Week in Review: Private Equity Firms Counting Their Cash

WEEK IN VERSE Jack Welch says this number is unbelievable. “These Chicago guys will do anything.”

Buyout firms in Europe are hustling for cash. | A cellphone deal is turning up the heat on Sprint. | Campaign ads are focusing on ties to Wall Street, no matter how thin. | Andrew Ross Sorkin said the private equity world had more money than it knew what to do with.

A look back on our reporting of the past week's highs and lows in finance.

T-Mobile to Acquire MetroPCS, Increasing Pressure on Sprint | The merger “signals a renewed phase of jockeying among cellphone service providers as they race to draw in more smartphone users and upgrade to the latest high-speed data networks,” Michael J. de la Merced reported. The talks were first reported on Tuesday. DealBook '

A Merger in Mining Is Said to Be on Track | The board of the mining company Xstrata announced on Monday that it was backing a revised $9 0 billion takeover bid from the commodities trader Glencore International, Mr. de la Merced and Mark Scott reported. DealBook '

Ads Attack Wall Street Ties, No Matter How Flimsy | Candidates are trying to gain an edge by linking their opponents to bailouts and banking, no matter how flimsy the connection may be, Peter Lattman reported. DealBook '

Deal Professor: In Stock Market Rebound, a Windfall for Wall Street Executives | Steven M. Davidoff says that in the depths of the financial crisis, banks were encouraged to compensate executives through long-term options and stock incentives, which are now worth hundreds of millions of dollars. DealBook '

What did they do to deserve such a reward? It's hard to justify and it goes a long way toward explaining the persistent anger toward Wall Street. And we have the government partly to blame for it.

Top 5 execs at top 18 US financial firms handed $142 mil in stock & options in Great Recession. Current value: $457 mil goo.gl/K9uQm

- Too Much (@Too_Much_Online) October 3, 2012

Equity Firms in Europe Struggling for Funds | As banks have curbed their lending in response to the European sovereign debt crisis, private equity firms have had to get creative to finance buyouts, Mr. Scott reported. DealBook '

DealBook Column: More Money Than They Know What To Do With | Andrew Ross Sorkin says that private equity funds need to spend nearly $200 billion on acquisitions in the next 12 months or it must be given back. “That means it is possible we could see a series of bad deals with even worse returns.” DealBook '

Many of the big private equity firms - Apollo Group, Kohlberg Kravis Roberts, Blackstone Group and Carlyle Group, among them - are public. And for the first time, it is possible that the interests of the public shareholders could diverge from the interests of the investor s in the buyout funds, at least in the short term.

And now, the PE bubble… RT @nytimesbusiness: DealBook: Private equity: more money than they know what to do with. nyti.ms/R8trKa

- defcon_5 (@defcon_5) October 2, 2012

Law Firms Mine San Francisco for Internet Start-Up Gold | In an effort to build credibility among new technology companies, Evelyn M. Rusli reports that Wilson Sonsini Goodrich & Rosati and others are employing a broad set of tools, including offering free services, cozying up to incubators and writing blogs. DealBook '

Wall Street Regulator Ramps Up Enforcement

Wall Street's smallest watchdog is starting to show its fangs.

The Commodity Futures Trading Commission, once considered a toothless regulator, brought a record number of enforcement cases over the past year, as fines soared. In a statement on Friday, the agency said it levied $585 million in sanctions during its 2012 fiscal year, which ended Sept. 30, up from $450 million the year before.

The surge in fines is largely tied to one case. In June, the British bank Barclays agreed to pay $200 million to the agency for attempting to manipulating a key interest rate.

“We pursue unlawful conduct to protect market participants and promote market integrity,” David Meister, the agency's enforcement chief, said in a statement.

Under Mr. Meister, the agency's enforcement unit has been revamped. It won broad new powers from the Dodd-Frank act, the regulatory overhaul law passed after the financial crisis, allowing the agency to police the previously unregu lated swaps market. The law also lowered the burden of proof in court, making it easier to bring cases.

Armed with its new tools, the trading commission brought 102 enforcement actions during the last fiscal year, a best for the agency that marked a slight uptick over 2011 and a nearly 80 percent jump from two years ago. The agency also has a deep pipeline of potential cases, after the enforcement team opened more than 350 new investigations.

The agency's cases traditionally took aim at no-name brokerage firms and traders suspected of manipulating commodity prices or orchestrating Ponzi schemes. But the agency raised the stakes this year as it dug into some of Wall Street's most prominent blowups, including the downfall of MF Global and the multibillion-dollar trading loss at JPMorgan Chase.

Still, the agency faces steep challenges. Congress, for example, is crusading to cut its budget.

The MF Global case, more than any other Wall Street transgression , also hangs heavy over the agency. When the brokerage firm collapsed on Halloween last year, its customers saw more than $1 billion of their money disappear. A criminal investigation turned up no evidence of wrongdoing among the firm's top executives, but the trading commission is still pursuing a civil case.

The rate rigging investigation appears more promising. After a four year investigation, the agency scored a settlement with Barclays in June, producing the largest fine in the trading commission's nearly 40-year history.

The case is the first of several expected actions against some of the world's biggest banks. The banks are suspected of manipulating the London interbank offered rate, or Libor, to squeeze out extra profits and deflect concerns about their health during the financial crisis.

Mr. Meister on Friday praised his team's progress. “I applaud the staff for their hard work and dedication to the task, and am honored to work alongside them.â €

Glut of Solar Panels Poses a New Threat to China

Peter Parks/Agence France-Presse - Getty Images

Workers at Suntech, which is temporarily closing a quarter of its solar cell capacity.

BEIJING - China in recent years established global dominance in renewable energy, its solar panel and wind turbine factories forcing many foreign rivals out of business and its policy makers hailed by environmentalists around the world as visionaries.

But now China's strategy is in disarray. Though worldwide demand for solar panels and has grown rapidly over the last five years, China's manufacturing capacity has soared even faster, creating enormous oversupply and a ferocious price war.

The result is a looming financial disaster, not only for manufacturers but for state-owned banks that financed factories with approximately $18 billion in low-rate loans and for municipal and provincial governments that provided loan guarantees and sold manufacturers valuable land at deeply discounted prices.

China's biggest solar panel makers are suffering losses of up to $1 for every $3 of sales this year, as panel prices have fallen by three-fourths since 2008. Even though the cost of has fallen, it still remains triple the price of -generated power in China, requiring substantial subsidies through a tax imposed on industrial users of electricity to cover the higher cost of renewable energy.

The outcome has left even the architects of China's renewable energy strategy feeling frustrated and eager to see many businesses shut down, so the most efficient companies may be salvageable financially.

In the solar panel sector, “If one-third of them survive, that's good, and two-thirds of them die, but we don't know how that happens,” said Li Junfeng, a longtime director general for energy and climate policy at the National Development and Reform Commission, the country's top economic planning agency.

Mr. Li said in an interview that he wanted banks to cut off loans to all but the strongest solar panel companies and let the rest go bankrupt. But banks - which were encouraged by Beijing to make the loans - are not eager to acknowledge that the loans are bad and take large write-offs, preferring to lend more money to allow the repayment of previous loans. Many local and provincial governments also are determined to keep their hometown favorites afloat to avoid job losses and to avoid making payments on loan guarantees, he said.

Mr. Li's worries appear to be broadly shared in Beijing. “For the leading companies in the sector, if they're not careful, the whole sector will disappear,” said Chen Huiqing, the deputy director for solar products at the China Chamber of Commerce for Import and Export of Machinery and Electronic Products.

The Chinese government also wants to see the country's more than 20 wind turbine manufacturers, many of which are losing money, consolidate to five or six. “Wind does not need so many manufacturers,” said Mr. Li, who in addition to drafting renewable energy policies is the president of the Chinese Renewable Energy Industries Association.

Chinese solar company executives blame their difficulties partly on the United States's decisions last spring to impose antidumping and anti-subsidy tariffs on solar panel imports, and on the European Union's recent decision to start its own antidumping investigation of imports from China.

“It is not a Chinese industry problem, it is a global solar industry problem,” said Rory Macpherson, a spokesman for Suntech Power, one of the largest Chinese solar panel manufacturers. “It is primarily the result of an imbalance between supply and demand, and the U.S. and E.U. trade investigations.”

Mr. Li said the solar industry's problems were the result of overcapacity in China, and not the fault of trade restrictions.

Yet he insisted that if the Chinese government could turn back the clock and revisit past renewable energy decisions, it would not do anything differently.

The problem lies in the eagerness of Chinese businesses to rush into any new industry that looks attractive and swamp it with investments, he said. Chinese companies and their bankers are then far more reluctant than Western companies to admit defeat for investments that prove unprofitable.

Mr. Li added that banking regulators had not yet decided what to do about banks' exposure to the solar sector. The central government tried without success to learn from local and provincial government agencies how much of the solar industry's bank debt they have guaranteed, Mr. Li said.

Cash Flows Are Critical for Tesla

In his debate on Wednesday night with President Obama, Mitt Romney referred to electric car-maker Tesla Motors as a loser. He put it in the same group as Solyndra, the solar panel company that collapsed last year owing the federal government $535 million.

As it ramps up sales of its sleek electric sedan, Tesla doesn't appear to be much of a loser right now. But a closer look at company's cash flows suggests it is hardly out of the woods.

In young companies like Tesla, calibrating cash flows is critical. Customer demand may be high for a company's product, but mistimed spending can lead to a cash crunch. And Tesla has been spending heavily to set up production as well as to acquire the parts that make up the new sedan, called the Model S. The specter of cash problems returned last week. The federal government eased terms of its $465 million loan to Tesla to ensure the company didn't breach key financial hurdles. The company then raised $193 million in a secondar y stock offering, easing cash concerns.

This week, Tesla's chief executive Elon Musk said that he expected the company to become “cash flow positive” at the end of November.

If Tesla does start becoming cash flow positive next month, and doesn't stop, it certainly would not be a loser. But there are reasons to be skeptical.

First, it seems as if Tesla was running very low on cash in the third quarter. It said that, after the stock offering proceeds and drawing down the last $33 million of the federal loan, it had cash in hand of $293 million at the end of September. Another way of looking at the situation is that Tesla had $67 million of cash before it drew down the loan and did the offering. That's not a lot for a company that has been consuming $120 million of cash a quarter this year. That figure combines the cash consumed by Tesla's basic operations, as well as outlays for plant.

Tesla's fans believe its cash situation will now rapidly improv e. Capital expenditures should fall off and as the Model S starts to sell in high numbers the company will take in large amounts of cash from those sales. To this camp, the only big thing to worry about is if Tesla experiences continued production delays.

“Investors, despite having that breathing room, will be keen to watch management's ability to meet production targets,” said Amir Rozwadowski, a Barclays analysts who covers clean-technology companies.

But there's a pessimistic school of thought, which holds that Tesla will struggle to produce adequate cash flows even if it sells a lot of cars. This theory says Tesla lacks the vast economies of scales that large auto companies operate under. As a result, its margins are likely to be slight and cash flows consistently weak. This may not become apparent for a while, since Tesla may initially tilt production toward high-ticket, customized versions of the Model S, which have higher margins.

For its part, T esla is aiming at a 25 percent gross margin next year, which is twice that of General Motors' auto operations in the 12 months through June. In other words, Tesla expects to be an outright winner, not an abject loser, among American automakers. But the way to track if that is likely to be true is to watch those cash flows.

Business Day Live: Jobless Rate Falls to 7.8%, Lowest Since January 2009

Economist Michelle Girard on why the jobless rate fell to 7.8 percent. | Start-ups get leaner and meaner - and create fewer jobs.

After Multi-Billion Dollar Loss, JPMorgan Continues to Revamp

Two senior executives at JPMorgan Chase are expected to leave by the end of the year, in the latest round of management reshuffling after the bank's multi-billion trading loss.

Irene Tse - who headed up the North American arm of the chief investment office, the powerful but previously little known unit at the center of the trading mishap - is leaving to start her own hedge fund. Barry Zubrow, who currently runs the bank's regulatory affairs, is expected to cede his current position by January, according to several current and former executives with knowledge of the move.

The exits come in the aftermath of trading blunder, which stemmed from a soured credit bet. The losses have been a rare black eye for Jamie Dimon, JPMorgan's chief executive, once considered among the most skilled risk managers on Wall Street.

As chief risk officer at the bank from 2007 to January 2012, Mr. Zubrow has been associated with the trading losses. Ms. Tse, meanwhile, joined the bank in early 2011 from hedge fund Duquesne Capital Management to take over as head of the North American trading desk.
News of Mr. Zubrow's move was previously reported by the Wall Street Journal.

As it works to move beyond the trading losses and reassure skittish investors, JPMorgan has revamped parts of its organization.

The bank has appointed a new head of the chief investment unit to succeed Ina Drew, one of the most notable casualties of the trading mess. The bank has also promoted a number of younger executives, including Mike Cavanagh and Daniel Pinto to head up a united corporate and investment bank. Mr. Cavanagh is leading the cleanup operation.

During Mr. Dimon's nearly six-year reign, the bank has undergone a number of management shuffles. Few of the executives who made up Mr. Dimon's inner circle during the financial crisis â€" including Bill Winters, Steve Black and Heidi Miller â€" remain.

A spokesman for the bank declined to comm ent.

Evercore Hires a Restructuring Specialist From Lazard

NEW YORK--(BUSINESS WIRE)--Evercore Partners Inc. (NYSE: EVR) announced today that Stephen Goldstein has joined the Firm's Investment Banking business as a Senior Managing Director in its Restructuring and Debt Advisory Group. Mr. Goldstein is based in New York and will focus on providing corporate restructuring and financing advice.

“Evercore's truly independent platform, strong restructuring and debt advisory practice and impressive group of industry bankers combine to present an extremely exciting opportunity.”

Mr. Goldstein was most recently a Managing Director in the Restructuring Group at Lazard. Prior to joining Lazard in 2002, he served in several investment banking positions at Thomas Weisel Partners and its predecessor firm, Montgomery Securities. Mr. Goldstein began his career as an attorney at Morgan, Lewis & Bockius, where he specialized in securities law and mergers and acquisitions. Mr. Goldstein has over 17 years of experience in a broad range of corporate finance activities, including restructurings, mergers and acquisitions, and debt and equity financings. He has recently advised corporate clients and creditor groups on a number of significant restructuring and debt financing transactions, including engagements for The Great Atlantic & Pacific Tea Company, iStar Financial, Charter Communications, the lenders to Masonite International, WCI Communities, Jacuzzi Brands and Spanish Broadcasting Systems, among others. Mr. Goldstein, 42, received his Juris Doctor from NYU School of Law and his Bachelor of Arts from Cornell University.

“We are delighted that Steve has joined Evercore,” said Ralph Schlosstein, Evercore's CEO. “This hire is a demonstration of our commitment to maintaining a world-class effort in restructuring and debt advisory.” David Ying, Head of Evercore's Restructuring and Debt Advisory Group, said, “Steve is very highly regarded in the restructuring community and his background and skill set perfectly complement our team of senior bankers.”

“I am thrilled to be joining the Evercore team and to being a part of the Firm's continuing growth,” said Mr. Goldstein. “Evercore's truly independent platform, strong restructuring and debt advisory practice and impressive group of industry bankers combine to present an extremely exciting opportunity.”

About Evercore Partners
Evercore Partners is a leading independent investment banking advisory firm. Evercore's Investment Banking business advises its clients on mergers, acquisitions, divestitures, restructurings, financings, public offerings, private placements and other strategic transactions and also provides institutional investors with high quality research, sales and trading execution that is free of the conflicts created by proprietary activities; Evercore's Investment Management business comprises wealth management, institutional asset management and private equity investing. Evercore serves a diverse set of clients around the world from its offices in New York, Boston, Chicago, Minneapolis, Houston, Los Angeles, San Francisco, Washington D.C., Toronto, London, Aberdeen, Scotland, Mexico City and Monterrey, Mexico, Hong Kong and Rio de Janeiro and São Paulo, Brazil. More information about Evercore can be found on the Company's website at www.evercore.com.

Morgan Stanley\'s Chief Sticks by Debt Trading

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The I.P.O. Blues

The I.P.O. Blues  |  The market was not kind to young companies trying to go public this week. The latest casualty came on Thursday, when Dave & Buster's Entertainment, the restaurant-and-arcade chain, withdrew plans for an I.P.O. The chief executive, Steve King, cited the usual reasons: “current market conditions are not optimal.” (Mr. King may have more to say this morning on CNBC at 10:45 a.m.)

Months after giving Facebook a chilly reception, investors are still skittish about new listings. The Berry Plastics Group fell 5 percent in its debut on Thursday after pricing its stock at the low end of its expected range. The I.P.O. was a black eye for Berry's private equity owner, Apollo Global Management, which is set to test the market next week with another company, Realogy, in a potential $1 billion I.P.O.

It doesn't help investor confidence that those newly minted, once-hyped Internet stocks continue to struggle. Zynga, which went public in December, said on Thursday that it likely lost money in the third quarter. It also wrote off about half of the value of Omgpop, the games start-up it bought for $183 million in March. Even Facebook's shares didn't get much of a lift after the social network announced its users had reached one billion. The company also faces dozens of lawsuits related to its I.P.O.

At least one company may be forging ahead with an I.P.O. Huawei Technologies, a Chinese telecommunications company, has been in touch with investment banks for advice on a potential debut, according to The Wall Street Journal.

MetroPCS in Play  |  T-Mobile's bid for MetroPCS could encourage some rival offers, the Deal Professor writes. “This is an open invitation for another bidder to come in and pay a hi gher amount, something the MetroPCS board must accept if it is a clearly superior offer.” All eyes are on Sprint Nextel, which on Thursday was “in the early stages of evaluating a bid for MetroPCS,” Bloomberg News reported. Sprint, which tried and failed to merge with MetroPCS earlier this year, is holding a board meeting by phone on Friday, according to The Wall Street Journal. Sprint's stock fell more than 2 percent on Thursday.

Shareholders Push Back on Pay  |  “The days when Wall Street banks could blithely hand out half their revenue in compensation to their staff without a murmur from shareholders have come to an end,” Reuters says. At Morgan Stanley, “furious” institutional shareholders took executives to task last year, questioning why compensation could not be lowered to about 30 percent of revenue from 51 percent, according to Reuters. Morgan Stanley's chief ex ecutive, James Gorman, seems to agree with shareholders' concerns. “There's way too much capacity and compensation is way too high,” Mr. Gorman said in an interview with The Financial Times. “As a shareholder I'm sort of sympathetic to the shareholder view that the industry is still overpaid.”

On the Agenda  |  It's jobs day. Economists surveyed by Reuters are predicting that 113,000 jobs were added in September, with the unemployment rate increasing to 8.2 percent from 8.1 percent.

The changing face of the workplace is only complicating the jobs situation. Catherine Rampell of The New York Times profiles Leap2, a start-up with 10,000 users but just one employee. Relying on contractors and part-time work has helped Leap2, but “the implications for the American work force are worrisome,” writes Ms. Rampell, who took a wonkier dive into the numbers.

Elizabeth Duke, a Federal Reserve governor, is speaking about distressed real estate at the New York Fed at 1 p.m. Friday is the one-year anniversary of the death of Steve Jobs.

European Buyout Firms Get Creative  |  With banks hesitant to take risks, private equity firms in Europe have had to look elsewhere for financing, writes DealBook's Mark Scott. Some are using high-yield bonds or mezzanine loans. It's been a boon to the high-yield bond market. But the broader popularity of high-yield debt is making money managers nervous. Some large investors, concerned about the risky borrowers, have recently begun to sell their holdings, according to The Wall Street Journal.

Julian Robertson's 80th  |  Julian Robertson, the founder of Tiger Management, celebrated his 80th birthday in style over the we ekend, with Mayor Michael R. Bloomberg, the author Tom Wolfe and many of Mr. Robertson's protégés attending a lavish party, according to Absolute Return. The evening was said to feature a video tribute from Mitt Romney, thanking Mr. Robertson for supporting his presidential campaign.

Mergers & Acquisitions '

Germany a Sticking Point in Aerospace Merger Talks  |  Reuters reports: “EADS and BAE Systems have edged closer towards winning political backing for a $45 billion merger to create the world's biggest arms group amid positive signals from Britain and France, but German misgivings over control is a big obstacle, sources close to the talks said.”
REUTERS

Canadian Politicians Oppose Cnooc-Nexen Deal  |  The New Democratic Party called on the Conservatives, which control the legislature, to reject the deal, saying it wouldn't necessary benefit Canada.
WALL STREET JOURNAL

Unilever Weighs a Sale of Skippy  |  The British-Dutch consumer products giant said on Thursday that it was considering selling its Skippy peanut butter brand in the United States and Canada as it focused more on emerging markets.
DealBook '

Moody's Puts H.P. on Review  |  After its chief executive gave a bleak assessment of its future, Hewlett-Packard may have its credit rating docked by Moody's.
ASSOCIATED PRESS

Why Aren't H.P.'s Shareholders Up in Ar ms?  |  Roben Farzad of Bloomberg Businessweek writes: “Increased shareholder vigilance can only do so much to combat the bad business trends that are hitting H.P. all at once.”
BLOOMBERG BUSINESSWEEK

G.E.'s Thai Bank Stake Said to Draw Interest  |  The Oversea-Chinese Banking Corporation and CIMB Group Holdings have signed non-disclosure agreements as they consider bidding for General Electric's stake in Bank of Ayudhya, Bloomberg News reports, citing three unidentified people with knowledge of the matter.
BLOOMBERG NEWS

INVESTMENT BANKING '

JPMorgan Chase Shuffles Top Ranks  |  Barry Zubrow, JPMorgan's regulatory aff airs chief, is expected to leave his post before the end of the year, The Wall Street Journal reports, citing unidentified people close to the bank.
WALL STREET JOURNAL

Barclays Names McGee Top Americas Corporate and Investment Banker  |  Barclays named Hugh E. McGee III, one of the firm's top deal makers, as its most senior corporate and investment banker in the Americas on Thursday as part of a broader reorganization within the bank.
DealBook '

Macquarie's Head of Asian Investment Banking Said to Be Leaving  |  Kalpana Desai, who runs investment banking in Asia for the Australian firm, is retiring by April, Bloomberg News reports, citing an internal memo.
BLOOMBERG NEWS

Citigroup Tries to Connect With Customers Over Twitter  |  The bank has been using Twitter to speed up the time it takes to respond to complaints.
WALL STREET JOURNAL

Goldman Sachs May Open a Representative Office in Chile  | 
BLOOMBERG NEWS