Deals of the Day: The Winner of the Pepsi Challenge Is…Pepsi

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Today in the Financial Rescue

Geithner Vents: The Treasury secretary blasted top U.S. financial regulators in an expletive-laced critique last Friday as frustration grows over the Obama administration’s faltering plan to overhaul U.S. financial regulation. [WSJ]

Stronger oversight: The Fed plans to strengthen its examinations of banks’ lending practices and financial health with new teams composed of experts in everything from law to economics and markets. [WSJ]

Mergers & Acquisitions

Something for Everyone? PepsiCo agreed to buy Pepsi Bottling and PepsiAmericas for about $7.8 billion. [Bloomberg]

GM-Opel-Magna: German Chancellor Angela Merkel’s coalition will champion Magna International as the buyer of Opel in talks with the two remaining bidders. [Bloomberg]

If at first you don’t succeed: Hicks Acquisition Co., a publicly traded investment vehicle run by Texas deal maker Tom Hicks, said it had agreed to acquire Resolute Natural Resources Co. in a deal valued at $582 million. [WSJ]

Sun-Oracle: The European Commission has set a Sept. 3 deadline for a decision on whether or not to clear Oracle’s planned $5.6 billion acquisition of Sun Microsystems. [MarketWatch]

Royal Bank of Scotland: Australia & New Zealand Banking will pay $550 million for some of RBS’s Asian banking operations, and plans to use them as a springboard into the region. [WSJ]

Hurting your case: Xstrata restated its case for a merger with larger rival Anglo American as it reported a sharp decline in profit for the first half of the year due to lower commodity prices, and again withheld a dividend. [WSJ]
Related: Xstrata’s largest shareholder Glencore International supports the mining company’s $44 billion proposed merger with Anglo American. [Bloomberg]

Financial Institutions

Today in bad marriages: BofA agreed to pay $33 million to settle a civil lawsuit alleging that it misled shareholders about billions of dollars in bonuses promised to Merrill employees. [WSJ]
Related: Bank of America shook up its management, opening up the field of potential successors to CEO Lewis. Former Citi CFO Sallie Krawcheck will run its global wealth and investment management operations. [WSJ]

CIT: The troubled lender sweetened the terms of its bond buyback, all but guaranteeing its success. [WSJ]

Goldman’s princes told to spend like paupers: Goldman Sachs CEO Lloyd Blankfein has warned his employess to avoid making big-ticket, high-profile purchases amid a firestorm of public and political anger over outsize bonus payments. [NY Post]

Andrew Hall: The Wall Street oil trader reportedly owed a $100 million bonus by Citigroup, has held talks to separate the trading business he leads from the troubled banking conglomerate. [Daily Telegraph]

UBS: The Swiss bank’s CEO Oswald Grübel said he expects the Swiss government to sell its equity stake in the bank by year-end. The bank’s net loss widened to $1.32 billion. [WSJ]

BNP Paribas: The French bank’s second-quarter net profit rose 6.6%, helped by another strong showing in its investment banking activities and an accounting gain from the acquisition of assets from stricken Belgian peer Fortis. [WSJ]

Bankruptcy & Restructuring

The Donald makes his comeback: Donald Trump will regain control of Trump Entertainment Resorts, with a plan to buy the company out of bankruptcy and take it private. [WSJ]

Buyside

Blackstone: Shares of the private-equity firm rose 21%, on speculation that upcoming earnings would be better than expected. [Reuters]

People & Players

Inghie Kwik: Affinity Equity Partners is hiring Morgan Stanley’s Inghie Kwik to lead the Asia-focused private equity firm’s push into Indonesia. [WSJ]

Robert Donald: The GLG Partners manager is leaving the London hedge fund for Soros Fund Management. [WSJ]


Mean Street: In Vino Veritas at the White House

A one-act play performed by President Obama and his top advisers. The setting is the White House kitchen table. It’s 11 p.m. on July 30, 2009. Harvard Professor Henry Louis Gates and Cambridge police Sergeant James Crowley departed hours earlier.

Now President Obama, Treasury Secretary Tim Geithner, National Economic Council Adviser Larry Summers, OMB Director Peter Orszag and Chief of Staff Rahm Emanuel sit around drinking the leftover beer. They are all a little tipsy.

meanstreet

Obama: Well, all’s well that ends well. I couldn’t believe that we managed to get Skip and the cop to hug each other for the cameras. Is the photo up on Huffington Post yet?

Emanuel: Not yet, but I just spoke to Arianna.

Obama: Hey, Tim. How come you’re not drinking your beer? Your bad mood is getting me down.

Geithner: (Taking a sip and sighing) Well, it’s the Chinese. They really roughed me up when they were in town earlier this week. With $800 billion in our Treasurys, they’re now calling all the shots. Just look at the beer they’re making me drink. (He holds up a bottle of Tsingtao and looks at Orszag.) Peter, you better not let me down with that budget.

Orszag: (robotically but cheerfully) Hakuna matata, Tim. Hakuna, matata. Remember the $100 million budget cutting challenge from last April’s Cabinet meeting? We already got that one nailed. You can’t believe the savings you get from double-sided copying. (pauses meditatively). Hmmm…maybe Congress should pass a law requiring double-sided copying. All those trees…..I’ll ask the CBO to score it.

Emanuel: That’s a great idea! Nancy will love it. The Sierra Club will love it. But we’ll have to make sure it only applies to households earning at least $250,000 a year.

Geithner: (angry, in a shaking voice) Peter, Rahm, will you wake up! What about the $3.1 trillion deficit we’re running this year and next? The Chinese are freaking out. Didn’t you see the lousy results of yesterday’s Treasury auctions?
 
Orszag: Oh, that deficit? That will get much worse. Tim, you know it has to. Ten percent unemployment. No tax revenues. Much, much worse….but, hey, it’s not my fault. The forecasts we were given never made any sense.

(Orszag looks at Obama and silently motions his head in the direction of Larry Summers. Summers is slumped over and snoring)

But don’t worry I put off the mid-session budget revision until mid-August. Nobody will notice. Everybody will be on vacation in the Hamptons or Martha’s Vineyard.

Geithner: Not me. I can’t afford it. I still can’t unload my house in Westchester. (Mumbling into his beer) We really have to gin up that mortgage modification program.

Emanuel: No worries, Tim. Barney’s on top of that already.

Obama: You know, Rahm. I still don’t understand why we’re so dependent on Barney and Nancy and the rest of your old friends. This health-care thing is not looking too good. And once Peter’s deficit numbers come out….We’re screwed.

(The rest of the cast freezes. Spotlight on Obama. He stands up and looks at the audience.)

Wait, let me calibrate those words differently…


Goldman Sachs: The Cuomo Report’s Bonus Breakdown

Here is the breakdown for Goldman Sachs:

Tarp funds received: $10 Billion

2008 Earnings: $2.3 billion, or $4.47 a share.

2008 total bonuses: $4.82 billion (includes $2.24 billion in cash) (No employees received more than 884,193 in cash)

The top four received a combined $45.9 milion

The next four received a combined $40.81 million.

The next six received a combined $56.40 million.

Number of individuals that received more than $10 million: 6.

Number that received more than $8 million: 21.

Number that received more than $5 million: 78.

Number that received more than $4 million: 95.

Number that received more than $3 million: 212.

Number that received more than $2 million: 391.

Number that received at least $1 million: 953.

Total work force: 30,067.


Merrill Lynch: The Cuomo Report’s Bonus Breakdown

And, here is the breakdown for Merrill Lynch:

TARP funds received: $10 billion (it was never drawn down by Merill, but give to Bank of America to help it offset the costs of taking over Merrill in January).

2008 Losses: $27.6 billion, or $24.82 a share.

2008 total bonuses: $3.6 billion.

Top four recipients received a combined $121 million.

The next four received: a combined $62 million.

The next six received: a combined $66 million.

Number of individuals that received more than $10 million: 14

Number that received more than $8 million: 20

Number that received more than $5 million: 53

Number that received more than $3 million: 149

Number that received at least $1 million: 696

Total work force: 59,000


Evening Reading: MicroHoo and the Problem of Integration

MicroHoo: Integration. Integration. Integration. Perhaps more than anything else integration is key to assuring that a deal becomes successful. That does not bode well for the new Microsoft-Yahoo partnership, according to 24/7 Wall Street. “The partnership between Yahoo! and Microsoft to integrate their search operations is even more complicated than was rumored. It is so complicated, as a matter of fact, that the execution risks will be tremendous for two companies with radically different cultures. The transaction is made more obtuse by the fact that Yahoo! and Microsoft will continue to compete aggressively in businesses including internet content, e-mail, and instant messaging, which muddies the waters and raises the question of each company’s motives to make the deal a success going forward.”

Meanwhile, despite the reams of text from Yahoo about the partnership, a few question still remain unanswered. VentureBeat takes a look.

Short selling the shorts: Few activities have garnered as much attention and attacks as short selling. All the complaints of certain CEOs at financial firms even led to a brief ban. Robert Teitelman over at Dealscape has a piece on the SEC’s new rules that provide more disclosure and limitations on shorting. His conclusion: “The truth here is that the SEC realizes the markets need a certain amount of shorting to keep everyone honest. Shorting is like free trade: The more you know, the more you realize its importance. You can easily overstate this, but the truth is the shorts were one of the few bulwarks against a bubble mentality, but because the bull market went on for so long, their resistance flagged. The last few years of the bubble may have been the worst: There were more and more obvious targets, but markets kept rising anyway.”

Did Michael Moritz force Zappos’s CEO to sell to Amazon? The Internet has been abuzz with this rumor since the deal was announced last week. Michelle Leder takes a look at the S-4 filing and her conclusion? There is probably enough ammunition in the filing to support the view that Moritz did. Bill Gurley at his blog abovethecrowd.com isn’t buying the conspiracy. First Gurley points out that it is very unlikely Michael Moritz had any “mechanism” to “force” a sale of the company. And second and more importantly, “the CEO of Zappos, the remarkably successful and talented Tony Hsieh, had several mechanisms to block a deal if he in fact was not in favor of it.”

GE and its Finance Units: Earlier this month Harley Davidson said that it is reviewing “strategic options” for its loss-making finance arm. And plenty have called for the GE to spin off GE Capital. So the question is should commercial companies be allowed to keep their financial arms? The Obama administration wants tighter regulation of financial firms so that financial industry can reduce the likelihood that any one company’s potential failure would hurt the broader markets and economy. Yet in good news for GE, Congressman Barney Frank, who is central to transforming Obama’s plan into legislation, said GE and others should be allowed to keep their finance arms. Frank told Bloomberg that companies that already have finance arms or industrial loan businesses known as ILCs should be able keep them without being subject to Federal Reserve oversight of their manufacturing operations. Frank also said there was concern that firms such as Fidelity Investments and Berkshire Hathaway could have been fallen under this portion of the regulations.


The Little Known Banks Advising Sprint-Virgin Mobile

Who are these guys anyway?

With a few exceptions, Sprint Nextel’s acquisition of Virgin Mobile USA involved a cast of advisers that aren’t household names in the M&A world.

Sprint Nextel was advised by Wells Fargo Securities, which didn’t crack the top 30 on Dealogic’s rankings of investment banks by announced U.S. deal volume through July 21. Most of Wells Fargo Securities’s investment bankers come from Wachovia, which Wells acquired last year.

Two little known firms, Foros Advisors LLC and Colonnade Advisors LLC, provided a fairness opinion for Virgin Mobile.

Dealogic has no record of Foros advising on any deals over the past five years. (Deal Journal couldn’t even find a listed phone number for the firm). It turns out that Foros is a tiny operation that was recently started by Jean Manas, Deutsche Bank’s former head of mergers and acquisitions for the Americas.

Colonnade, which is based in Chicago, has advised on 17 small deals — mostly under $50 million — in the past decade, according to Dealogic. Colonnade was started by former J.P. Morgan banker Stuart Miller.

Deutsche Bank also advised Virgin Mobile. As of July 21, Deutsche Bank ranked 11th in announced U.S. deal volume, according to Dealogic.


Evening Reading: Why Did GM Spin Off Delphi?

“I can’t live if living means without you”: It’s been a long slog through bankruptcy for Delphi. Today the auto-parts maker’s lenders prevailed in a bankruptcy auction and are poised to take control of the bankrupt auto-parts supplier. But as Matthew DeBord writes over at the big picture: “Through all the gyrations and the endless bankruptcy, nothing much has changed: GM still can’t afford to lose Delphi, and Delphi still can’t afford to be liquidated. So did it really make sense to spin Delphi off in 1999? Of course not. But that’s what Wall Street wanted, and that’s what Wall Street got. One can never underestimate the finance business’s hatred for old-line vertically integrated companies.”

I don’t want to play in this game any more: Wilbur Ross was once a big proponent of investing in banks. These days? Not so much. Well, at least not under the rules the FDIC has proposed for private-equity firms to invest in banks. “I assure you that my firm will never again bid if the proposed policy statement is adopted in its present form,” he wrote in a letter to the FDIC as part of the regulator’s public- comment process for the rules issued July 2. That’s quite an about face for a man who attended Sheila Bair’s roundtable discussion in early June and walked away calling the meeting “highly productive,” writes Erin Griffith.

Cha-Ching: Zappos.com Inc. CEO Tony Hsieh was reportedly opposed to his firm’s deal with Amazon. But whether he was or not, he certainly stands to have a pretty good pay day — $214 million, Dealscape reports.

Goldman Bashing: There’s little doubt that Goldman Sachs would prefer nothing more than to have its name out of headlines. That, however, does not seem likely to happen. The latest piece comes courtesy of Michael Lewis, who offers up a tongue-in-cheek examination of the many rumors about Goldman. And Lewis had to address the most vicious rumor floating around about Goldman: That it’s “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

Writes Lewis: “For starters, the vampire squid doesn’t feed on human flesh. Ergo, no vampire squid would ever wrap itself around the face of humanity, except by accident. And nothing that happens at Goldman Sachs — nothing that Goldman Sachs thinks, nothing that Goldman Sachs feels, nothing that Goldman Sachs does –ever happens by accident.”


Deal Journal Video: An SEC Trial of the Heart

How did a love affair lead to convictions in an insider-trading case?

In his column today, Deal Journal’s Dennis K. Berman tackles the story of an Ernst & Young partner, who went in search of an affair and ended up in with six counts of securities fraud. The ordeal comes at a time when the number of insider-trading cases are on the rise — they reached an all-time high in 2008. It also opens up a rare, intimate portal into how life really happens, and how it gradually, almost unexpectedly, can veer out of control.

Evan Newmark and Berman discusses the case.


Deal Profiles: Sprint and IBM Open Up Their Wallets

Yes, there are deals getting done.

This morning saw two brand-name companies — Sprint Nextel and IBM — make acquisitions.

Sprint doubled down on the fast-growing but highly competitive pre-paid mobile phone market with a $483 million acquisition of Virgin Mobile USA Inc.

Below is a profile of this potential deal courtesy of our friends at Dealogic.

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IBM, meantime, agreed to buy software developer SPSS for $1.2 billion, expanding Big Blue’s software portfolio and adding another deal to the growing list of recent acquisitions in the software industry.

Below is is Dealogic’s profile of the deal courtesy of our friends at Dealogic.

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Morning Reading: ‘Outrageous Pay’ vs. the Sanctity of the Contract

Wall Street compensation is once again making headlines.

The U.S. pay czar, Kenneth Feinberg, will push to renegotiate contracts that he views as excessive or seek other ways to reduce overall outlays at institutions receiving big dollops of federal aid, the WSJ reported Monday. That followed closely on the heels of a WSJ article regarding Citigroup trader Andrew J. Hall and his push for the financial giant to honor a 2009 pay package that could total $100 million.

Hall is the head of Phibro, Citigroup’s energy-trading unit, which occasionally accounts for a disproportionate chunk of Citigroup income. Citigroup needless to say is one of the firms that has received federal aid. The troubled bank is contractually obligated to pay Hall based on Phibro’s profits. And Phibro has been highly profitable for Citigroup. So much so that a number of people believe Citigroup stands a better chance of repaying the U.S. money with its Phibro unit humming.

But considering that Citigroup would have failed had it not been for the government rescues of the company, critics argue that such pay contracts should be redrawn.

Not surprisingly, this is stirring some debate across the web. Roger Ehrenberg, for one, is concerned with the precedent that voiding Hall’s contract would set.

“The talk of nullifying or modifying his contract simply because neither Citigroup nor the US Government like it brings with it dark and threatening implications. If contracts entered into legally and without prejudice are all of a sudden cast into doubt, the entire foundation of free and fair commerce is in jeopardy.”

But Yves Smith gives little credence to the “sanctity of contract” argument:

“I don’t seem to recall many, or frankly any Wall Street types going on about sanctity of contracts when agreements with the UAW were reworked to save GM…employment contracts can and do get voided and renegotiated ALL THE TIME.”

In another post on the topic, Smith also raises concern about Phibro’s set up:

“Deals like Hall’s are close to a firm within a firm, always a bad idea. Arrangements like that led directly or through knock-on effects to the end of Drexel, the mess at AIG, and the Treasury bond scandal at Salomon…The Phibro team is a stand-alone unit that takes a lot of risk that is not appropriate for a government-supported entity. The government safety net should extend only to crucial financial infrastructure. This is a great opportunity for Citi to shed a risky, non-core activity, which is exactly what it should be doing.”

But what about fixing the trader-compensation system on Wall Street. Here again, Ehrenberg’s post has caused some debate. Ehrenberg is aware that the trader-compensation system is badly broken. That the “Wall Street ‘heads I win; tails you lose’ payout paradigm rewards excessive risks and places little to no premium on risk management.”

So what model would Ehrenberg like to see Wall Street adopt? Well, the hedge-fund model. Ehrenberg writes: “Moving to a funded-book structure with long-term trader investment scheme would eliminate most of the bad aspects of the current model while bringing in some new, positive impacts.”

Here Smith is skeptical, pointing out that LTCM’s partners had their money tied up in their funds and well…we know how that ended.

And speaking of phat pay, enjoy this Michael Lewis “defense” of Goldman Sachs.


At Nufarm, Fundamentals Battle Potential Takeover Bid

One rule of thumb in investing is to buy stocks when a company is seen as a potential acquisition target. The math is pretty straightforward: company + expected takeover premium = profit.

Then there is Nufarm Ltd. A rally in shares of Australia’s leading chemical company ran out of steam shortly after Nufarm announced the receipt of bidding interest from Sinochem, a state-owned Chinese chemical company. After jumping 10% on Thursday and another 13% to 11.12 Australian dollars a share on Friday, the day the market received word of Sinochem’s interest, the Australian company had a market value of A$1.8 billion.

But on Monday, the stock fell 5%. What killed the short-lived rally? The company’s own gloomy fundamentals.

In June, the company warned that its operating profit would be down about 15% from a previous projection due to “a decline in demand for glyphosate and increased price competition for fewer sales opportunities in key markets,” according to Nufarm’s financial statement.

Friday, Credit Suisse downgraded Nufarm’s performance from neutral to underperform, according to this Dow Jones Newswires article. “While strategically the merits of a takeover add up, we would consider the timing curious given the constant earnings downgrades and poor quality cash earnings. Corporate appeal seemingly once again coincides with lower potential earnings,” Credit Suisse told Dow Jones. “Based on the share price appreciation and weaker fundamentals, we argue any takeover premium is seemingly already implicit in the share price at A$11.12 (Friday closing price).”

J.P. Morgan analysts, upon news of Sinochem’s possible bid, also cautioned its investors. “Considering we think the current share price is factoring in a takeover premium for a bid that has not been formalized yet, we will take a wait and see approach,” the analysts said.

Analysts at Standard & Poor’s were less critical, saying the worse-than-expected earnings didn’t immediately affect the company’s ratings. S&P’s ratings of Nufarm remain at BBB, the lowest investment grade. They also recognized the potential positive impact it would have on Nufarm if Sinochem really proposes an offer.

Still, the J.P. Morgan analysts, concerned about Nufarm’s weak performance, said “there are still significant risks around this deal being formalized such as agreement on price and due diligence.”

Then there is Nufarm’s history. On Nov. 2, 2007, China National Chemical Corp., or ChemChina, bid A$3 billion for Nufarm, only to pull the plug at the last minute without giving substantial reasons. That bid offered a 35% premium to Nufarm’s volume weighted average share price for the previous 12 months.

Another question J.P. Morgan analysts had is whether China would be prepared to pay a significant premium again. The 2007 bid was roughly 12.5 times Nufarm’s earnings before tax, which would imply an offer of A$21.67 a share this time around. J.P. Morgan analysts said they “do not think so, as it is roughly double where Nufarm is trading.”


Cracking the Code: Ranking Wall Street’s Systemic Risk

Mirror, mirror on the Wall (Street), who was the riskiest of them all?

It was the question at the heart of the global financial crisis, when investors pummeled the shares of companies whose exposures to various investments such as subprime-mortgage-backed securities were unclear, and it is a hot topic in Washington, D.C., as regulators seek ways to prevent another meltdown.

Into the fray have stepped researchers at New York University’s Stern School of Business. They have devised a ranking of 102 financial institutions, which measures which firm poses the greatest systemic risk to the financial system. In recent weeks, the group has shared its proposal with the Federal Reserve Bank of New York and officials at the International Monetary Fund.

Of course, measuring the impact an individual institution’s financial troubles could have on the overall financial system is tricky because, as the recent global financial crisis showed, systemic risk isn’t always apparent until the entire system is under stress.

The NYU researchers used three different methodologies. First, they looked at 5% of the trading days since the 1960s with the biggest declines and calculated how much each institution’s stock losses contributed to the market’s overall decline on those days. Second, they ranked each institution’s risk profile by calculating its losses during those particularly bad days as a percentage of its overall market value. The third measure is likely to prove the most controversial: The group proposes that each financial institution be required to take out an insurance policy that would pay out to the government in the event of a financial crisis.

While not all of the institutions are systemically significant by themselves, they present “red flags” for regulators seeking to identify vulnerable links in the financial system, says Matthew Richardson, one of the project’s authors and an NYU finance professor.

To be sure they measured the institutions’ risk before the financial crisis took hold and to test the predictive qualities of their research, the researchers calculated the rankings using data through June 2007.

Predictably, at the top of this first list, an individual institution’s contribution to the stock market decline on those down days, are the biggest financial institutions: No. 1 Citigroup; No. 2 J.P. Morgan Chase; No. 3 Bank of America; No. 4 Morgan Stanley; and No. 5 Goldman Sachs Group. (Look familiar?) At the bottom of the list were Berkshire Hathaway, United Health, Aflac Inc. and US Bancorp.

By the second criteria (stock losses duiring the 5% worst days as a percentage of a company’s overall market value), the top of the list reads: No.1 E*Trade; No. 2 Bear Stearns; No. 3 CB Richard Ellis; No. 4 Lehman Brothers Holdings; No. 5 Morgan Stanley. CIT Group, the small-business lender that recently narrowly escaped bankruptcy, ranked No. 10.

The insurance rates charged would be determined by a complex algorithm measuring an institution’s leverage (or debt load) and the volatility of its share price and how its corelates the overall market losses. As of 2007, the ranking of the highest rates reads like a Wall Street tombstone: No 1 Bear; No 2 Lehman; No. 3 Merrill Lynch; No. 5 Countryside Financial.

Under the NYU plan, rising debt loads and a stock market meltdown would trigger an insurance payout to the federal government to offset the costs of any bail out or other assistance. The idea is that the insurance fees, which could total tens of millions of dollars per firm, would discourage a bank or broker from taking too much risk in the same way that the federal tax on carbon emissions is meant to discourage pollution.

The problem is whether private insurers could afford to provide such systemic risk insurance. “You don’t want a situation like [American International Group] where insurers would be writing insurance they can’t pay off,” Richardson says.

Next up? Satisfied that they are on to something, the NYU researchers plan to bring the rankings up to date. We eagerly await those new standings.

Below is the 10 riskiest firms as of June 2007 measured by MES. Click here to see the complete list.

Marginal Expected Shortfall Ranking (%) Firm Marginal Expected Shortfall Ranking ($)*
E* TRADE FINANCIAL CORP  37 
BEAR STEARNS  20 
CB RICHARD ELLIS  54 
LEHMAN BROTHERS  12 
MORGAN STANLEY 
GOLDMAN SACHS 
MERRILL LYNCH 
CHARLES SCHWAB  16 
CIT GROUP  50 
10  TD AMERITRADE  42 
Source: New York University’s Stern School of Business


Deal Profile: Agilent to Aquire Varian for $1.5 Billion

Agilent Technologies agreed to acquire rival Varian for about $1.5 billion, which will expand the testing-equipment maker’s offerings in the industrial and life-sciences markets and give it entry to the nuclear-magnetic-resonance, imaging and vacuum-technology fields.

Agilent, which makes machines to analyze DNA, chemicals, sound waves and other items, will pay $52 for each Varian share, a 33% premium to Friday’s closing price. The deal is expected to generate $75 million in annual cost savings within five years.

Below is a profile of this potential deal courtesy of our friends at Dealogic.

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Deals of the Day: U.S. Set to Renegotiate Pay at Seven Firms

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Today in the Financial Rescue

Banks and lending: Lending continues to slow as bankers and borrowers refrain from taking risks, a bearish sign for the economy. The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter. [WSJ]

Government guarantees: The U.S. guarantee on new debt issued by financial firms will save the companies about $24 billion in borrowing costs over next three years. [WSJ]

Another Citi ‘milestone’: The U.S. government is poised to take a 34% stake in Citigroup. [FT.com]
Related: Citi’s shares are starting to generate investor interest. [Barron's]

Setting pay: The U.S. pay czar will push to renegotiate packages he views as excessive as he vets compensation at businesses receiving major state aid. [WSJ]

Fed Action: Bernanke defended actions he has taken over the past two years as necessary to avoid another Great Depression. [WSJ]

The City: London’s financial district was hit harder than Wall Street and may take longer to recover. [Bloomberg]

Mergers & Acquisitions

Aetna: The insurance giant is shopping its pharmacy-benefit management business, as the industry embarks on a widescale consolidation. [WSJ]

Corus Bankshares: Several private-equity firms are considering bidding for the Chicago bank. Those considering a bid include Fortress, Barry Sternlicht of Starwood Capital, Related Companies developer Steve Ross and Colony Capital. [FT.com]

Nortel: U.S. and Canadian courts are expected to approve Ericsson’s $1.1bn bid for most of Nortel’s wireless assets on Tuesday. [FT.com]

Citigroup: The bank is looking to sell its private banking business in Italy. [FT.com]

Anglo-Xstrata: Anglo American CEO Cynthia Carroll has to convince investors that the miner holds hidden value above any premium Xstrata might yet offer — and that she can deliver it. [WSJ]

Related: In the Anglo-Xstrat takeover battle, each side can take a little heart from De Beers’s first-half results. [WSJ]

Vale: The Brazilian miner has reportedly made a takeover approach for Central African Mining & Exploration (Camec). [Daily Telegraph]

Friends Provident: The U.K. insurer rejected a revised takeover proposal from Clive Cowdery’s financial-services restructuring firm. [WSJ]

Financial Institutions

Prime push: J.P. Morgan Chase reshuffled its senior equities staff in a bid to prepare the U.S. bank for a further push into prime brokerage. [WSJ]

Buyside

Sun Capital: The 14-year-old distressed-buyout firm has fallen upon hard times. About 74% of its latest fund remains uninvested at a time when there should be plenty of distressed companies to buy. [NY Post]

Tom Hicks and George Gillett Jr.: Liverpool soccer club’s American owners have refinanced 290 million pounds of debt with RBS and Wachovia. [Bloomberg]

What do Private Equity Firms do all Day? According to a white paper by auditors Grant Thornton and the Association for Corporate growth, they are actually running and trying to improve the portfolio companies they own. [BusinessWeek]

Capital Markets

IPOs: Second-quarter earnings could provide the thrust for more companies to announce plans to go public. [WSJ]

People & Players

Keith Magnus: UBS hired Keith Magnus from Merrill Lynch to run the Swiss bank’s Singapore and Malaysia investment banking team. [WSJ]


Winners & Losers From the Week That Was

nullAmazon: The online retailer opened up its wallet this week, buying online footwear retailer Zappos.com for about $847 million in cash and stock. The deal is Amazon’s biggest acquisition in its 14-year history and provides Amazon with greater penetration into the largest online-shopping category — one in which Amazon has had limited success in the past. Online apparel, footwear and accessories generate about about $23 billion in annual sales, ahead of personal computers at around $16 billion and consumer electronics at around $11 billion.

nullMedarex’s shareholders: Bristol-Myers Squibb agreed to buy partner Medarex for $2.1 billion. That’s represents a premium of more than 90% — the biggest premium for a sizable health-care deal this year.

nullNortel: The auction of the telecommunication equipment maker’s wireless network assets are drawing significant interest as Nortel winds its way through bankruptcy. Ericsson, Nokia Siemens Networks, and private-equity firm MatlinPatterson are all bidding for the assets, and it’s possible that the auction could drag through the weekend — a good sign for creditors seeking the highest bid. A bankruptcy judge in Delaware is scheduled to confirm the auction results on Tuesday.

nullWendelin Wiedeking: How things have changed for the former chief executive of Porsche. Last fall he was the wolf stalking Volkswagen. Now he is the biggest loser of that failed takeover attempt. Wiedeking’s mistake was taking on $14 billion in net debt to buy 51% of VW plus options for at least another 20%. He had hoped to pay down debt using cash on VW’s own balance sheet, but was thwarted.

nullCIT: The troubled lender was saved by its creditors who organized a $3 billion private-sector rescue plan. But it’s hardly out of the woods. The long-term success may still hinge on the mercy of its regulators and debtholders. That’s left CIT evaluating a breakup as the threat of bankruptcy bears down. And on Friday, it amended the terms of a cash tender offer for $1 billion of bonds critical to its future.

nullMorgan Stanley: Both Goldman and J.P. Morgan raked in the dough during the second quarter. Even Citi and BofA recorded profits. Morgan Stanley? It reported a $159 million second-quarter loss from continuing operations. But the real concern is that Morgan Stanley will decide to dial up the risk only to watch the markets crumble again.


The Nortel Auction and Canadian Pride

The auction for Nortel’s assets continued inside a Manhattan law office on Friday evening, but the drama was also playing out in Canada, where the fate of the once proud telecom giant is a matter of jobs, pride…and national security?

Yes, this week Canada’s Finance Minister Jim Flaherty sounded the nationalist call over the bankrupt Nortel. Flaherty vouched for concerns that had been raised by Canadian-based Research In Motion Ltd., the maker of the BlackBerry, that keeping Nortel assets in Canadian hands was vital to national security.

“I think he’s a great Canadian,’’ Flaherty said of RIM’s CEO Jim Balsillie. “I think he’s entirely right to ask for the government to be concerned about the issue.” RIM was excluded from the auction because the company wouldn’t agree to certain conditions.

The non-Canadian bidders include New York private-equity firm, MatlinPatterson, Nokia Siemens of Finland and Ericsson of Sweden.

It’s unclear whether the Canadian government has any grounds to intervene in a U.S. bankruptcy court proceeding. Last year, Ottawa halted the $1.33 billion sale of MacDonald Dettwiler and Associates’ satellite technology business to U.S.-based Alliant Techsystems Inc, for fear of surrendering top-secret satellite images. It marked the first time the sale of domestic company to a foreign buyer.

The Nortel wireless assets being auction could affect at least 2,500 employees, located primarily in Ontario and Texas. Nortel employs a total of about 30,000 people.

The auction is being conducted at the offices of Cleary Gottlieb, Nortel’s bankruptcy lawyer. It’s possible that the auction could drag through the weekend — a good sign for creditors seeking the highest bid. A bankruptcy judge in Delaware is scheduled to confirm the auction results on Tuesday.


Today in BofA Promotions: A New Head of Global Investment Solutions

Bank of America is filling one vacancy, amid the exodus of Merrill Lynch bankers. BofA has promoted Chris Dupuy, a 24-year Merrill veteran, to head its Global Investment Solutions, part of its Global Wealth Management division. Dupuy replaces Mitch Cox, who left the firm last week. Three other bankers that followed Cox’s exit from the Global Wealth group have not been replaced.

* * *

A message from Dan Sontag, head of Merrill Lynch Global Wealth Management: Chris Dupuy Named Head of Global Investment Solutions

Dear Colleagues:

I am pleased to announce that Chris Dupuy has been appointed head of Global Investment Solutions for Merrill Lynch Global Wealth Management. In this role, Chris will be responsible for managing GWM’s financial products, including mutual funds, stocks, bonds, new issue, insurance, alternative investments and structured products. Additionally, Chris will oversee all manager due diligence, portfolio construction and investment implementation activities for the business.

Chris brings a broad range of investment, product, service and distribution experience to the group. Currently, Chris is head of Americas Distribution for GWM, responsible for all wealth management and wealth structuring specialists and support desks. He also leads the Cross-Sell & Referral Execution Group charged with delivering cross-selling and cross-referral opportunities between the advisory business in the United States and Latin America and Bank of America.

Chris will continue to manage Americas Distribution until another leader is named for the group.
Previously, Chris served as chief operating officer of the Americas Bank Group as well as national sales manager, where he coordinated all platform and sales initiatives between the product and service areas and branch offices across Merrill Lynch’s Americas advisory business.

A 24-year veteran of Merrill Lynch, Chris began his career in operations, before moving on to become a top-producing Financial Advisor in the Morristown, N.J. office. In 1994, Chris was promoted to management and spent the next several years in field leadership positions across the United States, including district sales manager for Washington, D.C., Maryland and Virginia, and later complex managing director for Richmond, Va., Washington, D.C., Red Bank, N.J. and Long Island East.

Chris’s strong knowledge and proven experience have earned him the respect of colleagues, clients and Financial Advisors throughout the organization. I’m confident that under his leadership, GIS will be even better positioned to provide clients with innovative solutions to meet their financial goals.

Please join me in congratulating Chris on his new role and wishing him continued success.


Deals of the Day: Buffett Regains His Cred With Goldman Surge

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Mergers & Acquisitions

CIT’s aviation-finance and rail-finance operations are the units most likely to be sold as part of a break up plan to shrink the troubled lender’s over-leveraged balance sheet. [WSJ]

Ericsson is the latest bidder for control of Nortel Network’s core wireless division, pitting it against Nokia Siemens, one of its biggest European rivals, and MatlinPatterson, a large private equity fund. [FT.com]

Related: The chances that Research in Motion will enter a formal bid for the wireless assets of bankrupt Nortel Networks are slim. [Reuters]

GM-Opel: GM said it will continue detailed talks with Canadian parts maker Magna and Belgian investment firm RHJ about the sale of its Opel unit. [WSJ]

“If you are still down by the end of the year, it is all over for you”: That, reportedly, is Fortress Investments message to banks and other hedge funds that it’s looking to snap up this year. [FT.com]

A U-Turn for Wiedeking: Porsche’s ousted CEO is the main loser from the luxury sports-car maker’s reckless attempted takeover of Volkswagen. [WSJ]

Global push: Sinotruk’s agreement to sell just over a 25% stake in itself to Germany’s MAN is a step toward boosting the Chinese truck maker’s presence in Europe and other developed markets. [WSJ]

Canadian Hydro Developers: The renewable energy firm have urged shareholders to reject an unsolicited bid by TransAlta Corp. [Reuters]

Private Equity

Buffett’s Goldman Bet: Goldman Sachs’ comeback from the brink is adding luster to Warren Buffett’s investment street cred — and more importantly, lining the billionaire investor’s outsize pockets. [NY Post]

Lubert-Adler Partners:
The private-equity firm is among at least four investors weighing bids for Corus Bankshares Inc., the condo lender. [Bloomberg]

Financial Institutions

The secret of Goldman’s success? Are lightening quick, state-of-the art trading computers the real source of Goldman’s magically large profits. The new technology might be boosting trading profits, but also manipulating prices. [NYT]

PNC: The pace of loans going bad slowed during the second quarter at PNC Financial Services and Fifth Third Bancorp, following signs at larger commerical banks last week that credit losses may be bottoming out. [WSJ]

J.P. Morgan Chase: The bank is following Citigroup and Bank or America, and increasing salaries for some of its bankers. [Bloomberg]

Financial protectionism: A report on the future of financial regulation voiced concern about swift moves to change rules in the U.K. and the U.S. that would include curbs on risky compensation practices. [FT.com]

Companies & Industries

MircoHoo: Yahoo directors had planned to meet on Thursday for an update about a potential search partnership with Microsoft Corp. [WSJ]


Deal Journal Video: Wachovia Gives Wells Fargo Indigestion

Wells Fargo has convinced investors for much of the financial crisis that it is a cut above other large banks.

While the shares of other firms languish, Wells’s shares trade at 2.5 times tangible book value. That’s significantly higher than the 1.6 times that J.P. Morgan Chase’s shares trade at. But while Wells posted better-than-expected second-quarter profits, it also showed a sharp deterioration in credit quality.

Now that’s raising concern: Has Wells’s management been caught out by the recent poor performance of the bank’s loans? One reason Wells trades at a big premium over others is the perception that its executives have a strong handle on credit risk. Now, though, there are signs that the bank may have been too optimistic about the quality of loans it got from Wachovia, the large bank it acquired last year. Moreover, many of Wells’s own loans continue to perform disappointingly, with nonperformers going up in the second quarter for corporate loans, commercial real-estate credits and its $117 billion of core home-equity loans.

Heard on the Street columnist Peter Eavis explains why Wells Fargo disappointed investors.


Deal Journal Video: Morgan Stanley’s Pay Dilemma

So far this year Morgan Stanley has had trouble keeping up with the Goldmans.

Morgan Stanley reported its third straight quarterly losses, while Goldman Sachs announced a $3.44 billion profit in the second quarter. Perhaps Morgan Stanley’s strategy will pay off in the long run, but for now, it is raising concerns. One fear for investors is whether Morgan, having missed the bumper profits on offer this year, will decide to dial up the risk only to have the markets again crumble.

Another concern: Where will its compensation levels stabilize? Goldman has generated enough money during the crisis to keep the proportion of net revenue it pays out to staff at about half. Morgan’s weak results meant compensation hitting 72% of revenue in the latest quarter. That leaves a far smaller proportion for shareholders.

Heard on the Street’s Thorold Barker explains why pay at Morgan Stanley is not just a matter for government, but also for shareholders. Plus, what to look for going forward.