Discussion in 'Wall St. News' started by richardyu301, Oct 26, 2005.
No Surprise Here: Money Talks
On the Street, Firms Pay Plenty
In Fees to Make Deals Happen;
Private Equity vs. Big Corporations
By DENNIS K. BERMAN and HENNY SENDER
Staff Reporters of THE WALL STREET JOURNAL
October 27, 2005; Page C1
Welcome to Wall Street's most elite frequent-flier club.
The 10 names listed in the accompanying table are the biggest spenders on Wall Street, doling out hundreds of millions in fees to Street firms, stemming from their financial deals and financings. Like high-roller lists circulated around the Las Vegas strip, such corporate rankings are required reading for those competing for what is dubbed "share of wallet" in Street-speak. It is these companies that get the best access to "deal flow" (promising merger ideas, for example), as well as advice and key players at investment banks and law firms.
The list also goes a long way in explaining the changing power dynamics on the Street, where even the biggest corporations are skinflints compared with private-equity firms.
Private-equity firms, which get their funds from institutions and wealthy individuals, use their money to compete with the big corporations in acquiring companies or units of companies, usually issuing a lot of debt to finance their deals. Those firms dominate the top 10 list, controlling seven of the slots, while occupying two of the next 10, as compiled by data provider Dealogic. Even number 13 on the list, SunGard Data Systems Inc., spent more than $100 million as part of its agreement to get acquired by a mass consortium of private-equity buyers.
Remarkably, the buyout shops say that the Dealogic numbers, which tally up the fees spent on loans, bonds, stocks and merger advice, drastically underestimate their final spending tab. Factoring in all the fees paid from the businesses in which it invests or controls, Blackstone Group estimates it had paid about $700 million in fees each year since 2003.
The firms' influence stretches still deeper than a one-year ranking. Private-equity firms are in the very business of buying and selling companies, issuing torrents of fee-producing debt and stock along the way. "When you think about the lifecycle of a leveraged buyout, it's an attractive fee pool that can last for years," says Thomas Gahan, Deutsche Bank's head of corporate and investment banking for the Americas.
By comparison, any one company -- say, Kellogg Co. -- may dole out big fees one year and not call on a big bank until years later. Citigroup Inc., for instance, reckons that 50% of the initial public offerings since the early 1990s have come from private-equity-backed companies. And close to 50% of high-yield transactions have some connection to the buyout shops, Citigroup estimates.
"The private-equity firms have become the gas pedal, the brake and the steering wheel of the public-equity markets," says Michael Klein, Citigroup's chief executive officer of global banking.
In the late 1990s, the private-equity players might have accounted for 10% of any one bank's investment-banking revenue, says John Coyle, the head of J.P. Morgan Chase & Co.'s private equity-client group. That number is now around 25%, he says.
In adapting to this concentration of power, Wall Street is changing how it structures itself, deploying its best talent to work with the private-equity firms. Across the banks, the "first calls" on potential investments are inevitably flowing to the best customers. And at the likes of Deutsche Bank AG and Credit Suisse Group's Credit Suisse First Boston, there might be 100-plus bankers interacting with a private-equity buyer at any one time.
The buyout shops are acutely aware of their own clout, eager to deploy spreadsheets showing how much they spend at an individual bank. And they aren't shy about pushing bankers for discounts, either. One person who works closely with private equity recalls a typical conversation over financing: "You know I do five to 10 deals a year. If you want my business, you're going to have to give me better terms."
Indeed, the balance of power has shifted so drastically that the private-equity firms have been able to exact ever sweeter terms on even their riskiest financings. In the past, the banks were able to insist that if the private-equity firms had to renew bank borrowings on risky buyout loans, they would pay ever steeper charges on those borrowings. That in turn made the private-equity firms more cautious about their purchases. Today, those sorts of conditions are a thing of the past.
The private-equity shops have also bristled at direct competition from Wall Street banks' own private-equity arms. The buyout shops pushed J.P. Morgan Chase & Co. to separate from its large private-equity business, while CSFB is planning to raise a smaller fund than it has in the past. Private investing has proved so lucrative, however, that the banks are creeping back into the business, and that could heighten tensions as both sides chase the same deals.
Skilled deal makers that they are, the private-equity firms also know how to spread their influence for maximum effect. In a number of recent transactions, a bank might think it has an exclusive advisory relationship to a buyout client, recounts Fred Wainwright, executive director of the Center for Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business. But by the time the final transaction is announced, a whole list of advisers has been added.
"I don't think there is a power struggle going on," Mr. Wainwright says. "It's more of a symbiotic relationship."
Which raises the question of just how, and why, that relationship may sour. Some bankers are now privately questioning how far they are willing to go to serve their clients. For instance, it is now common for a buyout fund to borrow 80% of the purchase price for a company, borrow an additional 20% three months later, and then do a third refinancing to pay itself a dividend related to the deal. For bankers, the fear lurks that this aggressive lending will yield a spate of bankruptcies in the near future.
There's also the fate of Refco Inc., the fallen commodities broker that was taken private and then offered to the public in a stock sale by Thomas H. Lee Partners LP. It isn't clear how widespread the damage will be following Refco's filing for bankruptcy protection, but Refco appears to have punctured the aura of invincibility surrounding private-equity firms.
Indeed, on Tuesday, Thomas H. Lee and Bain Capital LLC pulled out of a deal to purchase education-supplies company School Specialty Inc. for $1.8 billion after School Specialty posted poor results and lenders balked at financing terms. A Bain executive said the breakdown was because of structural and market-related challenges.
"If financial risk begins to look too high and the lenders begin to tighten up, the engine that created all these returns is going to vanish in front of your eyes," says Colin C. Blaydon, Director of the Dartmouth private-equity center.
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