'E's not pinin'! 'E's passed on! This parrot is no more! He has ceased to be! 'E's expired and gone to meet 'is maker! 'E's a stiff! Bereft of life, 'e rests in peace! If you hadn't nailed 'im to the perch 'e'd be pushing up the daisies! 'Is metabolic processes are now 'istory! 'E's off the twig! 'E's kicked the bucket, 'e's shuffled off 'is mortal coil, run down the curtain and joined the bleedin' choir invisibile!! THIS IS AN EX-PARROT!!
— Monty Python's Flying Circus, "The Pet Shop."
Fabled jeweler Tiffany & Co., also known as Wall Street's canary in a coal mine, just kicked the bucket this morning. It reported same store sales growth in the US of only 2%, versus analysts' expectations of 6%. This was in spite of a 10% gain in sales at its flagship New York store, where Ukranian oil field roughnecks, Polish construction workers, and Irish package tour operators used their surging euros to snap up $15,000 diamond rings like they were so many Disneyland pennants. Apparently, the only Wall Streeters to be found in the fabled bling-bling emporium this Christmas were either using the public toilets to throw up in after learning their bonus numbers for the year or applying for counter sales positions at the Short Hills expansion store.
Investors showed their typical charity and marked down TIF shares more than 12% this morning, to a new 52-week low of $35. After this, the only people who are still likely to get a warm glow in their private parts from thinking about little Tiffany blue boxes are those wives and girlfriends whose investment banker husbands have not broken the news that they will be shopping for jewelry at Zales this year, if at all. Sounds like 2008 should be a good year for divorce lawyers.
What makes me so certain that Tiffany's travails prefigure the lumbering footsteps of doom for the Kiton-clad legions of high finance? Forget the global credit crisis. Forget the slowdown in M&A. What really portends the return of the inevitable business cycle to Wall Street and the City of London is the fact that about half of their best business just got flushed down the toilet.
I refer, of course, to another Bloomberg article this morning on the substantial decline in fees paid to New York and London investment banks by private equity firms.
Buyout firms paid $5.4 billion to securities firms in the U.S. and Europe in the second half of 2007, 38 percent less than the first six months, data compiled by New York-based research firm Freeman & Co. and Thomson Financial show. The drop was steepest in Europe where fees fell 54 percent.
That's over three billion dollars less revenue that flowed into the coffers of Blankfein, Pandit, Thain & Co. I don't care how big your P&L is, that'll leave a mark. It goes on.
The pace of announced buyouts slumped in the second half, with private-equity firms announcing $202 billion of deals worldwide, about 66 percent less than in the record first six months, according to data compiled by Bloomberg.
Oh great: not only was the second half of last year crap, but there is every indication PE firms are decelerating into the new year. There's more.
Fees for arranging syndicated loans, the most lucrative business for banks, slumped to $867 million in Europe in the second half from $2.1 billion in the first half. KKR, run by Henry Kravis and George Roberts, Carlyle Group in Washington and London-based Permira Advisers LLP, Europe's biggest buyout firm, paid no fees for bond sales in Europe in the second half, the data show.
In the U.S., LBO firms paid $1.05 billion in fees for arranging loans in the second half, a drop of 27 percent from the first six months of the year.
Note carefully, Dear Reader, that KKR—which the article tells us paid $599 million in fees to investment banks in the second half of 2007—paid exactly bupkus, zilch, nada for Old World bond placements during the same period. Maybe it's not so bad after all to live in a beleaguered country with a lame duck President and a currency preferred to toilet paper almost nowhere else in the civilized world.
And why, you cleverly persist in asking, is this such a bad thing? Surely Gentle Ben will make the bad credit demons go away. And corporate acquirors will step up to the M&A plate, won't they? Perhaps. But even if they do, they simply will not pay the kind of fees Wall Street has loosened its belt to enjoy at the PE-led M&A banquet of the past several years. Corporate buyers can use stock to purchase companies, which PE firms generally cannot. They don't have to pay a cent to Wall Street to do that. They also tend to use a lot less debt than buyout firms in their acquisitions, and the debt they issue tends to be of higher average credit rating. Higher-rated debt means a lot less coin in the pockets of investment bankers.
But most importantly, they are just nowhere near as promiscuous dealmakers as private equity firms have been, especially over the past few years. From a global M&A market share of mid-single digits several years ago, private equity came to represent around a third of total M&A market volume, and that in a growing market. Furthermore—although they will not like you to hear this—buyout shops are some of the least price-sensitive customers investment banks have. They insist on really tight spreads from their banks on the debt they raise to fund deals, and they negotiate the price and terms of acquisitions with target companies like a wolverine with a squealing marten in its mouth, but they really don't care to haggle the last few basis points off the banker's fee. For one thing, they get to turn around and bill their limited partners deal fees and other goodies when they do a deal, so the general partner usually is not paying bank fees anyway. Besides, the failure or success of most buyout deals simply does not depend on whether you paid 2% or 2.5% for your high yield underwriting. Don't worry, though: PE firms have plenty of other ways to beat the crap out of investment banks, and they take advantage of every one. They're not getting soft in their old age.
As an aside, if you want corroborative anecdotal evidence that tumbleweeds are indeed rolling through private equity offices worldwide, just turn to PE insider blogsite Going Private. After falling off the grid (relatively speaking) in October, November, and December, sardonic memoirist Equity Private has surged back with a New Year's deluge of postings having a word count well in excess of last month's Congressional Record. (It takes one logorrheist to know another.) Given that fact, and the fact that she has spared very few of those words from flaying Andrew Ross Sorkin and praising activist hedge fund investors to write about her own business, methinks She Who Must Be Feared has a little too much time on her hands. (I can sympathize.) Besides, any time a blogsite resorts to instant messaging transcripts recounting the amorous misadventures of Wall Street legend Muffie Benson-Perella, you can be sure it's a naked grab for page views.1
So you see, private equity has been one of the biggest, fastest growing, and most profitable business lines for investment banks during this past cycle. You can bet your girlfriend's diamond-encrusted thong that the banks have staffed up big time to ride the money wave. Most Wall Street management is too sophisticated to rely simply on revenue per banker to manage headcount, but it's not that inaccurate a proxy. Furthermore, there are only so many bankers you can reassign to covering Sovereign Wealth Funds or the alternative energy sector. Things are gonna get ugly in the Financial Sponsor and Leveraged Finance groups this Spring. Lessee ... expected revenue down by half. How many FSG and LevFin bankers should we cut? You do the math.
I could be wrong, though. The busy beavers in the Wall Street coal mine might not be dead after all.
Maybe they're just pining for the fjords.
1 Like that, just there.
© 2008 The Epicurean Dealmaker. All rights reserved.