Issues & Opinions

Based on the events of Friday afternoon, I’m reminded of the only phrase I can recall from Nancy Reagan’s tenure as First Lady: “Just say no”.

About an hour before Wall Street closed for the week, I got a call from an old friend who’s an equity analyst for an east coast hedge fund. He wanted to know whether it was possible that there was any truth to the rumor he’d heard about a merger in the waste industry.

That merger? Republic Services and Allied Waste Industries.

While it turns out that I should have just said no, that I had no idea, and moved on to other matters, I first told him that I’d heard no such rumor. Not that all, or any, rumors run through me before they’re generally available to the rest of the populace, mind you, but I do have some experience in the waste industry, including some related to M&A activity. So his question wasn’t out of place, my specific ignorance of this rumor notwithstanding.

I thought about it for a bit, and then, while allowing that of course anything’s possible, told him that this was highly unlikely, for a lot of reasons. For instance, have a look at these two track records:

---

One of those two report cards is decidedly not like the other, yet this is billed as a “merger of equals”. Hey - we’re in the 21st Century - so we’ve got to say whatever makes the kids feel good about themselves, I guess. Everyone gets a trophy! I realize, of course, that they’re roughly equal in market cap, with Allied being the bigger of the two by several hundred million dollars, but that market cap was smaller than RSG’s before the rumor of a deal leaked out, and with good reason.

Feel free to have a look for yourself - RSG has outperformed most of the waste industry by a noticeable margin in the last five years.
Read the rest of this story »

This question might apply both to the Marketwatch website and to the principals in the Clear Channel LBO saga (details at Dan Primack’s always enjoyable peHub).

First, though, Marketwatch - their blast email message a bit ago, was entitled:

Clear Channel Communications: Judge orders banks to fund $19 billion buyout

As this is a subject that interests me, and I happened to be up and at the computer when it arrived, I clicked on it, only to find the title now was:

Clear Channel: Judge grants restraining order against banks

Which actually makes much more sense, and congrats to them on the quick kick-save. The first headline was so intriguingly worded as to be downright inflammatory (unintentionally, on the inflammatory part, I’m sure). The case went before the judge only within the last 12 hours or so, and it would seem to me (a non-lawyer) that an order to fund a $19 billion deal, under terms that everyone seems to think will start out causing a large hole in the pockets of the funding banks, would at least take longer to arrive at.

From Heidi Moore’s WSJ Deal Blog entry of yesterday afternoon, “Clear Channel: What Would Yoda Say?”, a plausible argument that neither the PE group (THL & Bain) nor the banks want to carry the deal forward:

In this upside down world, it’s easy to see doubts behind every negotiation. Blackstone Group, for instance, pointed to apparently onerous regulatory requirements as a reason it was wary of the buyout of ADS. Last week, the OCC clarified its stance. Now many people are watching Blackstone to see if that was enough.

Similarly, the buyout firms and lenders involved in Clear Channel are arguing over the terms of the debt financing. Does their inability to agree indicate a healthy negotiation, or a passive-aggressive attempt to spike the deal without suffering reputational consequences?

Sometimes contracts encourage parties to take the fight as far as possible. Walker told us, “One of the ways that the buying group can argue that it has satisified its obligations is to bring a lawsuit against the lenders. Once they satisfy that, their only obligation is to pay the termination fee, not to close the deal.”

By that playbook, the penultimate act by the banks and PE firms was taken yesterday, and a reasonable person might have concluded that CCU was well and truly a dead deal.

Whoops. The Texas court, at least (there’s a separate suit in New York) has thrown a spanner into the works, and might well, before it’s over, force a financing camel through the eye of this particular deal needle.

The commenters on Ms Moore’s blog entry are almost unfailing in their desire to say she was wrong about the intent of THL and Bain, but a reasonable person could say the jury’s still out on that.

And I do.

Addendum: In today’s PE Week Wire, Dan Primack adds:

In case you haven’t heard, Clear Channel and its prospective buyers – Bain Capital and Thomas H. Lee Partners – late yesterday sued six banks for refusing to fund the protracted $19.5 billion deal. The suits were filed in New York and Texas, with the primary difference being that the plaintiffs asked for the death penalty in Texas. No, wait, I’m being told that’s not correct. The primary practical difference is actually that CCU is being represented in the Texas suit by Joe Jamail, who represented Penzoil in a suit against M&A backtracker Texaco. The result was a jury award that essentially bankrupted Texaco, so the banks should be more than a bit concerned about that one.

(emphasis mine)

I do so like a clever turn of a phrase.

It was only after reading his piece that I realized Joe Jamail was involved, and I find myself questioning whether the addition of Jamail should cause any tremors, based on something he did half-a-life ago. He’s fast approaching 200 years old (though, admittedly, no faster than I am), and has had at least one big case in recent years that I’m aware of which ended badly enough for him that he fired the client rather than appealing.

…to one of my favorite sites, Going Private. Among the best written and most enjoyably read sites I frequent, the only problem I’d cite is that its author doesn’t have time to write several posts per day.

And when she must, for a variety of surely-good reasons, let extended periods pass without new material, I find myself almost pining for the next post.

Which is really rather sad, now that I see it written out there, above. But no matter - I’m a big fan of her work.

…1.34 million page views, 401 posts, 86 trackbacks, 26.3 points of lifetime IRR net fees, 18 transactions, 14 date requests, 8 ambiguous invitations to coffee, 5 marriage proposals, 4.5 death threats, 4 threatening legal letters, 3 cities, 2 years, 1.5 promotions and 1 love letter later…

Of course, this post will effect the 87th (or 88th, or 89th…) trackback for her site. And if I were certain she actually existed, I’d probably bump her up to her 9th ambiguous invitation to coffee, just to hear how in the world she’s been able to craft, in addition to the business-specific but impersonal and well written posts, such an interesting body of obfuscated writing about supposedly real situations.

I don’t have cause to doubt the reality of her subject matter - far from it, as many of the events she chronicles have analogues, if not doppelgangers, in companies I’ve observed up close and personal. How such a widely read site can relate the stories she does and still hedge the risk of being de-cloaked remains a fascination for me.

From the just-prior entry here, this was the closing line:

Let the race resume, because this melodrama has several acts yet to play, but it seems unlikely at this point that, regardless of moves in the prices of assets under their management, Messrs Cayne & Prince will repeat the mistaken actions of Mr. O’Neal.

Unsurprisingly, it turns out that even without repeating the mistakes of Mr. O’Neal, it’s pretty easy for other members of the august group of executives listed above to be kicked to the curb.

Today’s WSJ, in an article too long and beefy to effectively excerpt without violating fair use, entitled “Bear CEO’s Handling Of Crisis Raises Issues“, you’ll find the anatomy of a palace coup. Omitting only malfeasance, fraud, and necrophilia, Mr. Cayne is “charged” (in the sense of the items having been discussed in a front page WSJ article) with a laundry list of complaints. Among them:

• Lack of attention to detail
• Excessive enjoyment of personal time
• Being filthy rich
• Enjoying golf and bridge
• Being a marijuana smoker

One of these charges is not like the others. And the article in which the complaints appears is made quite lopsided by the short, seemingly random inclusion of his alleged preference for the killer weed.

Sure, the article has lots of quotes from supportive staff members, relating that he’s always reachable when needed, totally engaged in the business, and so forth. But the overall picture gives the impression of a calculated character assassination.

Not that there’s anything wrong with that, mind you - perhaps he even deserves it. But this one is so heavy-handed, that my first thought on reading it was “Cui bono?“. I don’t know who might be among the “players” within Bear Stearns, but surely in a firm known for its sharp elbowed trading prowess, they must be found in every corner office, no? Honestly, though, this one makes the attempted embarrassment of Blackstone’s Stephen Schwarzman look like a grade-school taunt.

The connection, to the extent one exists, between Mr. Cayne’s current agonies and those of Mr. O’Neal might be the “alumni network”. Apropos nothing much, there’s this, from the WSJ story of Nov 1:

Late in June, as the outcry from investors in Bear’s hedge funds grew, Bear authorized an 11th-hour loan of up to $3.2 billion to the less-risky of the two beleaguered funds. The fund ultimately borrowed about half that amount from its parent company.

On July 12, chatting with visitors over lunch, Mr. Cayne seemed less interested in discussing the markets than in talking about a breakfast-cereal allergy and his stash of unlabeled Cuban cigars. On another occasion, he told a visitor he pays $140 apiece for the cigars, keeping them in a humidor under his desk.

Five days later managers of both funds informed investors their holdings were virtually worthless.

The next day, July 18, Mr. Cayne left for Nashville to play in the bridge tournament, accompanied by his wife, Patricia, who is a neuropsychologist and another avid bridge player. Mr. Cayne took part in a prestigious event called Spingold KO. He was in Nashville all or parts of 10 days, according to bridge and hotel records.

For most of that time, Warren Spector — then co-president of Bear and also a competitive bridge player — was in Nashville as well. Mr. Spector was in charge of asset management at Bear, along with all of its trading operations and its prime-brokerage unit, which handles trades for big clients such as hedge funds as well as lending them money.

…

Amid the turmoil, Mr. Cayne on Aug. 1 called in Mr. Spector, the co-president who had been with him at Nashville. Mr. Cayne was annoyed that Mr. Spector had been away from the office during the fund crisis, according to people familiar with his thinking. He told Mr. Spector he had lost Mr. Cayne’s confidence and should resign, these people say.

(ellipsis mine)

Just being a conspiracy-monger, I find myself wondering whether this is all just a comeuppance delivered on behalf of, or directly by, Warren Spector? Seems pretty obvious, I know, but his having taken the bullet several months ago on Bear’s behalf seemed odd at the time (since they were both at the same tournament), and seems odder now.

Perhaps, then, Cayne’s getting knifed by a guy who owes him a knifing. Perhaps it’s far broader than that.

But it might provide an object lesson: Make sure you’ve got competent friends and incompetent enemies. Corollary: Be sure not to convert a competent friend into an enemy.

And it’s not over yet. Tomorrow’s WSJ will contain a follow on, entitled “CEO of Crisis-Hit Bear Denies He Used Marijuana“, (a gratuitous pile-on, I think, given that the original article also contained his denial) including this:

In a note to clients, Punk, Ziegel & Co.’s Richard Bove said “the article clearly places the company in play” because Mr. Cayne would more likely sell Bear than retire “in disgrace.”

The original WSJ piece, above, reported that Bear (which is heavily owned by employees, with Mr Cayne being personally among the largest shareholders) has been able to spurn earlier merger approaches:

He [Mr. Cayne] has resisted overtures to sell Bear. In 2002, when Mr. Dimon, then head of Bank One Corp., raised the possibility of buying Bear, Mr. Cayne didn’t give the idea much consideration, according to people to whom he spoke. Mr. Cayne told members of Bear’s executive committee he would do a deal only for a significant stock price premium, a big personal payout and the use of a private jet, say people familiar with the conversation. The takeover idea ultimately faded away.

So, of course, another plausible explanation for an airline toilet being dumped on his head, aside from the possibility of revenge from a former associate, is that this is all a bit of inside baseball, and that one way or another, Bear’s going to be owned by someone else.

Ignoring the unsavory undertones of such a public defenestration, this story seems likely to get more interesting before it gets boring.

Addendum - Might as well throw this one in too, to keep the circle (Cayne/O’Neal/Prince) complete. In addition to continued rumblings about Prince’s stewardship of the post-Sandy Weill Citigroup, WSJ’s Deal Blog reports other strange things potentially afoot at the Circle K.

Addendum - (11/2/2007 3:24PM) This just in:

NEWS ALERT from The Wall Street Journal

Nov. 2, 2007

Citigroup board members are expected to gather for an emergency meeting this weekend, two people familiar with the matter said. The meeting comes amid worries of potential writedowns and pressure on CEO Charles Prince.

Addendum - (11/4/2007 5:15PM) No story link yet, just an alert from WSJ:

NEWS ALERT from The Wall Street Journal

November 4, 2007

Citigroup CEO Charles Prince resigned at a board meeting Sunday, as the bank faces big new losses from distressed mortgage assets. Board member Robert Rubin, the influential chairman of the company’s executive committee, will be named Citigroup chairman, while Sir Win Bischoff, chairman of Citi Europe, will become interim CEO.

I’m sure the story will be up shortly, and of course this event is no surprise. What will surprise me, however, is if the chattering classes avoid the usual hand-wringing and shirt-rending over his “exit package”.

Like Merrill Lynch, Citigroup has no reported severance agreements in place for its exiting CEO. Stan O’Neal walked away with about $160 million, and Prince is reportedly set to leave with about $40 million. In the first case, the storyline was that O’Neal got a massive golden handshake. A fairer reading might indicate that he just received what he’d earned and owned. This would also be the case for Prince at $40 million - to all appearances so far, he’s got an earned and owned stake of $40 million.

Even operating under the presumption that they were both constructively fired for cause, there’s no case to be made for depriving either of what they already own. I look forward, perhaps futilely, to press coverage that recognizes this, if in fact it also ends up being true in Mr. Prince’s case.

And so, it looks to be a done deal.

News Corp. Is Poised to Win Dow Jones
Murdoch Prevails
As Bancrofts Agree
To $5 Billion Buyout

Paying Fees Cinches Deal

By SARAH ELLISON and MATTHEW KARNITSCHNIG
August 1, 2007

A century of Bancroft-family ownership at Dow Jones & Co. is over.

Rupert Murdoch’s News Corp. sealed a $5 billion agreement to purchase the publisher of The Wall Street Journal after three months of drama in the controlling family and public debate about journalistic values.

All it took to nudge the matter across the finish line was agreement to allow the company to pay $30 million in fees for the Bancrofts’ advisors? Small beer, really, at least to Dow Jones & News Corp, though such a number would not be small to me, personally.

It was $30 million largely wasted, in retrospect, though the Bancrofts surely didn’t spend it knowing that it would be so. The deal approved today by both companies’ boards is functionally identical to the one initially offered.

And the $30 million didn’t buy guarantees of editorial independence or the continued absurdly high quality of the Wall Street Journal family of publications, either. My argument all along has been that Murdoch has no plans to tarnish the stellar reputation of the Journal, and I don’t expect to be proven wrong about that in the future. So the fee payment agreement really ends up being a sop to the Bancrofts, and apparently one final preference tendered to them that’s not available to the lowly holders of A shares. I doubt that the A holders will complain, and I’ve got no basis to do so, so good for the Bancrofts, happy trails, and all the rest.

And speaking of predictions, I, certainly not alone, have asserted all along that the outcome would likely be just this - Dow Jones selling to News Corp, at the original price. Big deal - predictions are cheap, and this one, particularly given the premium offered and the logic behind it, was the most obvious all along.

Consequence free prediction? True, in my case, which makes such predictions even cheaper. Have a look:

At any point from May 9 thru May 31, and quite notably as recently as yesterday, there was serious money to be made buying the stock on the presumption of a deal being completed.

Did I? No.

Do I wish I had? No.

Why? Because if the Bancrofts had somehow mustered the votes to block the deal, this stock would have been back in the 30s in a heartbeat, and that was a risk not sufficiently offset for me by the $9 or $10/share the market was leaving on the table.

Even though the very fact that the results of rejection would be a $1.5 billion haircut in martket value pretty much guaranteed that the deal had to be done. On the flip side, it could cause some minor pain to be among those short 3.8 million shares of DJ as of the report three weeks ago, I’m thinking.

Or so it would appear - the consortium whose apparent (to me, anyway, and perhaps to me alone) grotesque overbid for Sallie Mae made news back in April may have found a pretense for reasoned re-examination.

Why? As reported at CNNMoney, “Sallie Mae says planned buyout may fail“.

Jul. 11, 2007 (AFX International Focus) –

WASHINGTON (AP) - The planned $25 billion buyout of SLM Corp. could be in jeopardy as the investors that agreed to buy the nation’s largest student lender, commonly known as Sallie Mae, say congressional legislation could kill the deal.

Sallie Mae disputes that. The takeover deal, one of the largest private buyouts ever, is led by private-equity firm J.C. Flowers & Co. At issue are the two sides’ interpretation of their acquisition agreement, signed in April, under which significant negative developments can nullify the deal.

On entry into this absurd offer to buy the company, the buying group was already aware of the coming significant reduction in federal subsidies for student loans, and surely had to also be aware of the firestorm that arrived just after their offer became public, the investigation by New York’s AG Andrew Cuomo, and the fact that other states were starting to pile on.

Subsequent events, nominally triggered by Blackstone’s IPO (or not - see addendum below), have shone bright lights on private equity, threatening (though not guaranteeing) meaningful changes in taxation for the dealmakers. Given the enormous competition for PE deals in the past year, the PE firms have reportedly been forced to reduce expectations for IRR on deals, down from the mid-30s to the mid-teens. Such is the curse (for PE) and the benefit (for sellers) of an imbalance between supply and demand for buyouts. With margin expectations squeezed, and with financing costs and covenants sure to keep getting tougher, the marginal deals are easy candidates for a skeptical review.

I have no way of knowing, of course, but this looks like an excellent excuse for a case of buyer’s remorse to set in, and best that it does so before having actually written the checks.

Sallie Mae said Wednesday it had been informed by the investors’ group, which also includes Bank of America Corp. and JPMorgan Chase & Co., that the investors believe that legislative proposals pending in Congress ‘could result in a failure of the conditions to the closing of the merger to be satisfied.’
Reston, Va.-based Sallie Mae said it ’strongly disagrees with this assertion, intends to proceed toward the closing of the merger transaction as rapidly as possible, and will take all steps to protect shareholders’ interests.’

If the deal were to fall through, the acquisition agreement provides for a $900 million breakup fee payable by either side under certain conditions.

(both excerpts edited to remove reams of tickers; emphasis mine)

Of course, Sallie Mae would dispute the potential deal-killing effect of the mooted evaporation of 25% or more of the buyers’ profit, due to a change in the tax regime. What else would they be expected to say?

The market took the threat seriously, however, shaving more than 14% off the price of SLM before the normal close of trading:

I’ll leave it to the imagination of the reader to guess what time the announcement occurred.

While the stock recovered several lost dollars in the aftermarket session, market actors seem clearly to think there’s something to the concern of the putative buyers.

And, given a reasonable, if not dispositive, assumption that the take-private offer was stupid-high, unjustified by any rational thought process, and likely to have succeeded at a much lower premium, the $900 million breakup fee might be the cheapest lesson the buyers ever learned, should they choose to pay the tuition.

If all it takes to get into that class is to say, “Hey, wait a minute - how many potentially life-threatening deal points are we willing to concede here? And on an unrelated matter, what’s Congress up to these days?”, then so much the better.

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Addendum - Good grief. Now that I’ve already written the story, based primarily on a Marketwatch headline that wasn’t specific about which Congressional action had gotten the buyers’ chests all bowed out, I see the full story at WSJ, and I find that the largest part of the issue is the reductions in federal subsidies.

The CNNMoney story, likewise, focused on the subsidy cuts, but because I tend not to take AP stories nearly as seriously as I do those in the WSJ, I presumed, incorrectly, that it had to be more than just subsidy cuts, because those were widely public before the deal was announced, and even mentioned in my April story on the matter.

Given the credence I place on the Journal, and the fact that its story, linked above, contains nothing related to private equity taxation as a causative in this current unpleasantness, I’ve got two things to add:

• If it’s not one of the causes, it should be, for Flowers’ sake
• Also, if the prime driver here is the subsidy cuts, that $900 million breakup fee is going to quickly go from hypothetical and conditional to cast in concrete - it’s a lame, lame excuse.

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Addendum - July 12 Whew! I still jumped the gun, but retrospectively, I can retract my partial retraction, just above. In an article this morning, entitled “Under Fire, is Private Equity Trying to Duck Out?”, the Journal included the potentially constricted debt markets and the new taxation proposals as additional rationale for the quibbling. Flowers et al, then, seem still to be within sniffing distance of a chance to make an arguably bad deal less bad.

From an email alert, which provided easily 30 seconds’ headstart before everyone in the financial world also reported it:

NEWS ALERT from The Wall Street Journal

June 21, 2007

General Electric and Financial Times publisher Pearson said they have decided not to pursue a combination of CNBC, the Financial Times and Dow Jones. A possible bid by GE and Pearson was seen as a challenge to News Corp.’s $5 billion bid for Dow Jones, publisher of The Wall Street Journal. GE and Pearson said they continue to discuss cooperation agreements with GE between CNBC and the Financial Times Group.

For more information, see:
http://wsj.com/article/0,,SB118244257856443515,00.html?mod=djemalert

Somewhat inexplicably, the Dealbreaker Murdoch Meter remains at only 90%

Addendum - As referenced in yesterday’s post, Brad Greenspan, the “founder” of MySpace, tossed an offer over the transom, and it seems I’m hardly the only one to have ascribed grudge-based intent to his effort. In that Valleywag article just linked, they provided a further link for Greenspan’s letter to the Dow Jones Board. (included in the extended entry, since I expect the website on which it appears to disappear one day soon. I’d prefer to include a link to Edgar, but the letter’s not on file there)

After reading it, I had a flashback to October, 2001, and a hilariously nut-encrusted SEC filing from a company called TOKS. You can read the full filing at the Edgar site, but to save you the trouble of scrolling past all the boilerplate, I’ve included just a taste, below. Am I wrong to equate that to Greenspan’s “offer”? I think not, but what would you expect me to think?

                                         Filed by Toks Inc. Pursuant to Rule 425
                                            under the Securities Act of 1933 and
                                            deemed filed pursuant to Rule 14a-12
                                            under the Securities Exchange Act of
                                                                            1934

                                     Subject Company: AT&T WIRELESS SERVICES INC
                                     Commission File No. 333-67068

                                     Date: October 8, 2001

Toks  Announces  Proposal to Combine With  General  Motors  Corporation,  Hughes
Electronics  Corporation,  General  Electric  Company,  AT&T  Corporation,  AT&T
Wireless Services,  Inc., AOL Time Warner and Marriott International for a rough
estimate  of over $2  Trillion  or more in stock.  Including  assumption  of all
outstanding debts. There will be amendment of full value that will be calculated
by professional  accountants.  This is just an initial proposal. This is not the
whole  picture of. At the same time Toks Inc. will stick to its original plan to
issue its Class A Common Stock in heavy premium to the  shareholders of targeted
entities.

Combination  Would  Establish  Only Toks Inc. as the "Parent" of General  Motors
Corporation,  Hughes  Electronics  Corporation,  General Electric Company,  AT&T
Corporation,  AT&T  Wireless  Services,  Inc.,  AOL Tiime  Warner  and  Marriott
International,  Inc. as "Wholly" owned  subsidiaries.  This will compliment each
subsidiary under one "roof."

Synergies  Could Create Up To Additional  over $300 Billion in annual  revenues,
even after  liquidation  of assets or spinoffs  recommended  by  regulators  and
initiated  by  the  Company.  Also  a  business  plan  will  include  aggressive
expansions of Toks Inc. into other industry  sectors and its  subsidiaries.  The
potential to make Toks Inc. the largest U.S public entity. Or the largest public
entity in the world.  Expansion will cover all corners of the globe. Our Company
listing will cover different  exchanges around the globe to gain access to their
capital markets. This will include developing countries as well.
...
There's a fine line between "ambition" and "desperation." Toks Inc. is an
"ambition" entity not a "desperate"  entity.  Meaning the Company  doesn't
have to fight to convince a shareholder to tender his or her shares. The
Company will take its securities to others if those we first seek rejected our
offer.  The Company is not interested in wasting  resources to seek proxy
votes.  The resources can be better spent to issue securities to those that want
them.

{entire filing, sic, ellipsis mine}
Read the rest of this story »

From tomorrow morning’s WSJ: “Dow Jones Board Takes Over Talks On Firm’s Future”

Notwithstanding the fact that the Bancroft family could squelch a deal with News Corp, if they were able still to muster a majority of their ownership minority to do so, the overall board is taking the correct approach here, it seems.

Dow Jones & Co.’s board, frustrated with the pace of the Bancroft family’s negotiations with News Corp., said it would take over talks on the future of the company. The move, coming after more than two weeks of little progress between the parties, increases the likelihood of a deal to enable Rupert Murdoch’s media giant to buy Dow Jones, the owner of The Wall Street Journal

Sure, the voting control of the Bancrofts (and, to a lesser extent, the Ottoways) can prevent a deal being done, or promote a deal that is less financially lucrative for the shareholders, but at some point, the slow pace of action becomes a problem for the full board. The Bancrofts have 25% of the board seats (4 of 16), and while the 4 directly elected class B directors are primarily responsible to the class B shareholders, their delays, however understandable in light of their responsibilities, can’t be allowed to stymie action by the full board.

And so, after what one might assume was a contentious discussion on the matter, the full board, of course including the Bancroft representatives, now has the helm:

Dow Jones Statement on Negotiations
June 20, 2007 5:06 p.m.
PRESS RELEASE: Dow Jones Issues Statement

NEW YORK, June 20, 2007 — Dow Jones & Company (NYSE:DJ) announced today that its Board of Directors and representatives of the Bancroft family have concluded that the best way to continue to evaluate the News Corporation proposal to acquire the Company would be for the Board of Directors to take the lead in addressing all aspects of the proposal and all other strategic alternatives, including remaining independent.

Accordingly, the Board of Directors, including representatives of the Bancroft family, will conduct further discussions with News Corporation relating to the proposal and will oversee the exploration of strategic alternatives. Representatives of the Bancroft family, which owns shares representing a majority of the Company’s voting power, reiterated that any transaction must include appropriate provisions with respect to journalistic and editorial independence and integrity.

Any acquisition will require the approval of the Board of Directors and shareholders owning a majority of the Company’s voting power. There can be no assurance that any transaction or other corporate action will result from the foregoing or that the Board of Directors or the members of the Bancroft family will support any specific proposal.

Source: Dow Jones via Prime Newswire

Or perhaps it wasn’t a contentious discussion at all? GE & Pearson have yet to make an offer, and may not ever do so. At least one other bidder has arrived on the scene, but the impact of that offer is less than clear:

But yesterday, another bidder, MySpace co-founder Brad Greenspan, sent a letter to the Dow Jones board seeking to pay $60 a share for a 25% noncontrolling stake in Dow Jones. Even if these factors don’t scuttle Mr. Murdoch’s plans, they could slow the process.

Slowing the process is the last thing the board would be likely to want - as the game goes on, speculation about outcomes puffs the stock, and stock that gets puffed can just as easily become unpuffed, with the board catching part of the grief for having allowed the process to spin out of control. Director liablity if the auction process collapses can’t be trivially ignored here.

Dow Jones’ stock closed today at $60.65, above Murdoch’s offer price, and while I won’t pretend to know why, it seems far more likely to have been due to an assumption of a GE/Pearson overbid than to Brad Greenspan’s offer of, essentially, an outside-funded stock buy back.

The outside purchase of a non-controlling 25% stake won’t reduce shares outstanding, and thus won’t increase EPS. It also won’t be a valid indication of the go-forward value of the company - it’s only worth $60 or more right now because that’s what Murdoch has offered and what others might offer. Greenspan’s offer does not much more than provide a 25% buffer for the Bancrofts’ voting bloc, and by the time it became fact, the voting will likely be over. From whom he proposes to purchase the stock is also a mystery, at present.

There’s another part of the story of Mr. Greenspan, laid out in the final paragraph of the continued-excellent WSJ coverage of the saga by Dennis Berman, Susan Pulliam, Sarah Ellison, et al:

Mr. Greenspan, who sent the letter to the Dow Jones board yesterday, is the former chairman and chief executive of Intermix Media Inc., the parent company of MySpace when it was created. After he left the company but still held a significant stake in it, MySpace was sold to News Corp. Mr. Greenspan sued, claiming the $580 million deal defrauded shareholders by undervaluing the asset. But in October 2006, a Los Angeles court rejected the legal challenge.

Grudge investing, if that’s what Greenspan’s offer happened to be, is not indicative of true market value. I can’t imagine the offer being taken seriously by the board as an alternative to Murdoch’s. Maybe he’s planning a public tender for the shares he desires? If so, I can’t imagine the market taking him up on it either, unless Murdoch takes his offer off the table. At which point, of course, Greenspan would be the happy buyer of stock overvalued by 40% or more.

Seen at the Dealbreaker: The Murdoch Meter.

My view of likely outcome still happens to agree with theirs.

The News Corp pursuit of Dow Jones had gotten rather quiet, and then at the beginning of June, grew louder, with news that the Bancroft family had chosen to engage in discussions with Mr. Murdoch. Predictable concerns arose after that meeting, centered around the legacy of the paper, and the (absurd) possibility that Murdoch was willing both to buy it and to destroy that legacy. Nearly two weeks later, the Bancrofts put forth a plan to “safeguard The Wall Street Journal’s editorial independence”, and it wasn’t met with the wholehearted approval the Bancrofts might have hoped for.

Minor stalemate.

But the game remained afoot last week, with the Bancrofts “fine-tuning” their proposal. Earlier that same week (last Monday, June 11), came the news that “GE, Microsoft Discussed Buying Dow Jones“, including the fact that “…the two sides couldn’t reach an agreement…”.

Another minor stalemate.

Undaunted, however, GE remains in the game. Today we find that “GE and Pearson Discuss Joint Bid For Dow Jones“. All well and interesting, not least because GE, unlike Pearson, can actually afford such a transaction. Pearson, like GE, a fine company, and unlike GE, part owner of one of my other favorite periodicals, the Economist, doesn’t have anything like the financial muscle to overpay for Dow Jones, while Murdoch does.

Like Pearson, GE’s interest is strategic:

Both GE, which is based in Fairfield, Conn., and London-based Pearson have reason to fear a Murdoch-Dow Jones tie-up: News Corp.’s global presence would help The Wall Street Journal compete with the FT in Europe and Asia; and the Dow Jones imprimatur would be likely to help News Corp.’s planned Fox News business channel compete against CNBC.

Even with that in mind, I can’t assess how much either of them, let alone what I’d presume to be the “big brother” in the transaction, GE, might really care to dangle over the edge on a strategic acquisition. Specific to GE, their television broadcast business is a potentially transient asset, and might be better off sold than augmented by acquisition. And if GE should happen, for some reason, to bow out of the bidding, Pearson surely doesn’t seem able stay in on its own as a principal.

So, it seems, the end result of this recent surge of interest (or pretense to interest) in a Dow Jones acquisition might best be judged by likelihood that GE can find reason to remain within a consortium attempting to outbid Murdoch.

Before I hit the button to publish this entry, I’ll be going to check the newswires for any recent developments in the matter, the better to avoid unnecessary embarrassment. So if you’re reading this, that means I’ve failed to find any mention, so far, of new developments.

And here’s the thing - Murdoch’s offer of $60/share is not only a fair offer, it’s absurdly so, based not on the gleaming brand that is Dow Jones and the Wall Street Journal, but on that brand’s ability to generate revenue, earnings, and cash flow. While I can’t presume to speak for anyone but myself, I don’t know that anyone seriously expects Murdoch would do anything to harm that brand. Therefore, aside from intransigence, there’s no compelling argument that Murdoch’s made anything but a fine offer.

In a vacuum, GE can throw money around with the best of them. But GE never operates in a vacuum - it didn’t become the world’s second largest company (by market value) through misguided acquisitions. Outbidding someone who’s offering 40X earnings and 16X EBITDA might classify as misguided. Even with that in mind, GE could still get away with it, but for another lingering problem, highlighted last month (May 22) in a Breaking Views commentary, coincidentally published in that day’s WSJ.

General Electric’s planned sale of its plastics business to Saudi Basic Industries is a double-edge sword for the conglomerate. The $11.6 billion the division fetched is good news. After all, investors valued the unit at as little as $8 billion when they added up GE’s parts to come to a valuation for the whole shebang, according to Deutsche Bank. So the price GE achieved unlocked 45% more value for shareholders.

GE remains a well run company, an exemplar of the diversified-yet-flexible conglomerate. Too many transactions like the sale of GE Plastics to SABIC at a premium to their captive value within the GE conglomerate, however, and the flexibility to take a flyer on deals, which is precisely what a Dow Jones bid might represent, will disappear.

Breaking Views’ commentary is certainly better informed than my own, but by coincidence, they, too seemed to think that broadcast television might be good for GE to jettison:

Companies that trade at a discount to their parts are prime targets for activist investors. Mr. Immelt should consider spinning off businesses such as GE Money and NBC Universal, before uppity investors dictate a more-Draconian corporate strategy for him.

It’s quite unlikely that GE can both strategically acquire to protect its NBC assets and simultaneously consider selling them on to unlock value. The choice they make in that regard, or with regard to other, non-broadcast assets, will need to be intellectually consistent with whatever they choose to offer for Dow Jones. Conglomerates, like individual market participants, prefer to sell overvalued assets and purchase undervalued ones. Selling anything in the GE portfolio and buying Dow Jones at a price high enough to beat News Corp’s offer seems sure to violate that preference.

And therefore, I doubt GE will do it. So News Corp still seems likely to win the race.

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Addendum - 10:00PM, Jun 18 - In a story from tomorrow morning’s WSJ, several interesting things, including the statement that cost synergies between WSJ & FT would only be about $50 million, as of the last look taken at the matter “several years ago”. Given the greater need for Pearson to generate a return on any DJ investment than for Murdoch, the article also highlights the obvious, which hadn’t occurred to me: The 700 editorial staff of the WSJ + the 500 editorial staff of the FT = too many staffers. Which raises the concern about mass layoffs, and the presumption (simple-mindedly ignoring obviously overlapping remits) that editorial quality would drop as a result.

So it’s not just GE who faces a potential impediment based on market expectations.

“I think most shareholders probably would have preferred a decision by Marjorie Scardino (ed: Pearson’s CEO) to concentrate on what they are good at, which is education, and dispose of some marginal interests,” says Ted Scott, a portfolio manager at F&C Asset Management PLC, which owns £136 million ($268.6 million) in Pearson shares, according to filings.

“It may come [as] a bit of a surprise that they may want to defend their investment in the FT.”

If she goes ahead with a bid and fails, that poses risks for Mrs. Scardino, a former journalist from Texas who was knighted by Queen Elizabeth II in 2002. Private-equity firms, which covet Pearson because the company could easily be broken up and sold off, would likely try to take advantage of the turmoil.

There’s nothing unique these days about finding someone who questions the belief that private equity is soon to replace all public equity markets. So that’s not what this item is about. I profess no opinion on whether there’s a private equity bubble, or whether that bubble, if it even existed, is about to pop.

This is much more mundane.

Blackstone is of course in the middle of a slow strip-tease with the market, effected via periodic updates to its S-1 filing with the SEC. The latest of these, in combination with some recent press in yesterday’s WSJ, entitled “How Blackstone’s Chief Became $7 Billion Man“, is enough to open some eyes about Stephen Schwarzman, Blackstone’s other principals, and private equity generally.

First, the numbers, from the WSJ article just mentioned:

Later this month, the giant buyout firm intends to go public, offering many investors their first opportunity to share the kill. If there was ever a doubt about what investors will be buying, a Securities and Exchange Commission filing Monday cleared that up: Mr. Schwarzman utterly dominates the firm. He stands to pocket as much as $677.2 million, and will retain a 23% stake in Blackstone, likely to be worth more than $7.5 billion.

By the way, according to my math, that would make him a “More than $8 billion man”, contrary to the WSJ headline, but that’s neither here nor there. Also neither here nor there, for the purposes of my small commentary on the matter, is the number of zeroes after any of the numbers just cited. Witness the subtitle to the article: “Schwarzman Says He’s Worth Every Penny”.

And not that my opinion on it matters a whit, I believe him. He’s worth whatever are the results of his efforts so far, from 1985 to today, as evidenced by the fact he continues to control Blackstone, a successful enterprise. If the markets decide to take him and Blackstone up on their offer of 10% of the entity for about $4.7 billion, then the fact that he ends up controlling a $7.5 billion stake is subject to the arithmetic and judgment of the market, not some specious claim on his part that he’s magically worth any given number. So the numbers don’t concern me, not in the least. Bully for him, and may his success continue, notwithstanding the other part of the subtitle to the story “$400 for Stone Crabs”. Populist rhetoric, and pretending to give a care how much Schwarzman spends on his meals, is of no interest to me, though the headline writer and authors of the WSJ piece seem to feel differently.

Here’s the part that’s troubling: The risk factors on page 32 of the amended S1 (see Edgar) are not, to steal from one of Google’s license agreement pages, “The usual yadayada”. They’re quite real, including the cost of the leverage Blackstone and other PE houses use, but most importantly including the proposals presently afoot to radically change the taxation of private equity’s carried interest in its investments. No less a luminary than Robert Rubin has come out in favor of ordinary income treatment for carried interest (via Daniel Primack @peHub).

Add to that the unique structure of the deal (from the S-1/A), which dispenses with the difficulties of having to be responsive to public equity holders:

Unlike the holders of common stock in a corporation, our common unitholders will have only limited voting rights and will have no right to elect our general partner or its directors, which will be elected by our founders (the State Investment Company will not have voting rights in respect of any of its common units).

Or, as the WSJ says:

Mr. Schwarzman intends to run it without instituting such traditional corporate-governance restrictions as having a majority of independent directors, according to an offering document.

And here’s the other part that’s troubling: In the WSJ piece, there were several non-money related matters on which Schwarzman comes off looking like a goofball who’s in love with himself and everything he does. Not very Buffett-like at all. They include:

When he pursues deals as the chief executive of Blackstone Group, he says, he wants to “inflict pain” on and “kill off” his rivals.

Over the course of several conversations earlier this year, Mr. Schwarzman said he views each deal as a contest to the death. His intended message to the market: Blackstone will get what it wants at the price it wants to pay. Mr. Schwarzman likes battles to play out quickly. “I want war — not a series of skirmishes,” he said of his philosophy. “I always think about what will kill off the other bidder.”

“I didn’t get to be successful by letting people hurt Blackstone or me,” he said. “I have no first-strike capability. I never choose to go into battle first. But I won’t back down.” Mr. Schwarzman declined to talk specifically about Blackstone’s business. SEC rules impose a “quiet period” before a public offering.

Well, thank goodness for the SEC, because by that point, Schwarzman had already said way too much. The brashness and bravado is not really all that shocking, seen in the light of his 60th birthday bash, earlier this year:

…an extravagant affair at New York’s Park Avenue Armory…

Mr. Schwarzman had no qualms about stage managing the accolades. When Blackstone colleagues prepared a video tribute, he sought to squelch any roasting, asking his peers not to poke fun at him.

…

Judging by the lavishness of his birthday bash, which was extensively chronicled in the press, he isn’t particularly concerned about being seen as ostentatious. The Armory’s entrance hung with banners painted to replicate Mr. Schwarzman’s sprawling Park Avenue apartment. A brass band and children clad in military uniforms ushered in guests. A huge portrait of Mr. Schwarzman, which usually hangs in his living room, was shipped in for the occasion.

The affair was emceed by comedian Martin Short. Rod Stewart performed. Composer Marvin Hamlisch did a number from “A Chorus Line.” Singer Patti LaBelle led the Abyssinian Baptist Church choir in a tune about Mr. Schwarzman. Attendees included Colin Powell and New York Mayor Michael Bloomberg.

But here’s the thing - it’s unseemly, and utterly unnecessary for Schwarzman to revel so deeply in his self-image. Not only doesn’t Warren Buffett do it, Bill Gates doesn’t do it either. Larry Ellison? Well, he does it, but who wants to be like Ellison?

David Bonderman, co-founder of TPG, summarized it well:

“When Steve Schwarzman’s biography with all the dollar signs is posted on the Web site” when Blackstone becomes a public company, he said, “none of us will like the furor that results — and that’s even if you like Rod Stewart.”

Schwarzman and his firm are exceedingly competent, particularly in an era of easy money and low rates, and deserve all the wealth they’ve created for themselves. But in a world where writers, at the WSJ and elsewhere, consider it good copy to fulminate on the wretched excess that comes from having far more money that one could ever spend, wisdom might dictate a bit more quiet enjoyment of one’s well earned riches, and a fewer martial metaphors for describing one’s business dealings.

Lumberjacks and populists always like to take their axes to the biggest of trees, because they make the most noise when they fall. It’s not at all inconceivable to think that some day, perhaps some day soon, Mr. Schwarzman could come to regret the public image he’s portrayed for himself, particularly since he hasn’t seemed to have needed such a public image in the past 21+ highly successful years.

Addendum - Whoops. At WSJ’s Deal Blog, two items posted late today:

Congress Puts a Chill in Blackstone’s IPO

Congress has finally lowered the hammer on the private-equity industry. And it’s hitting Blackstone Group in the head.

Sens. Max Baucus and Charles Grassley, the ranking Democrat and Republican on the Finance Committee, introduced a bill today that would eliminate favorable tax treatment for the private-equity firm, which is planning to go public later this month.

…and this:

Jesse Jackson Cries Foul Over Blackstone IPO

Jesse Jackson is not impressed with Stephen Schwarzman’s new-found wealth. What Jackson is more focused on is the list of underwriters for the $4.7 billion IPO of Schwarzman’s firm, The Blackstone Group. In an interview with Deal Journal, Jackson says the share sale unfairly shortchanges minority-owned firms.

“We’re going to protest this pattern of exclusion,” Jackson says. He calls it “Wall Street apartheid.”

Jesse Jackson’s opinion on any matter is a good counter-indication of rational thought, and he’s the second biggest race-hustler in the US. His opinions on Blackstone are beneath immaterial, and will be ignored by all right-thinking people. However, Mr. Schwarzman has invited such baseless attacks, whether he planned to or not.