argue, will give them the flexi- a closing window to take these funds bility to invest in companies that do public before interests rates rise not meet their private-fund criteria. much further, making funds less at- “We’re leaving deals on the table,” tractive. Some of the intended offer- one private-equity executive said in ings may not make it through that explaining the attraction. window. But that still doesn’t square. The The private-equity firms plan to firms are leaving some take their standard 2 deals on the table for a percent management reason: they may not be fee and 20 percent of the so good. profits, the way they do The other big conflict The public can with their private funds. is spelled out in the pro- But they are also taking spectus of Apollo Invest- join blue-chip a liberty that their pri- ment Management, part clubs, but the vate investors would of Apollo Advisers. Apol- probably laugh at: lo’s private funds, it memberships some are charging in- reads, “may from time to vestors for direct ex- time have overlapping appear to be penses as well. investment objectives” Apollo Advisers, with those of the public second class. founded by Leon D. fund. “As a result, the Black, formerly of partners of Apollo In- Drexel Burnham Lam- vestment Management bert, is the only firm so will face conflicts in the allocation of far to take one of these vehicles pub- investment opportunities to other lic, making a quick $17 million in Apollo funds,” it says. “When the management fees overnight after partners of Apollo Investment Man- raising $871 million. And here’s a lit- agement identify an investment, tle-known fact: Apollo can double they will be forced to choose which that fee simply by borrowing another investment fund should make the in- $871 million for the fund. vestment.” Clearly, a successful offering So, which fund do you think will get would be a godsend for a private eq- the next great deal? The public one, uity firm: it does away with the trou- where the investment has already ble of spending six months to a year been raised and will remain in perpe- traveling the country, cup in hand, to tuity, or the private one, which de- raise money from picky investors ev- pends on a constant infusion of cash ery couple of years. But should ordi- from discerning investors? nary investors play along? A banker These funds do not pose problems working on underwriting several big just for public investors. They are offerings said, “I wouldn’t put my also creating agitation among some mother in one of these.” big institutional clients. “I don’t want So how is Apollo’s offering doing? the guys I’m investing with to be It closed at $13.08 on Friday, down spending one second worrying about from its offering price of $15. Ø

Minimum wage, in 2000 dollars.

$8 an hour

0 ’60’70 ’80 ’90 ’00

Source: Economy.com ID NAME: NYTx,2004-06-13,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

ID NAME: NYTx,2004-06-13,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

THE NEW YORK TIMES, SUNDAY, JUNE 13, 2004

DEALBOOK

ANDREW ROSS SORKIN Backing a Client, And Selling Anyway

OLDMAN SACHS has long ers, has been quietly dumping its been the go-to firm on Wall shares in the company for months. G Street for companies threat- From Dec. 31, 2003, to March 31 this ened by hostile takeover bids. For year, Goldman Sachs reduced its years, the firm has made its name — holding by more than 60 percent — to and billions of dollars in advisory 1.3 million shares from 3.6 million — fees — successfully defending busi- according to filings. And it continued nesses under attack from unwanted to sell after that, traders say, poten- suitors. tially contributing to the steep de- So when NeighborCare, a small cline in the stock price in May that health care services company, re- led Omnicare to make its hostile bid ceived a hostile offer last month in the first place. from Omnicare, an industry behe- The fact that Goldman Sachs was moth, whom did it call? Goldman selling shares in NeighborCare, typi- Sachs, of course. On the advice of cally at prices much lower than Goldman Sachs, NeighborCare’s Omnicare’s $30-a-share bid, is hardly board quickly rejected the bid and a ringing endorsement of the defense scurried to open a counteroffensive. strategy it helped to develop for the It derided Omnicare’s $30-a-share of- firm — namely, that the company’s fer — a 70 percent premium at the shares are undervalued. time — as “blatantly opportunistic,” That apparent lack of confidence calling it an attempt “to deprive our is even more striking when you con- shareholders of the upside that we sider the other ties that Goldman believe is inherent in our plan.” Sachs has to NeighborCare: its in- But there is a problem with this vestment was one of the building picture that has gone unnoticed for blocks in the founding of the compa- the most part: Goldman Sachs, one ny, formerly called Genesis Health of NeighborCare’s largest sharehold- Ventures. And at least two executives connected to Goldman Sachs have served on the board of Neigh- borCare: Arthur Reimers, a former managing director of Goldman Sachs, is on the board now, and Jo-

The CO2 Trade Trading began this year in Europe for carbon dioxide emissions credits — a tool in The CO2 Trade the effort to curb greenhouse Trading began this year in gases. Prices in the United Europe for carbon dioxide States, where emissions are emissions credits — a tool in not capped, have never the effort to curb greenhouse topped $1. gases. Prices in the United 15 euros States, where emissions are not capped, have never topped $1. 12

15 euros 9

12 6

9 Price for a one- 3 metric-ton emissions credit in Europe, 6 deliverable in 2007 0 Price for a one- JFMAM 3 metric-ton emissions credit in Europe, Source: Bloomberg Financial Markets deliverable in 2007 0 The New York Times JFMAM

Source: Bloomberg Financial Markets

The New York Times ID NAME: NYTx,2004-06-13,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

ID NAME: NYTx,2004-06-13,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

Christophe Vorlet

seph A. LaNasa III, a current man- “These securities were purchased in a sideshow and not at all relevant to aging director at Goldman Sachs, is error by Goldman Sachs and subse- the real issues here.”And what do the a former member. quently unwound on the same day by research analysts at Goldman Sachs But there’s more: a day after Goldman Sachs.” think of NeighborCare? Oddly, the Omnicare made its offer public, the Nonetheless, the attempted trade bank does not “cover” the company. trading desk at Goldman Sachs said a lot, especially if you take a But if the views of other analysts made another surprising bet. It look at the name of the fellow who ex- and investors are to be believed, the bought “calls” of NeighborCare’s ecuted it: Mr. LaNasa, the former decision by the trading desk at Gold- shares at $30, in effect wagering that board member of NeighborCare. man Sachs to thumb its nose at its NeighborCare would be acquired — A spokeswoman for Goldman own bankers and sell its shares in a bet against its own firm’s ability to Sachs said that there was nothing NeighborCare may have been the defend NeighborCare. improper about the trade and and right move. The trade was voided when the that there is a Chinese wall between On Thursday, Joel M. Ray, an ana- compliance department at Goldman the firm’s trading operations and its lyst at Wachovia, downgraded Sachs learned of the calls later that investment banking business. NeighborCare to underperform from day. In its filing with the Securities NeighborCare refused to comment market perform. “While we do not and Exchange Commission, Gold- directly on its relationship with Gold- preclude OCR from raising the man Sachs included this footnote: man Sachs, saying, “We view this as tender offer price, we sense there is little upside potential to current share prices with the current offer in place,” Mr. Ray wrote, using ticker symbols as shorthand for company names. “If, however, OCR is unable to consummate the acquisition, we believe shares of NCRX will fall, pos- sibly to levels prior to the disclosure of merger activity.” NeighborCare’s shares, now at $30.51, could fall this week. Neighbor- Care is planning to formally reject Omnicare’s offer again and to present a new plan prepared by Goldman Sachs to enhance shareholder value, executives close to the company said. Maybe Goldman Sachs will keep selling. That’s what friends are for, right? Ø

2 The CO2 Trade Trading began this year in Europe for carbon dioxide emissions credits — a tool in the effort to curb greenhouse gases. Prices in the United States, where emissions are not capped, have never topped $1.

15 euros

Price for a one- 3 metric-ton emissions credit in Europe, deliverable in 2007 0 JFMAM

Source: Bloomberg Financial Markets

The New York Times

The CO2 Trade Trading began this year in Europe for carbon dioxide emissions credits — a tool in the effort to curb greenhouse gases. Prices in the United States, where emissions are not capped, have never topped $1.

15 euros

Price for a one- 3 metric-ton emissions credit in Europe, deliverable in 2007 0 JFMAM

Source: Bloomberg Financial Markets

The New York Times 3 7 15 25 50 75 85 93 97 ID NAME: NYTx,2004-06-27,BU,005,Bs-BW,E1 3 7 15 25 50 75 85 93 97 ID NAME: NYTx,2004-06-27,BU,005,Bs-BW,E1

ID NAME: NYTx,2004-06-27,BU,005,Bs-BW,E1 3 7 15 25 50 75 85 93 97

THE NEW YORK TIMES, SUNDAY, JUNE 27, 2004

DEALBOOK

ANDREW ROSS SORKIN Résumé Buffing, the Wall Street Way F you happened to read the news release of MGM Mi- tle or nothing. The corporations do so in hopes of getting rage’s planned takeover of the Mandalay Resort better terms on their loans, and the investment banks do I Group, you might have been struck by the first sen- so as a way to puff up their own deal lists so they can tell tence of the last paragraph. It said that six Wall Street prospective clients and investors that their mergers- investment-banking firms had helped advise MGM on and-acquisitions advisory practice has been involved in the deal. That wasn’t a typo. All six were listed: Morgan some of the biggest transactions. Besides, it costs the Stanley, Citigroup, Deutsche Bank, J. P. Morgan Chase, companies little — or, in the case of MGM, nothing — to Bank of America and Société Générale of France. add a friendly bank to its advisory team, or to the end of It is not uncommon for companies to hire one or two a news release. investment banks to help advise them on a transaction, The résumé buffing is being fueled by Wall Street’s especially when the deal is complex. Occasionally, com- obsession with so-called league tables — rankings companies involved in a hostile takeover have even hired piled every quarter by several big financial services da- three banks, partly as a defensive measure to prevent tabase companies — and the bragging rights associated them from working for potential interlopers. But who with them. This week, Thomson Financial will issue would hire six banks? midyear rankings, setting a off a new cycle of banker Not MGM, it turns out. In fact, with the exception of boasting. Morgan Stanley, none of the firms listed as working on At one time, the rankings may have offered a true the deal had anything to do with it. portrait of the state of the industry, but today the league No banker from Citigroup flew to Las Vegas. No tables are so skewed by fanciful representations that banker from Deutsche Bank did a valuation analysis. No they can no longer be trusted. To be sure, most firms banker from J. P. Morgan Chase stayed up late putting that have big lending arms have well-established, trust- together a PowerPoint presentation. No banker from ed bankers, but in these instances, what you have, really, Bank of America negotiated a particular sticking point are lenders masquerading as strategic advisers. Indeed, in the deal. And no banker from Société Générale even any executive or investor who looked at the rankings to left Paris. make any sort of important judgment about a firm’s ex- So why did MGM list all those banks? perience or volume of work would be looking in the In what appears to be an increasingly widespread wrong place. — and potentially misleading — type of back scratching, And Wall Street is beginning to concede it. Charles corporate America is often giving its biggest lenders Alexander, co-head of European mergers and acquisi- credit for strategic advisory work, even when they do lit- tions at Lehman Brothers, acknowledged the problem ID NAME: NYTx,2004-06-27,BU,005,Bs-BW,E1 3 7 15 25 50 75 85 93 97

last week while speaking on a panel with me in London at the International Bar Association’s annual mergers- and-acquisitions conference. “Financing has become a way of buying league table credit,” he said. “We all do it. We’re not immune.” True, this practice has been going on for years. But it had been under the table and its impact was marginal. Now, the practice seems to be overt and systemic. Just last fall, Warner Music’s deal with Edgar Bronfman Jr. included an overflow of banker credit, too. Bank of America, Deutsche Bank, Lehman Brothers and Merrill Lynch — which provided the debt financing — all made the adviser list, as did Jefferies & Company, AGM Part- ners, the media banking boutique, and Gary Fuhrman of GF Capital. And though some of the biggest lenders argue vigor- ously that their ability to lend provides them with a syn- ergistic opportunity to offer advisory work, they are often added to deals as a second or third adviser simply as a courtesy. A good question may be why ranking firms like Thomson allow the banks to, in effect, hijack the rankings. The answer, from the man who manages the tables at Thomson, Mark Siciliano, is that “it’s a self-policing effort.” The banks, he added, can challenge one another’s roles if they want. “I guarantee it does go on, but we have limited resources to investigate each deal.” And

Matt Collins when Thomson does look deeper, he said, “every adviser comes with the same story: they say they were an inte- gral part of getting the deal done.” Ø

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C M Y ID NAME: NYTx,2004-08-22,BU,005,Bs-4C,E1 YELO MAG CYAN 3 7 15 25 50 75 85 93 97 C M Y ID NAME: NYTx,2004-08-22,BU,005,Bs-4C,E1 YELO MAG CYAN 3 7 15 25 50 75 85 93 97

C M Y ID NAME: NYTx,2004-08-22,BU,005,Bs-4C,E1 YELO MAG CYAN 3 7 15 25 50 75 85 93 97

THE NEW YORK TIMES, SUNDAY, AUGUST 22, 2004

DEALBOOK

ANDREW ROSS SORKIN Wall Street Is Ogling the Real Google Payoff

ID Google take Wall Street, or vice versa? million more shares will become unrestricted. Much has been made of the cut-rate fees Google’s founders, Sergey Brin, 30, and Larry Page, Morgan Stanley and Credit Suisse First Boston 31, each sold fewer than half a million shares, or 1.25 D percent of their holdings. They had planned to sell much accepted to underwrite Google’s initial public offering. Instead of 7 percent of the offering’s total —the industry more into the initial offering, but decided at the last standard — the banks were strong-armed by the Wall minute to hold onto them because of worries that de- Street-hating founders of Google into taking a measly mand was weaker than expected. Google’s chief execu- fee of 2.8 percent of the $1.67 billion raised in the auction. tive, Eric Schmidt, 49, sold just 2.5 percent of his hold- That’s not chump change — the banks divvied up ings rather than the 5 percent he had planned to unload. some $47 million — but for an industry that is watching They are all sure to be selling more soon. its profits erode, the deal has some nervous bankers Then there are the venture capital firms: Sequoia grumbling. In fact, after paying to build complex new Capital and Kleiner Perkins Caufield & Byers had origi- computer systems to manage the unorthodox auction nally planned to sell 10 percent of their holdings in the and doling out ridiculously outsized salaries to the bank- company, a total of 4.5 million shares, but decided to ers who have worked on the offering for nearly a year, hold on. They won’t sit on the sidelines much longer. the banks won’t make much, if anything, on the deal. Their business model calls for them to “exit” their in- But critics of the banks miss the point. The I.P.O. vestments eventually. And Morgan Stanley and First was never about the money. It was a loss leader for the Boston would sure like to help. next deal — the Google Gravy Train to come or, in Hol- Now that Google has so much cash, it is likely to dip lywood parlance, a piece of the back end. In the next sev- its toe into mergers and acquisitions — music to the eral months and even years, Google will probably be un- ears of investment bankers. Again, you can bet that loading millions of additional shares on the stock mar- Morgan Stanley and First Boston will expect a seat at ket. You can bet your lunch reservations at the Four the table. And some fat advisory fees. Seasons that Morgan Stanley and First Boston will be at the head of the line to do those secondary offerings — UT will Morgan Stanley and First Boston get all and they won’t be accepting the same stingy fees. or any of this business, given the messy valua- That’s just the start. The banks’ private wealth B tions and other embarrassing setbacks through- management groups are sure to be cozying up to some out the Google I.P.O. process? Or will Google use Gold- 2,000 Google employees who have become millionaires man Sachs or some other bank? on paper, hoping to manage their new fortunes. And yes For the past several weeks, there has been finger- — ka-ching — they will charge a no-discount fee, too. pointing among Google’s management, the venture cap- The banks also plan to lend a helping hand to those italists and the bankers about setting I.P.O. expecta- employees selling shares, taking a commission with ev- tions too high. Will the bankers be held accountable? ery transaction. Next month, the first set of lockup Can they? After all, it was Google’s founders who want- agreements restricting the sale of shares by current ed to pursue the unorthodox auction and who, by all ac- and former employees will expire, opening the flood- counts, have tried to run it their way. gates on 4.6 million shares. Another lockup period ex- But Morgan Stanley and First Boston still seem to pires in 90 days, potentially putting 38.5 million more have an advantage. Unlike Goldman Sachs, which railed shares in play. And 24.3 million more shares could hit against the auction concept when they pitched Google the market after 120 days and an additional 24.3 million during a bake-off earlier this year, Morgan Stanley and in 150 days. The biggest wave is after 180 days, when 171 First Boston took on the challenge when Google asked them to think outside the box regarding the I.P.O. So with the offering now complete — and so far successful — you can forgive the banks for wanting to press the “I’m feeling lucky” key. Ø ID NAME: NYTx,2004-09-05,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

ID NAME: NYTx,2004-09-05,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

THE NEW YORK TIMES, SUNDAY, SEPTEMBER 5, 2004

DEALBOOK

ANDREW ROSS SORKIN Good Deals for Banks, Both Coming and Going

HEN Loews Cineplex Entertain- haps even more at firms best known for ment was sold this summer to a their advisory business, like Goldman Sachs W consortium of investors, the deal and Morgan Stanley. So far, no problems seemed pretty standard. A bunch of private have become evident, but it also appears to equity investors anted up some cash and be a Securities and Exchange Commission then borrowed some more from Wall Street inquiry waiting to happen. After all, it is one banks to pay the $1.5 billion asking price. thing to advise a buyer and lend it money, But the banks that lent the money, Citi- but quite another entirely to work both sides group and Credit Suisse First Boston, had of the deal. another role in the deal: they were paid ad- The conflicts are so rife, where to start? visers to the owners of Loews, which had First, there is the question of allegiance. Os- hired them to run the auction. tensibly, an investment bank hired to advise Call it Wall Street’s version of vendor fi- the seller represents the best interests of the nancing — or, potentially, conflict-ridden seller. But the moment the prospective buy- double dipping. er also becomes a client, with its own inter- With so few mergers and acquisitions ests, the interests of both sides are potential- these days and with fees shrinking for the ly in a position to be compromised. occasional ones that do come along, bankers The problem has become even knottier. In have found a new way to milk more cash out the past, loans were made mostly to private of deals. Their pitch goes something like equity groups, but they are now also being this: “We’ll sell your company and make extended to big corporations. That is further sure it gets sold by lending the buyers the enticement for banks to cozy up to the buy- money.” er, by way of the loan. Once the deal is So the bank ends up collecting not only an made, after all, the bank loses the seller as a advisory fee from the seller, but also inter- client. Better to get hitched to the buyer, a est payments from the buyer. On Wall possible future client. Street, the term for this kind of transaction The other big potential problem arises is “staple financing” because, well, that’s when the sell-side adviser has to render a what it is: the loan agreement is often liter- fairness opinion on the deal. If you thought ally stapled onto the deal’s term sheet. “Fi- fairness opinions were a joke to begin with, nancing Made Easy” could be its slogan. you might end up in a hospital with laughing While staple financing is not a new prac- pains after reading a fairness opinion on a tice, it has become more routine in the past deal where you know both sides are paying year — not just among the big banks known the bank. for lending, like J. P. Morgan Chase, but per- Wall Street defends staple financing as a

Bulging Debt

Ratio of nonfinancial 2.00 Bulging Debt debt to gross domestic product 1.75

Ratio of nonfinancial 2.00 debt to gross 1.50 domestic product 1.75 1.25

1.50 1.00

40’s 60’s 80’s 00’s 1.25 Source: Federal Reserve Board 1.00 The New York Times 40’s 60’s 80’s 00’s

Source: Federal Reserve Board

The New York Times ID NAME: NYTx,2004-09-05,BU,006,Bs-BW,E1 3 7 15 25 50 75 85 93 97

Stuart Goldenberg

smart and important financing option that bank would make up the fee by collecting in- can give sellers a more robust auction. Typi- terest from the buyers. cally, the guarantee of financing for buyers The banks like to say that there is a Chi- means that more companies and private eq- nese wall between the bank employees who uity firms are likely to bid. Banks have suc- manage an auction and those who offer the cessfully sold sellers on this idea by con- financing. But in practice, it doesn’t always tending that allowing them to finance the work that way. When the bank, as sales ad- deal reduces the risk that the deal won’t be viser, sends sales books to prospective buy- completed. They also like to argue that al- ers, the packages often include information lowing them to finance the deal speeds up about contacting the bank’s lending arm. the auction process and keeps it more confi- But in reality, who does the buyer really dential because bidders don’t have to bring call? The guy whose phone number is on the in multiple banks to finance the deal. cover letter, the “advisory” banker. Some clever sellers also like the idea, be- It is plausible that staple financing, man- cause they see an opportunity to reduce the aged properly by ethical and competent peo- fee they have to pay. Several bankers said ple, can be beneficial for both sides. But in privately that sellers had allowed them to the wrong hands — and Wall Street has had offer staple financing only after the bank cut its share of those over the years — the prac- its advisory fee. The sellers argued that the tice could turn dangerous. Ø

Bulging Debt

Ratio of nonfinancial 2.00 debt to gross domestic product 1.75

1.50 2 1.25

1.00

40’s 60’s 80’s 00’s

Source: Federal Reserve Board

The New York Times C M Y C M Y YELO MAG CYAN 3 7 15 25 50 75 85 93 97 ID NAME: NYTx,2004-09-19,BU,005,Bs-4C,E1ID NAME: NYTx,2004-09-19,BU,005,Bs-4C,E1YELO MAG CYAN 3 7 15 25 50 75 85 93 97 C M Y C M Y YELO MAG CYAN 3 7 15 25 50 75 85 93 97 ID NAME: NYTx,2004-09-19,BU,005,Bs-4C,E1 ID NAME: NYTx,2004-09-19,BU,005,Bs-4C,E1 YELO MAG CYAN 3 7 15 25 50 75 85 93 97

Shelters From Disasters Shelters From Disasters Catastrophe bonds, created after the devastating Catastrophe bonds, created after the devastating Hurricane Andrew of 1992, have been used Hurricane Andrew of 1992, have been used Shelters From Disastersincreasingly by the insurance industry to cover their increasingly by the insurance industry to cover their potential losses in the event of a natural disaster. Shelterspotential losses inFrom the event Disasters of a natural disaster. Catastrophe bonds, created after the devastating Catastrophe bonds, created after the devastating Hurricane Andrew of 1992, have been used$1.8 billion CATASTROPHE BOND MARKET 2003 ISSUES Hurricane$1.8 billion AndrewCATASTROPHE of 1992, have BOND been MARKET used 2003 ISSUES increasingly by the insurance industry to cover their Bonds can beincreasingly issued for by the insurance industry to coverBonds their can be issued for 1.6 TOTAL RISK 1.6 TOTAL RISK multiple disasters and regions, potential losses in the event of a natural disaster. multiple disasterspotential and regions,losses in the event of a natural disaster. CAPITAL ISSUED so categories do not equal theCAPITAL ISSUED so categories do not equal the EACH YEAR 1.4 EACH YEAR total for the year1.4 total for the year $1.8 billion CATASTROPHE BOND MARKET 2003 ISSUES $1.8 billion CATASTROPHE BOND MARKET 2003 ISSUES Bonds can be issued for California earthquake 1.2 Number of California earthquake1.2 Number of Bonds can be issued for 1.6 TOTAL RISK multiple disastersbonds issued and regions, $848 million 1.6 TOTALbonds RISK issued multiple$848 million disasters and regions, CAPITAL ISSUED so categorieseach yeardo not equal the CAPITALeach year ISSUED so categories do not equal the EACH YEAR 1.0 Japan earthquake1.0 Japan earthquake 1.4 total for the year 1.4 EACH YEAR total for the year 801 801 Number of 0.8 California earthquake 0.8 1.2 1.2 Number of CaliforniaEurope windstorm earthquake bonds issued $848 million Europe windstorm bonds issued $848575 million each year 0.6 575 0.6 1.0 Japan earthquake 1.0 each year JapanEast/Gulf earthquake Coast hurricane 801 East/Gulf Coast hurricane 0.4 0.4 801517 0.8 517 0.8 Europe windstorm Europe windstorm Japan typhoon Japan typhoon 0.2 5 5758 10 9 7 7 8 0.2 5 8 10 9 7 7 8 575 0.6 278 0.6 278 East/Gulf Coast hurricane East/Gulf Coast hurricane 0 Other 0 Other 0.4 517 0.4 517 ’97 ’98 ’99 ’00 ’01 ’02 ’03 225 ’97 ’98 ’99 ’00 ’01 ’02 ’03 225 Japan typhoon Japan typhoon 0.2 5 8 10 9 7 7 8 0.2 5 8 10 9 7 7 8 Source: Guy Carpenter278 & Company Source:The Guy New CarpenterYork Times & Company 278 The New York Times 0 Other 0 Other 225 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’97 ’98 ’99 ’00 ’01 ’02 ’03 225

Source: Guy Carpenter & Company The New York Times Source: Guy Carpenter & Company The New York Times

C M Y ID NAME: NYTx,2004-09-19,BU,005,Bs-4C,E1 YELO MAG CYAN 3 7 15 25 50 75 85 93 97

THE NEW YORK TIMES, SUNDAY, SEPTEMBER 19, 2004 DEALBOOK

ANDREW ROSS SORKIN The MGM Approach: Pay Me First, Sign the Deal Later The MGM Approach: Pay Me First, Sign the Deal Later

HE term “in principle” is usually a bright red flag. So when a consortium of investors led by the T Sony Corporation of America announced that it had reachedShelters a deal in principle Fromto acquire Disasters Metro-Gold- wyn-MayerCatastrophefor nearly bonds, $5 billion, created it came after as the no devastatingsurprise that thereHurricane were whispers Andrew on of Wall 1992, Street have questioning been used whether the tentative deal would be completed. increasingly by the insurance industry to cover their But the whisperers may have missed the fine print, includingpotential one of thelosses most in unusual the event deal of termsa natural in takeover disaster. history: MGM said it had “received a security deposit of $1.8 billion CATASTROPHE BOND MARKET 2003 ISSUES $150 million” from the consortium, which includes the buyout firms , Bonds can be issued for 1.6 ProvidenceTOTAL Equity RISK Partners Texas Pa- cific Group and DLJ Merchant Banking Partners as multiple disasters and regions, CAPITAL ISSUED so categories do not equal the well as a partnership with . Sony had the higher 1.4 EACHComcast YEAR total for the year bid, but it was the last-minute deposit, structured much like the earnest1.2 moneyNumber that home of buyers hand over California earthquake when making a contractbonds offer, issued that pushed Time War- $848 million each year ner, the expected1.0 winner, out of the running. Japan earthquake Big corporate mergers often include a break-up fee 801 to compensate0.8 the buyer or seller in case the deal falls apart, but it is exceedingly rare for the buyer to make aEurope windstorm nonrefundable0.6 deposit on a deal that still requires addi- 575 tional due diligence and is more than a week away fromEast/Gulf Coast hurricane 0.4 517 Japan typhoon 0.2 5 8 10 9 7 7 8 278 Illustration by The New York Times 0 Other ’97 ’98 ’99 ’00 ’01 ’02 ’03 225

Source: Guy Carpenter & Company The New York Times C M Y ID NAME: NYTx,2004-09-19,BU,005,Bs-4C,E1 YELO MAG CYAN 3 7 15 25 50 75 85 93 97

Shelters From Disasters Catastrophe bonds, created after the devastating Hurricane Andrew of 1992, have been used increasingly by the insurance industry to cover their potential losses in the event of a natural disaster.

$1.8 billion CATASTROPHE BOND MARKET 2003 ISSUES Bonds can be issued for 1.6 TOTAL RISK multiple disasters and regions, CAPITAL ISSUED so categories do not equal the 1.4 EACH YEAR total for the year

1.2 Number of California earthquake bonds issued $848 million each year 1.0 Japan earthquake 801 0.8 Europe windstorm 0.6 575 East/Gulf Coast hurricane 0.4 517 Japan typhoon 0.2 5 8 10 9 7 7 8 278 0 Other ’97 ’98 ’99 ’00 ’01 ’02 ’03 225

Source: Guy Carpenter & Company The New York Times

official sign-off by all companies’ boards. way it could lose would be if a higher bid for MGM The security deposit maneuver was even more un- emerged, in which case MGM would have to pay back usual because the entire cost was borne by Sony. The the $150 million to Sony. other investors refused to contribute to the payment, ex- The decision by Mr. Stringer, backed by Robert S. ecutives close to the negotiations said. (It makes sense Wiesenthal, Sony’s chief financial officer, was made eas- that the private equity investors refused to ante up; ier by a $4.25 billion loan commitment from J. P. Mor- their agreements with their investors would never allow gan Chase & Company. That enormous loan, negotiated such a risky move.) So it was left to Sony of America’s by James B. Lee Jr., vice chairman of J. P. Morgan, and chairman and chief executive, Howard Stringer, to wire Mr. Stringer at the United States Open last Saturday, all $150 million to MGM. was more than the group needed. So even if one of Sony’s If something goes wrong as the consortium and partners dropped out, it would still have enough finan- MGM try to sign the deal this week, Sony will be left on cial firepower to close the deal. the hook. Mr. Stringer’s decision may appear especially The paid-in-advance security deposit was the brain- risky because it leaves him vulnerable to the possibility child of Kirk Kerkorian, MGM’s controlling shareholder, that his partners could try to “retrade” — that is, rene- and Alex Yemenidjian, MGM’s chief executive, who gotiate — the terms of their investment in the deal. And were justifiably nervous that the finicky Sony-led group the private equity firms have not exactly been perfect might try to back out of the deal or change the terms af- partners with one another, especially Texas Pacific ter Time Warner had given up, leaving them with no lev- Group, which kept trying to alter the terms of its in- erage. MGM had tentatively negotiated a $150 million volvement. The consortium had been bogged down by in- “business interruption fee” with Time Warner if that fighting ever since it made its original bid for MGM in deal fell apart, but it was hardly a security deposit. In- April, opening the field to an offer from Time Warner. deed, according to the executives, MGM never expected But Mr. Stringer’s gamble may be canny. The pay- the Sony-led group to meet its nonrefundable deposit de- ment guaranteed that the Sony group would win the auc- mand. tion, and the terms of the deposit give it the equivalent of But it did. Will other deal makers now have the a nine-month option to buy the company. In fact, the only chutzpah to make — or meet — the same demand? Ø

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THE NEW YORK TIMES, SUNDAY, NOVEMBER 28, 2004

DEALBOOK

ANDREW ROSS SORKIN For a Takeover Artist, One Bluff Too Many?

ARL C. ICAHN, the pushy fi- — he is estimated to be worth some nancier, is at it again. $7 billion — threatening to take over C This time Mr. Icahn is play- companies and then rarely going ing “chicken” with Mylan Laborato- through with the proposition. ries, a maker of generic drugs that is About a year ago, he pulled virtual- trying to buy a rival, King Pharma- ly the same stunt he is trying with ceuticals. After failing through per- Mylan on a company called Visx, sonal persuasion to dissuade Mylan starting a proxy fight and then mak- from pursuing King, Mr. Icahn de- ing a bid. After much vitriolic back- cided to play hardball: he made a and-forth, he backed down. He got in- $5.4 billion bid for Mylan. vestors in a tizzy another time last Of course, the moment that Mr. year, when he started buying shares Icahn’s offer crossed the wire with of Kodak, with investors speculating his trademark comments demeaning that he could start a fight to take con- the company’s board members — he trol there, too. Again, nothing of con- said that if they didn’t consider his sequence ever happened. Mr. Icahn, who says his offer is se- proposal, it would “constitute a quin- rious despite his encouraging Mylan tessential example of a board abro- to seek other bids, seems to almost gating its responsibility” — shares of revel in the power he has to move the Mylan soared. Then, right on cue, in- market by buying up shares or mak- vestors started to question whether ing an offer — which is typically the deal with King would be complet- filled with so many conditions that it ed or thwarted. is impossible to believe that they But the real question is why any- could ever be met. But once the stock one on Wall Street takes Mr. Icahn has popped, he’s often out the door. seriously anymore. He is Wall And he rarely declares when he is Street’s perennial Boy Who Cried selling — in contrast to occasions Wolf. Mr. Icahn has a made a fortune when he buys stock and publicly an- nounces his takeover efforts. It is easy to understand Mr. Icahn’s motivation in breaking up the Mylan-King deal. He is “long”

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Stuart Goldenberg

shares in Mylan — he bought them against him with some unusual right after the deal was announced moves. A bevy of hedge funds, led by and the shares had dropped — and Perry Capital and Citadel, which had stands to make money if Mylan is ac- bought King shares in the hope that quired or if the King deal falls the deal with Mylan is completed, through, in which case Mylan’s stock have started buying shares of Mylan would presumably rise. At the same to help push the deal through. But to time, Mr. Icahn is protect themselves, “short” King, meaning some of these investors that he would profit if have begun using so- that stock dropped, Some big phisticated swap trades which it would almost with banks so that they undoubtedly do if its ac- investors are have no exposure to quisition by Mylan fell Mylan’s stock price. through. lining up to This way, the investors Mr. Icahn is not the have voting power, but only investor hoping to challenge no real economic inter- kill the Mylan-King deal. Carl Icahn. est in Mylan. UBS Global Asset Man- It is a fairly innova- agement, which owns tive maneuver that may about a 3.6 percent vot- have important implica- ing stake in Mylan, has also come out tions for the takeover business, and against the deal, arguing that it in this instance will make Mr. would make Mylan much less profit- Icahn’s efforts doubly difficult. able, distract management and upset Whatever the outcome, chances the introduction of Nebivolol, one of are that Mr. Icahn, who didn’t return its most anticipated new drugs. a call seeking comment, will not be- What makes this fight with Mr. come the new owner of Mylan. But Icahn particularly interesting is that then again, he probably never want- several big investors are lining up ed it anyway. Ø

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