Magazine

A Shadow Over Buyout Firms


Will G-men drag private equity into the public glare? The Wall Street Journal reported on Oct. 10 that the Justice Dept. is looking into potentially anticompetitive behavior by top private-equity funds. Letters to the likes of Kohlberg Kravis Roberts and Silver Lake Partners seek behind-the-scenes tidbits from bidding deliberations since 2003. Regulators are looking into how buyout clubs share information about targets. Do players observe tacit agreements to avoid pushing up deal prices? Stay tuned.

Not that this is choking off the going-private craze. On Oct. 9 the controversial family that controls cable TV provider Cablevision -- along with plum properties such as the New York Knicks, the New York Rangers, and Madison Square Garden -- unveiled a $7.9 billion buyout offer, nearly a 13% premium over the stock price at the time. The bid struck some analysts as pricey, but others figure that Time Warner (TWX) may ultimately buy the cable assets and that the Dolans want to be in a position to reap all the profit.

Those wiggly lines on seismographs on Oct. 9 spelled a serious setback for President George W. Bush's foreign policy and for those of Japan, China, and South Korea as well. North Korea's nuclear test makes an unstable corner of the world even scarier. But markets barely shrugged, and no major credit rating company has downgraded South Korea, perhaps because a preemptive U.S. attack on Pyongyang seems unlikely.

See "Costing the Unthinkable"

The week took a high toll in the corridors of power. Christian Streiff parachuted out of the CEO spot at Airbus on Oct. 9, having been there just three months, after a struggle with parent EADS. Andrew Mc-Kelvey, chief of job-search giant Monster (MNST), handed himself a pink slip the same day, partly impelled by an inquiry into stock-option practices. On Oct. 10, Tim Donahue said he would retire at yearend as chairman of Sprint Nextel (S), which has been struggling, and David Kies quit as chairman of biotech ImClone Systems (IMCL), which is under siege by investor Carl Icahn. On Oct. 11 the options scandal brought down CNET (CNET) Chairman and CEO Shelby Bonnie and McAfee (MFE) Chairman and CEO George Samenuk and President Kevin Weiss.

See "Airbus: The Ride Just Got Bumpier" and "Is Time Running Out for Sprint's Forsee?"

The twentysomething founders of online video mecca YouTube, Steve Chen and Chad Hurley, having their pick of would-be swains, finally chose one. On Oct. 9 they accepted an all-stock, $1.65 billion bid from Google (GOOG). More evidence of Dot.com Boom II?

See "Google's Video-Search Challenge"

If you can't beat 'em, join 'em. In order to stay competitive and raise much-needed capital, Visa followed archrival MasterCard and said on Oct. 11 that it'll go public after years of denying it would. The U.S. arm of the San Francisco credit-card outfit will morph from a bank member-owned operation into Visa USA, a for-profit, public company, in the next 12 to 18 months. MasterCard went public in May, and its shares have soared 76% since.

Kirk Kerkorian didn't waste any time tossing down the gauntlet. On Oct. 6 his right-hand man, former Chrysler (DCX) and IBM (IBM) CFO Jerome York, bade the General Motors (GM) board adieu. York and Kerkorian were miffed that GM didn't go along with their bid to snuggle up with Renault-Nissan. They also claim the board is too cozy with management. Many think Kerkorian, who owns 9.9% of GM stock, may launch a proxy fight. But given GM's earnings uptick, it may not be easy to win over shareholders.

See "GM: Things Are About To Get Nasty"

Alcoa (AA) is the industrial sector's canary in a cage, reporting earnings first every quarter. Based on its third-quarter numbers, manufacturers may need oxygen. The aluminum giant said on Oct. 10 that net income jumped 86% from a year earlier, to $537 million, on a 19% bump in sales. Sounds dandy, but analysts had been expecting profits of $673 million. Alcoa blamed the miss on declining aluminum prices and weakness in the automotive and home-building sectors. Its share price sank 5% on Oct. 11, closing at its lowest level this year.

The price of oil may be down, but Europe's inflation hawks aren't relaxing. The European Central Bank on Oct. 5 pushed up its benchmark rate for the fifth time in less than a year, to 3.25%, and warned that another quarter-point hike is likely in December. It's a signal that the ECB still spies oomph in the European economy, expected to grow 2.6% this year. Some outside economists even figure Europe will outperform the U.S. in 2007 as corporate restructuring feeds a productivity surge.

Global trade produces winners and losers, and union workers at Goodyear Tire & Rubber (GT) know which group they're in. Three years after granting cuts in pay, benefits, and jobs, more than 12,000 members of the United Steelworkers went on strike on Oct. 5 after the company insisted it needs to trim paychecks even more and close two more U.S. plants. Back in 2003, Goodyear, the biggest U.S. tiremaker and No. 3 globally, was on the verge of bankruptcy. But today the Akron company is profitable, and CEO Robert Keegan received $5.6 million in bonuses in 2004-05 for turning things around. So far, Goodyear has been using imported tires to offset the strike. And there's a glut due in part to slower Big Three car production.

PC networking pioneer Ray Noorda died at age 82 on Oct. 9. In 1982, Noorda co-founded Novell (NOVL), which once ruled the networking software market but lost out to its nemesis, Microsoft (MSFT). In the 1990s, Noorda became obsessed with beating Microsoft and took the software behemoth on unsuccessfully in one market after another. Hampered by memory loss that was the first sign of Alzheimer's disease, he retired from Novell in 1995 and formed a venture capital firm called Canopy Group.

A Nobel Prize for a proof of futility: Not inspiring, maybe, but highly relevant for economic policy. Edmund Phelps of Columbia University, who won the prize on Oct. 9, showed that the government, much as it might wish, cannot permanently boost growth by accepting slightly higher inflation. Why? When workers catch on that inflation is eroding their pay, they ask for more money. Higher wages cause prices to rise faster, setting off a spiral that doesn't end until the economy slows and unemployment rises back to its natural level. Phelps's once-surprising proof is now gospel at the Fed. The only weak spot is that the "natural" rate of unemployment is unstable and unpredictable -- unlike, say, the freezing point of water. Inflation has been restrained for the past decade even though joblessness has averaged just 5%, way below where most economists once pegged the natural rate.

See "Why Edmund Phelps' Economic Theory Matters"


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