Nice piece on Warburg Pincus

Amid all the high-flying deals in buyout land, Warburg Pincus has been selective in its acquisitions, and that's just the way it likes it.

Harris Williams: The Rapidly Growing Middle Market Investment Bank

One of the more successful middle market investment banking practices has been Richmond Virginia based Harris Williams. The below article is a nice summary of the practice's growth and prospects for the future. One of the more interesting things about Harris Williams is that it recently sold its business to PNC, one of the nations largest commercial banks. Historically, acquisitions of investment banks have not been the most fruitful of tie-ups. It is yet to be determined how succesful Harris Williams will be as a part of a large conglomerate.

See the article below.

Harris Williams Continues Rapid Growth As Middle-Market Investment Banker

By Lew Koflowitz

Harris Williams & Co. (HW) is on a roll. In 2005, the 15-year-old middle-market M&A sell-side investment bank, based in Richmond, VA, recorded another record year in revenues - representing a continuous stretch of annual increases since its founding, with the exception of 2001.

In the past 18 months alone, Harris Williams has completed more than 70 transactions, with an average deal size of about $125 million - meaning total transaction value greater thatn $8.75 billion.

The firm, which also has offices in San Francisco (since 1999) and Boston (since 2002), as well as new offices in Philadelphia and Minneapolis, is one of the largest U.S. investment banks focused exclusively on middle market companies, with deal sizes in the $50 million to $500 million range. With its increasing number of offices, it has a growing nationwide presence, representing private equity groups as well as publicly and privately held companies both in the U.S. and worldwide.

HW represents selling companies in a broad range of industries. The deals involve firms that are either being acquired as strategic acquisitions by operating companies, or as portfolio investments by private equity firms.

Further enhancing its market reach, in October 2005, Harris Williams was acquired by PNC Financial Services Group, based in Philadelphia, one of the nation's largest financial institutions. The transaction created a win-win for both organizations: HW can leverage PNC's broad middle market relationships, and PNC can draw on HW's accumulated middle market investment banking experience and capabilities.

Related to its new affiliation with PNC, Harris Williams opened its Philadelphia office in January. And in early March, it announced the hiring of Glenn Gurtcheff, formerly the co-head of Piper Jaffray's middle market mergers and acquisitions group, to open the new Minneapolis office.

HW's success is reflected in a number of statistics provided by the firm:

• A very high deals-initiated-to-deals-closed ratio of 90%;
• Staff tenure averaging about 8 years, reflecting significantly lower turnover than other firms in its industry;
• Staff size, now over 100, has been doubling every 2-3 years.

Many Deals in the Northeast

Harris Williams' four-year-old Boston office has contributed significantly to the firm's continued growth, particularly in technology-related transactions. Transactions completed by that office's investment bankers will often have one or more parties to the deal that are based in the Northeast region.

For example in late December, HW advised WordWave, Inc. in its sale to Merrill Corp. (www. merrillcorp.com). WordWave, Boston, is an international provider of litigation support, captioning and subtitling, and court reporting and transcription services. WordWave's litigation support division, LegaLink is a global leader in court reporting, legal videography and trial services.

What Accounts for Harris Williams' Successful Growth?

In explaining the firm's significant growth in the past several years, Kim Baker, HW's marketing director, said, "Our success has largely been due to the fact that Harris Williams was a pioneer in middle market investment banking. The bulge-bracket investment banks had consistently been focused on doing the larger, more glamorous deals, while the middle market hasn't been fully mined for its deal-making potential. Although the larger firms have now begun to recognize that potential, there continues to be a real opportunity for HW to bring credibility and enhanced deal-making capabilities to the middle market."

In a recent interview with American Venture, Phil Ivey, an HW managing director who has been with the firm's Boston office practically since 2002, discussed the background he brings to the firm, and how his team in Boston – and the firm overall -- operates to deliver value for their clients.

Ivey says that HW's Boston office has helped the firm win an increasingly larger share of the reinvigorated technology M&A market in the Northeast. "There's no substitute for being on the ground in the region – being able to meet the principals, the lenders and equity investors in the area," he says.

In addition to the firm's bringing on board many experienced M&A professionals, Ivey says an additional factor promoting good deal-making is the increasing degree of "institutionalized knowledge" that continues to accumulate within the firm. That accumulated knowledge includes a formalized, proprietary database of deals done and institutional and strategic buyers, he says. "The culture of the firm enables us to share the knowledge very effectively," he says.

The British-born Ivey brings with him a substantial degree of financial service and middle market investment banking experience, He took his undergraduate degree in math and statistics at the University of Bristol in the UK, and his MBA in marketing at Northwestern University's Kellogg Graduate School of Business in Chicago.

Ivey has a strong background in financial services and consulting, dating back to the late 1980s, when he worked for UBS Securities in London. Beginning in the 1990s, he did sell-side investment banking for Tucker Anthony, which was later acquired by RBC Dain.

Later, he did consulting and transactional work in the financial services sector for the consulting division of accounting firm KPMG, which later spun off the unit, now known as Bearing Point.

Projecting out into the remainder of 2006, Ivey remains optimistic. "From our vantage point, the coming year looks pretty strong," he says. "We're seeing a tremendous amount of attractive deal flow – perhaps equivalent to our record year in 2005."

Henry Paulson's WSJ Interview

The esteemed Henry Paulson was interviewed by the WSJ in today's issue. See the article below.

Goldman CEO
Tackles Critics,
Touchy Issues

Paulson Defends Firm's Strategy
On Both Investing and Advising:
'We Are Very Much Client-Driven'

By SUSANNE CRAIG
April 26, 2006; Page C1

At Goldman Sachs Group Inc.'s last annual meeting, a shareholder blasted Chief Executive Henry Paulson Jr. for being an environmental do-gooder who isn't as focused on the firm's core business as he should be. Mr. Paulson defended himself, saying if there is one thing shareholders would agree on it's that Goldman is good at making money.

The firm had record annual profit of $5.63 billion in 2005 and its shares are soaring. Goldman is the world's leading provider of merger advice.

But Goldman also gets criticized for the way it makes its billions. Often, the global securities giant deploys its own capital to make big market bets for itself or take stakes in companies. This strategy is emblematic of what is going on across Wall Street -- more and more firms are putting their own money at risk to boost profits. By having more skin in the game, critics wonder if Wall Street firms, such as Goldman, are putting their interests ahead of clients. It's an assertion that gets Mr. Paulson hot under the collar.

Mr. Paulson, 60 years old, graduated Phi Beta Kappa from Dartmouth in 1968 with a major in English literature and All-East laurels as a tackle on the football team. He cut his teeth at Goldman as an investment banker in Chicago. He has worked at Goldman 32 years and has run the firm since 1999.

He recently sat down in his top-floor office at Goldman's Manhattan headquarters to discuss the firm's success, its critics and the challenges ahead. He also addressed his future plans, including an oft-rumored post in the Bush administration, and explains why he once brought a bird to work.

* * *

WSJ: There is a lot happening on Wall Street these days, and not all of it is positive. What is the biggest challenge facing Goldman these days?

Mr. Paulson: Managing growth. Since 1999 the number of people we have has roughly doubled, as has our revenue, and our capital base has gone up four times. All this is good. But there's no doubt that our culture likes things small. So the key ... is maintaining a very strong culture, staying entrepreneurial despite our current size. We spend a lot of time thinking how to do a better job of institutionalizing some of the processes that we were able to do on more of an entrepreneurial basis when we were smaller.

WSJ: Goldman was recently in the news when one of its employees and a former employee were ensnared in an insider-trading case. Are these the type of issues part of the growing pains?

Mr. Paulson: There's always some probability, no matter how hard we try, that we're going to hire some bad people. We have got 24,000 employees. Towns of that size have a jail. Hopefully, we have a better screening process but we are still very embarrassed that we had that person at Goldman Sachs.

WSJ: Tell us a little bit about your plans for the future. There is a lot of talk that you are a candidate for Treasury Secretary.

Mr. Paulson: I love my job. I actually think I've got the best job in the business world. I plan to be here for a good while and I'm very focused on the challenges we've got in front of us at Goldman Sachs.

WSJ: You talk about how important your clients are. But probably more than any other Wall Street firm people accuse Goldman of competing with its clients. You have a private-equity arm that makes investments. How do you manage it when client A calls up and says, "Why are you bidding for ABC Telecom Co. against us?"

Mr. Paulson: I strongly disagree with your assertion. We look to co-invest with our clients. Our clients, by and large, are very sophisticated. And so when our clients ask us to perform a role they are pretty thoughtful about it, and they're doing it based upon our history of being able to manage conflicts and potential conflicts.

I do believe that the way in which we manage the conflicts and perceived conflicts is critical to our reputation and we would not have the market share we have and the client relationships we have if we weren't able to manage those in a way in which it meets the high standards we set.

WSJ: Still, your firm continues to make headlines on this issue. In 2005, you acted as adviser to both the New York Stock Exchange and Archipelago Holdings when they merged. The CEO of the NYSE is a former Goldman president. People were outraged.

Mr. Paulson: I think that's a very good example of something that we don't think was a conflict. I'm gratified that deal has been recognized by the market for how great it was for the New York Stock Exchange and more importantly for the capital markets. We'll look back on that in a number of years and say, it is one of the few things we have played a role in that has made such a significant difference.

I think it is generally known we came up with the idea. The boards of each client very much wanted Goldman Sachs, and we agreed to work with them in developing the business model, figuring out how to put the two companies together. They didn't just ask, they insisted that we do that on a sole basis early on. It was very important to keep the transaction confidential. Also, we did not advise either side on price.

In addressing conflicts there is another issue at play: public perception. Does it appear appropriate? I have to tell you we are increasingly aware of that.

WSJ: Goldman has internal hedge funds and makes a lot of money using its own money to wager on the market. Your critics say Goldman is just one big hedge fund. Are they right?

Mr. Paulson: I think that's ridiculous. We are very much a client-driven firm. We are very good advisers. We have client relationships that are second to none. We're good investors, and we've got a first-rate team that knows how to anticipate market change and respond to client needs. I think that when people say, you know, gee, you're like a hedge fund, they look at the securities businesses and its results and so much of it comes under sales and trading. But the vast majority of that is us performing our role as a financial intermediary and taking risk to help clients make investments or execute transactions. That's very different from the role of a hedge fund.

WSJ: A lot of your business now comes from outside the U.S. What concern do you have about the growing backlash against foreign investment?

Mr. Paulson: There's not just a backlash outside of the U.S. There is a backlash inside the U.S. The way I think about it is that if the last 20 years have shown us anything, it's that there's no good alternative to globalization. What the last 20 years have shown is those countries that have opened themselves up to globalization have benefited. The others have been left behind.

In the U.S. we have benefited more from free trade and global competition than any country in the world. But yet, at a time when our economy is growing and new jobs are being created, there's still quite a protectionist sentiment here. I really believe that we need to be better at articulating the benefits of globalization to society and better at acknowledging the shortcomings and addressing them.

WSJ: Goldman is heavily invested in a number of countries, notably China. What is the next country Goldman might look at?

Mr. Paulson: I've been to China about 70 times since the end of 1990. I just got back from the Middle East. There are huge amounts of capital in that region. They have much more capital than investing opportunities. So there are real opportunities there.

Business in Germany is picking up. That economy is definitely stronger. We not only have India and China growing, but also Korea and Japan. In Latin America, whoever thought we'd see Brazil growing and with a surplus that's 6% of GDP?

WSJ: Everyone on Wall Street brags about how good they are at risk controls. What makes you different?

Mr. Paulson: We spend an enormous amount of time on risk controls. We look at all kinds of scenarios. For example we study market, credit and operational risks. But we're realistic enough to say that we don't know when there's going be a global financial crisis, or some kind of global shock. And when that comes, market positions that aren't supposed to correlate will correlate. Because many of us have similar positions, the things we thought were going to be liquid will be illiquid, and in some cases the reverse will be true.

When you deal with something like that, the most important thing you can do is have excess liquidity, and we do. In 1998, when we went through the last shock, because we had excess liquidity, we were able to maintain our strategy, hire people from our competitors and invested in Asia immediately.

In recent months there has been a lot of talk about your support of various environmental causes. It is true you once brought a live bird to a staff meeting?

Not exactly. I was chairman of the Peregrine Fund and they do captive breeding and releases of endangered raptors, originally the Peregrine Falcon... They were doing some fund-raising and I had people from the Peregrine Fund come by the office with a falcon.

Write to Susanne Craig at susanne.craig@wsj.com

Private Equity Succession Issues

The barbarians at the gate that sparked the LBO boom 25-30 years ago now are dealing with succession issues, writes the Deal in a special feature article.

See the article on this link or see below.


Time to move onby David Carey and Vyvyan Tenorio Posted 08:32 EST, 20, Apr 2006What future awaits private equity when its founding fathers retire? Will the firms hatched 25 or 30 years ago, now among the biggest names in the buyout business, flounder as their aging leaders — a generation of charismatic entrepreneurs like Tom Lee, Henry Kravis and David Bonderman who invented the LBO — exit the scene? Can the protégés who succeed them hope to match their stellar achievements?
This conundrum is no trifling matter to the investors who entrust billions to LBO firms. For years, limited partners could only wonder what lay in store, even as time inched on and the question of generational succession became more urgent.
But over the past several years, many elite firms have shuffled leadership or anointed heirs apparent, and turnover in the top ranks has accelerated across the industry as the old guard reaches traditional retirement age.
The era of transition is in full swing.
The issue really came to the fore when the news surfaced in December that Lee, 62, who hit it big in the 1990s with leveraged buyouts of Snapple Beverage Corp., data provider Experian and nutritional chain GNC Corp., would sever ties to his Boston-based Thomas H. Lee Partners LP and surrender the reins to a trio in their 40s.
At about the same time Andy McLane, the longtime No. 2 partner at TA Associates Inc., another prominent Boston buyout house, scaled back his role, and TA's CEO, Kevin Landry, confirmed that he will step down as boss in the coming months.
Since 2003, power also has migrated at Apax Partners from Ronald Cohen to Martin Halusa, and at Hellman & Friedman LLC in San Francisco from Warren Hellman to Brian Powers, while Chicago's Madison Dearborn Partners LLC tapped Sam Mencoff and Paul Finnegan to succeed John Canning Jr. one day.
The list rolls on: Since 2000, the next generation has taken charge at Advent International Corp., Warburg Pincus, Leonard Green & Partners LP and Welsh Carson Anderson & Stowe. In fact, it seems the only remaining top-flight firm led by sexagenarians not to have plotted a succession is Kohlberg Kravis Roberts & Co. Henry Kravis and co-founder George Roberts, both 62, have made it clear they won't cede authority anytime soon.
There is no question, then, that the generational handoff is well under way. But it won't be clear for years how it will reshape the business.
Indeed, the flurry of retirements is merely Act 1 of the transition. The next act will unfold gradually as the new bosses settle in and forge their own track records. And it will take formidable talent to match, let alone eclipse, their legendary mentors, especially at a time when the business is expanding and becoming increasingly institutionalized and global. The business has matured, and to stay ahead requires more than the brilliance, creativity and entrepreneurial flair that marked the pioneers. Today the industry demands not only strategic vision but bureaucratic skill. Who among the younger leaders will fill the old guard's shoes is a hotly debated topic.
"It's still too early to tally things all the way up," says Brian Wade, director of private equity for the state of Virginia's $49 billion pension fund, talking about the successor generation.
Even where the baton has been handed off, longtime bosses are still coaching from the sidelines, shaping the firms long after they've given up much hands-on control.
"You can name on one hand, with fingers left over, the big firms that have had a transition and [the once-dominant] guy is totally gone," as Erik Hirsch, chief investment officer at Hamilton Lane Advisors LLC, a buyout fund investor and pension fund consultant, puts it.
Sometimes successors shine once they are removed from a founder's deep shadow. That can be true even when the parting of the ways is downright contentious.
Take Leonard Green's split with Leonard Green & Partners, the Los Angeles firm he started in 1989. Testimony in Green's divorce revealed that he was at odds with his partners, who were infuriated in 1999 when he struck a deal to pump $300 million of the firm's money into Rite Aid Corp., a troubled retailer in which he personally held a stake. By then, Green, in his mid-60s, had virtually ceded control to its three current leaders, Jonathan Sokoloff, John Danhakl and Peter Nolan. The breakup became definitive in 2000; Green died two years later.
Their rift aside, his ex-protégés have carried on with Green's value-oriented style and have performed splendidly on their own, racking up impressive returns in a string of transactions, and boast one of the best recent records in the middle market. Says Hirsch: "Leonard Green is an example of a transition that has worked out very well."
Tom Lee's exit from Thomas H. Lee Partners, his 32-year-old firm, is one of the few complete exits. While the situation wasn't nearly as messy as at Leonard Green, it had its dash of melodrama. And strangeness.
Lee's departure followed the collapse and bankruptcy late last year of Refco Inc., the futures broker T.H. Lee owned, saddling the firm with a $260 million net loss. But the timing was coincidental, people familiar with the firm say. In fact, Lee had largely scripted his own retirement back in the mid-1990s. Then he remarried, moved to New York from Boston and took to managing T.H. Lee from his one-man outpost far from the firm's nerve center. In 1999 he sold a 25% stake to in T.H. Lee to Putnam Investments, personally banking more than $100 million in proceeds, sources say. At that time, the firm set in motion a slow succession mechanism. By the late 1990s, Lee had largely ceased sourcing deals.
Over time, Lee generously surrendered to his partners the bulk of his share of the firm's "carried interest" — the 20% of investment profits it rakes off in incentives. By 2000, when the firm's $6.1 billion fund was raised, Lee had slashed his own piece of the carry to just over 10%, from 66% in the early 1990s. In 2003, he ceded most of his day-to-day duties to three co-presidents, Anthony DiNovi, Scott Schoen and Scott Sperling, but kept the titles of chief executive and chairman. By late 2005, T.H. Lee was gearing up to raise another fund in which he had long said he would have no substantial role.
The stage seemed to have been set, by the man himself, for Lee to deliver a gracious valedictory and withdraw. Instead, an unexpected, behind-the-scenes dustup intervened.
It seems that Lee, resisting the prospect of becoming a figurehead, was keen to start an independent buyout shop. His old partners, who held rights to the potent Thomas H. Lee brand name, viewed his plan suspiciously. They insisted he would have to set up his new fund under a different banner. The two camps further engaged in a low-intensity public-relations battle over who could claim credit for T.H. Lee's recent success. Lee's camp suggested he'd been a hands-on CEO and deserved much credit. The Boston camp suggested otherwise.
On March 17, the sides announced a departure agreement. Because Lee aims to stick to the small- and mid-cap markets, the Bostonians agreed he could call his new shop Thomas H. Lee Capital. He'll also have limited rights to use his old firm's track record to market his new fund. The two sides wished each other the best.
How institutional investors parse the conflicting messages remains to be seen. One said he views Lee's leaving as a key loss, noting: "The firm is still marketing off of Tom Lee's record in Fund I and Fund II. You take his contribution out, and they have a very different track record." But others said Lee's absence should have little impact on T.H. Lee's future performance.
All in all, it was an odd coda to a legend's long and stellar run.
Private equity has had its share of high-profile fatalities. Wesray Capital Corp., in its day perhaps the industry's top performer, didn't survive the late 1980s breakup of founders William E. Simon and Raymond Chambers. Irreconcilable differences ripped apart Golder, Thoma, Cressey, Rauner Inc. in the mid-1990s and more recently Hicks Muse Tate & Furst Inc., where investment loses aggravated the internal divide. (Each of those partnerships split in two; the successor shops still exist.)
Then there is the strange destiny of Forstmann Little & Co., led by Theodore Forstmann, whose renown in the 1980s equaled that of Henry Kravis. A year and a half ago, following catastrophic losses in telecom deals that wiped out much of Forstmann Little's capital and prompted one key limited partner to sue, Forstmann, then 64, announced he'd decided to wind down operations.
To many, his "decision" looked like an effort to paper over the firm's inadvertent self-destruction. Still, one former associate insisted the move was voluntary.
"Ted didn't see the firm as an [enduring] institution," the associate says. "He didn't see private equity as an 'industry'; he saw it as a series of investment opportunities. He never wanted to build a huge firm, never wanted to go global. The industry had evolved in a direction he didn't like, away from the best interests of investors. In the end, he decided he'd had enough."
At most other firms, of course, the survival instinct is stronger. Most of the industry's old guard hope that the firms they built will last. Limited partners and buyout executives alike say that to ensure a smooth leadership succession and increase a firm's chances of success, private equity partnerships must take some key steps.
Step One is to keep the best young talent from leaving — especially those gifted enough to lead the firm. That means paying them what they're worth. In the old days, it may have made sense for a firm led by a rainmaker or two who originated every deal to pocket most of the fee income and carry. But as buyout firms' purses and portfolios have grown, so have the partnership ranks. To hang on to up-and-coming dealmakers requires management to spread more than just the workload; founders also must spread the wealth.
That's why limited partners say they like it when older partners do what Tom Lee did and gradually shrink their share of the carry.
"We're always concerned about whether the staff is properly compensated for the effort they're making. If the senior people are all keeping the carry, that's a potential disaster," says William Franklin, who oversees Bank of America Corp.'s LP investments in private equity funds.
A second smart move, say limiteds, is for firms to set up committees that enable younger partners to help make key decisions and think through issues with more seasoned colleagues.
"More and more firms are setting up operating committees and investment committees," Hirsch remarks. "That way, they not only leverage their resources to better effect, but it makes for a smoother exchange of the baton."
In fact, so many private equity houses have delegated decision making to committees that they are reshaping how the industry operates, says a partner at a large West Coast firm, who views the trend favorably, as a sign the business has matured.
"Private equity has transitioned from an entrepreneurial into a more institutional industry. When I joined my firm eight years ago, I'd bet that half the firms did not have investment committees. The founding partners called the shots. That has changed. Today decision making is much more rigorous and formalized," he says.
More significant, several firms have scrapped the single-leader structure entirely in favor of what those that have done so call a partnership structure, popularly known as management-by-committee. At least one West Coast firm, Leonard Green, has embraced leadership by a group of equals. But the trend has positively swept Boston.
In addition to Thomas H. Lee Partners, most of the city's other big players are led by three or more partners: Bain Capital LLC, once led and wholly owned by Mitt Romney, now Massachusetts governor, is managed by a committee of four. Six managing partners now hold sway at Summit Partners, a firm long led by the retired founders, Roe Stamps IV and Stephen Woodsum. And six partners oversee Advent International, which Peter Brooke started in the mid-1980s before passing the reins to Douglas Brown, who retired as CEO in 2001.
"We felt there were a group of talented people who could better manage the firm than any single person," says David Mussafer, one of Advent's top six.
Another Boston firm soon will join the club.
At TA Associates, Kevin Landry, 62, will relinquish his CEO's title within the next several months. He won't be replaced. As long ago as the late 1980s, authority over pay, changes in ownership and policy devolved to a four-member executive committee on which Landry, Jeffrey Chambers, Michael Child and Brian Conway now sit. (Conway joined the committee Jan. 1, replacing the now-semiretired Andy McLane, TA's longtime No. 2 partner.)
Authority over investments, meanwhile, is exercised not by a single investment committee of fixed members, but rather by investment committees — plural — whose makeup varies by deal. Each committee has four members, including two people who worked on the deal and two high-ranking TA partners who did not. Until October 2004, Landry or Child sat on a majority of the investment committees. But Landry has handed off his duties to Bruce Johnston, a partner in TA's technology sector group.
Landry, whose firm just wrapped up a $4.3 billion fundraising, says TA is too big an operation now for one boss to call all the shots. "In the mid-'80s, I would make a lot of the investment decisions. Today we are more of an open democracy. There is no small group here that is thought to be infallible and has a monopoly on good judgment."
Like many — but by no means all — sexagenarian bosses who began prepping for departure well in advance, Landry has cut back his piece of the carried interest, from a high of 40% during the '80s to single digits today. Landry also has slashed his ownership stake in the partnership.
Carry and ownership ought logically to correlate. But at some firms they don't, with founders holding a greatly disproportional ownership stake even after they've cut in younger partners on the carry. Younger partners may not object if they get fair slices of the profit pie. But the discrepancy can pose problems when the founders transition out because they may insist on a big buyout. At a time when there is speculation that some buyout firms may go public, those with big stakes may not cede them as willingly as Lee and Landry did. Ex-leaders who have collected big buyout payments when they left include Bain's Romney, Tom Lee, Warburg Pincus' Lionel Pincus and Apax's Ronald Cohen.
Such buyouts typically are financed with debt, which can be a drag on a partnership's finances.
Transitions are likely to be smoother where a firm has periodically readjusted partners' ownership stakes to approximate their percent of the carry. Landry's TA does so, as does San Francisco's Hellman & Friedman. Limited partners say they weight this alignment of ownership when they mete out dollars.
"Like the carry, ownership is something we look at very closely," says one institutional investor. "If there's a financed buyout, it can a impose a tax on revenue for the people who stay. That can encourage some of them to leave."
What most concerns LPs is when the older generation ignores these succession issues and dissension erupts among the ranks, causing key personnel to leave. "We want to see them bring in other people who can gain our confidence in terms of the roles they can play while slowly reducing the responsibilities of senior partners selectively," says Charles Froland, managing director of Greenwich, Conn.-based Performance Equity Management LLC. "So you still have a deep and seasoned bench with staying power through the next fund. That is the challenge."
As the industry's generational succession moves into high gear, such is the provisional evidence that limiteds have to sift. Iron-clad it is not.
Information about how the carry is dispersed or personal assessments of the quality of the remaining talent are imperfect clues to a firm's future. Nor is a smooth succession a sure augur of successful investments.
At Welsh Carson Anderson & Stowe, for instance, several of the firm's limited partners decided not to reinvest in its latest fund, which is expected to close at $3 billion, about 25% less than what the firm raised in 2000. One concern was the transition from the founders to a new generation of managers whose track record may not be as stellar as the previous generation's. "People weren't rushing into it and have said no because they haven't been as successful recently as the firm had been several years ago," says one large pension fund investor. "They need some time to prove themselves out.

Ex-Chicago economists are all the rage at Goldman

An article that I had meant to point readers to from the WSJ is pasted below. It sheds light on the ultra secretive Global Alpha. It's quite a story on how these guys came together, but more fascinating is the results they have produced. See below.

Goldman GurusStrike It RichWith Hedge Fund
Global Alpha's Stellar ReturnsMean Pay-Dirt for Ex-Academics; The Envy of Wall Street Firms
By RANDALL SMITHApril 20, 2006; Page C1


NEW YORK -- In early 1997, Mark Carhart was an academic at the University of Southern California. His big claim to fame was his doctorate work at the University of Chicago on mutual-fund performance.
Today, the 40-year-old Mr. Carhart and another former Chicago-school colleague run a big, secretive hedge fund at Goldman Sachs Group Inc. which, with an estimated $10 billion in assets, is the Cadillac of a fleet of alternative investments that have boosted the earnings at the blue-chip Wall Street firm. And the two men are making millions themselves.
Known as Global Alpha, the Goldman hedge fund was a leading contributor to a surge in "incentive fees," or performance-related fees, that Goldman reported for the first quarter ended in February. In that period, the incentive fees soared to $739 million from $131 million a year earlier, helping Goldman's earnings rise 64% to $2.48 billion, the biggest first-quarter gain of any major Wall Street firm.
Global Alpha's recent returns have been sizzling. In the 12-month period ended in March, the fund returned more than 48% before some fees, according to Goldman Sachs JBWere, an Australian affiliate of Goldman. It was closed to new investors last year. (On Wall Street, the word alpha refers to investment returns beyond those generated by the market.)
The bearded Mr. Carhart and his colleague, Ray Iwanowski, manage Global Alpha. A 50-member team they lead also offers a menu of services for Goldman clients based on statistical models first developed by a group led by Clifford Asness, another former Chicago student.
The Global Alpha fund was seeded in late 1995 with just $10 million, and in its first full year, 1996, the fund returned 140%, one former group member recalls. Mr. Asness left Goldman in 1997 with seven of the group's 13 members, to form his own hedge-fund business, AQR -- short for Applied Quantitative Research.
Partly to ease the risk of litigation, the Asness team decided against taking the entire group, leaving Messrs. Carhart and Iwanowski as the senior remaining members. In his own academic career, Mr. Iwanowski co-authored "Dynamics of the Shape of the Yield Curve," in 1997 in the Journal of Fixed Income.
One of the reasons the Asness group left was that Goldman at the time refused to pay members of its money-management group, Goldman Sachs Asset Management, bonuses linked directly to the performance of their business units. Instead, Goldman set bonuses on a more discretionary basis.
That changed a few years later, at the urging of some GSAM executives. The result is that Messrs. Carhart and Iwanowski are said to be among the firm's highest-paid employees -- with annual compensation estimated by some outsiders at $15 million to $20 million apiece.
GSAM also has other hedge funds, private-equity funds and "funds of funds," which offer a menu of hedge-fund investments to Goldman clients. One client, the Utah state retirement system, invests in Global Alpha as well as other quantitative strategies, aimed at beating different stock indexes.
GSAM has become the envy of some other Wall Street firms which have vowed to expand in hedge funds or private equity. For example, Morgan Stanley aims to grow in both of those areas, and both UBS AG and J.P. Morgan Chase & Co. are also pushing into the hedge-fund field.
Goldman, which shuns the creation of stars based on its culture of teamwork, declined to make Messrs. Carhart and Iwanowski available for interviews. A Goldman spokesman declined to provide information about the fund, citing regulatory restrictions.
Mr. Carhart hails from Washington state, according to Russ Wermers, an associate professor of finance at the University of Maryland business school. Mr. Wermers said he wouldn't have predicted the "unpretentious, down-to-earth" Mr. Carhart would become "a master of the universe."
When they met in 1996, Mr. Carhart was embarking on a 200-mile Portland-to-Seattle bike ride, Mr. Wermers said. Other colleagues say Mr. Carhart still brings his mountain bike on cross-country business trips, and sometimes cycles in Manhattan on workday evenings.
The Global Alpha group's lineage traces to a group of students of Professor Eugene Fama, an influential Chicago finance professor known for a belief in efficient markets. In the early 1990s, his former teaching assistant, Mr. Asness, was recruited to join Goldman by a college friend, and in turn recruited numerous colleagues from Chicago.
One of the group's early assignments was to build quantitatively oriented asset-allocation models. Part of the methodology, which underpinned the strategy of Global Alpha, was to select stocks selling at cheap prices based on their book value, earnings or other metrics, while betting on a decline in stocks selling at higher prices based on their growth prospects.
The Goldman group later used similar methods to choose not only stocks but also bonds, currencies, and entire country markets, former group members say. The models also included a "momentum" factor based on which stocks or markets have recently performed well. Although the models have evolved, the underlying "quant" methodology remains similar.
In addition to Global Alpha, Goldman employees manage two other hedge funds specializing in quantitative stock and bond investments with an estimated $8 billion in assets. While some competitors grumble that Goldman traders could gain an advantage based on possible access to client information, the Goldman funds don't have such access, former group members say.
The Goldman "quants" also offer a product similar to the Global Alpha fund known as global tactical asset allocation, which gives pension funds and other institutions the chance to boost returns using statistical methods. Goldman's 2003 annual report featured a team including Mr. Carhart which invested $1 billion for the General Motors Corp. pension fund using "active alpha investing."
The Goldman team continues to rely on the latest work from academia. Maryland's Mr. Wermers recalled a visit to Goldman about a year ago to discuss a paper he had written on whether the flow of investments into top-performing mutual funds could predict whether stocks they held would rise in price.
When he presented his findings in a boardroom filled with about 20 GSAM employees, Mr. Wermers recalls, "it was kind of a high-pressure event. They asked very, very tough questions."
Write to Randall Smith at randall.smith@wsj.com2

URL for this article:http://online.wsj.com/article/SB114550097877130828.html

Chicago GSB Admit Weekend

So it's been a few days since I have posted with interesting thoughts and articles on the markets, and the delay is primarily because I was in Hyde Park for most of the weekend. University of Chicago had its "Admit Weekend" for accepted students to the full-time MBA program, and I was one of the many who attended with the hopes of getting a better feeling for the school that I would be attending this fall. I had not paid my deposit yet, but I was 100% certain that I would be attending the school, so for me there was little convincing the school had to do. But for many other attendees, the Admit Weekend was a time to get a feel for the school before making the big decision. Personally, I feel that most people know where they want to be and that a campus visit does very little to sway them either way. But that's just my opinion.Overall, Admit Weekend was a blast. Both the current students as well as the admitted students were approachable and interesting. The weekend included informational sessions on the school and it's programs, Q&A with students, and social functions where everyone got to know their peers in a less intense atmosphere.I decided to sign up for the Random Walk trip experience. Check out the site here.

Random Walk trips were stressed pretty hard and the students did a good job convincing many of the admits to sign up. I'm looking forward to the experience. I signed up with the following three as my preferences (in decsending order of preference)

1) Brazil
2) Galapogos Islands
3) Belize

But anyway, it was back to work today. About 2 months left before the fun begins.

Funny Video of Indians Dancing By a Pool

Check out this hilarious video clip of FOBs dancing in a swimming pool.

KKR Buzz

The buzz in PE land the past few days has been on KKR's plans to launch a public buyout fund that would be traded on an Amsterdam (Euronext) Exchange.

Here are some interesting articles on the issue:

TheDeal.com
Reuters.com
DealBook
WSJ

Personally, I think it makes sense to pursue retail investors for some of these funds, and its natural for partners to look at the IPO route because they dread the marketing/fund-raising process.

Whither the PM?

Interesting article that discusses how industry experts feel the financial markets will look 10 years from now.

Interesting Argument on Private Equity Fees (Financial Times)

The Financial Times makes a pretty compelling argument on the state of the fee structure at private equity firms.

India's Run-up: Frothy territory?

Sometimes too much of a good thing is indeed too much.

The Indian stock market has been hotter than ever. The run-up has been justified, given the economy's growth, the emergence of a solid middle class, and a general sentiment that the BRIC economies (Brazil, Russia, India, and China) is where all the opportunities are.

But as any trader knows, intense buying at a peak is what starts a bubble. P/E levels are high for the Indian index, the Sensex, and many of the smart money investors (fund managers) are backing away.

"Thanks to investors like Mr. Reddy, the bellwether Sensex stock market index in Mumbai soared 45 percent in 2005, and it has already risen 20 percent in the first three months of this year. The impressive gains have been spurred by India's surging economy, which posted a growth rate of 7.5 percent last year.

At the same time, the country has attracted more overseas investors, who poured $10.7 billion into Indian equities in 2005, and $4.13 billion in just the first quarter of this year.

But analysts and fund managers are cautioning that the stock market pendulum may have swung too far, and they warn that some companies are highly overvalued.

As a result of such concerns, the Sensex recorded a two-day decline of 3.6 percent last Wednesday and Thursday, the steepest in six months. The markets were closed Friday for Good Friday, but investors saw a buying opportunity Monday, sending the index up 2.7 percent."

NASDAQ getting financing from BofA to fund LSE share purchase

The surprising 15% investment in the LSE made by NASDAQ scared many NDAQ investors, as they wondered where the $800 million would come from to make the purchase. Nasdaq has announced that Bank of America had provided some of the financing.

"The electronic stock market announced the new borrowing arrangement in a Securities and Exchange Commission filing late yesterday. Nasdaq paid $781.7 million for a 14.99% stake in the London exchange last Tuesday and today is scheduled to replace a $748.1 million credit facility arranged by J.P. Morgan Chase & Co. and Merrill Lynch & Co. late last year with the money from the Bank of America loan. That leaves Nasdaq about $395 million to possibly buy more shares of the LSE, which many analysts expect it to do as early as this morning."

Interestingly, hedge funds are now salivating at the prospect of investing in the LSE. In their view, the NDAQ investment is a floor on LSE's shares.

"Nasdaq has effectively put a floor on the share price at least in the short term," said one hedge fund manager who declined to be identified.

Chesapeake Partners Management Co, Eton Park International LLP, D.E. Shaw & Co and Halcyon Asset Management LLC are among the largely U.S.-based funds to reveal stakes in the LSE over the last few days. The stakes have been built mainly through purchases of contracts for difference or swaps.

"Whether they (Nasdaq) decide to hold onto the stake for six months or longer ... The risk-reward of owning LSE shares has changed because of that stake. There is not as much risk," the hedge fund manager said.

Buffett and Berkshire acquiring Russell Athletic

Warren Buffett's Berkshire Hathaway will acquire sporting goods maker Russell Athletic for approx. $600 million.

Forbes lists Top 10 movies about Money

Check out the Forbes List

Sandy Weill's last days as Chairman at Citi

The great Sandy Weill is in his last days at Citi as the behemoth's chairman. What a ride it's been for the company and its shareholders.

The story of Sandy's rise to prominence is worthy of a novel. Ousted at American Express, he took a small little outfit in Baltimore called Commercial Credit and turned it into the financial bellwether that Citi is today.

Goldman to be ease hostile bid financing

See the article.

"The chief executive of Goldman Sachs (NYSE:GS - news), Hank Paulson, has told the firm to think carefully about using its own money to finance hostile takeovers after a backlash against its role in a series of UK deals, a source close to the bank said on Tuesday. "

"Paulson's move followed the disclosure that Goldman made an unsolicited approach to UK airports operator BAA (BAA.L), which is facing a hostile bid led by Spanish construction company Ferrovial (FER.MC).

Goldman Sachs was also involved in a consortium that made an offer for Mitchells & Butlers, the UK pub chain operator, which then turned hostile.

The bank also backed bids for UK television network ITV (ITV.L) and Associated British Ports (ABP.L).

Goldman's move highlights the increasing conflicts investment banks face in their roles as advisers and investors in M&A activity that frequently involves private equity firms."

MBAs wanting tech again

CNNMoney reports that MBAs are looking hard for tech jobs again. Google is 2nd on the wishlist of MBAs. Last year it wasn't even on the survey but got many write-ins.

Tivo wins lawsuit and soars

The talk of the markets yesterday was Tivo and the blockbuster ruling that a federal judge granted it for its patent infringement case against Echostar Communications.

"TiVo had sought $87 million in damages from the Dish satellite-TV network in a patent dispute that TiVo lawyers said could be "life or death" for the company that sold the first box for pausing and rewinding live television."

"TiVo claimed EchoStar violated its patent for a "multimedia time warping system" to pause, rewind or fast-forward live TV programs by recording them on a hard drive. EchoStar's own box "didn't work. It was a disaster," TiVo lawyer Sam Baxter said.

News of the verdict sent TiVo shares soaring nearly 20 percent, or $1.60, to $9.65 in late-session electronic trading. EchoStar shares dropped 27 cents. "

Interestingly part of TiVo's push yesterday was likely due to the Barron's article over the weekend that stated that TiVo could be a takeover candidate. This same article, however, said TiVo would have tough times ahead as a standalone company. I interpret Barrons' sentiment as a way of saying that any large increase in price is not based on TiVo's fundamentals but rather takeover speculation. How many traders have gotten burned on buying on rumor mill talk? Buy the rumor, sell the fact. Now might be as good a time as any to get out of TiVo.

The Bear and China?

The WSJ has, for the past two days, had a prominent article on the prospect of Bear Stearns partnering up with a China Construction Bank. The Journal alludes to discussions between the venerable Jimmy Cayne and Ace Greenberg and China Construction Bank officials that have centered on the possibility that CCB could invest $4 billion in the Wall Street firm in the form of convertible bonds. CCB has denied the rumors.

The Bausch & Lomb Debacle

The Bausch and Lomb saga continues. Many are questioning if the Company has taken enough action to ensure that people aren't buying its products.

NYSE possibly in talks with LSE

Reuters had an article stating that the NYSE may be in talks with the London Stock Exchange regarding an acquisition. This comes on the heels of a filing in which the NYSE stated that it is involved in discussions with another exchange regarding a deal. A deal with the LSE may be difficult given that the NASDAQ recently announced that it owns 15% of the LSE. This 15% stake, which the Nasdaq purchased from Threadneedle Asset Management, makes NDAQ the largest shareholder in the LSE. Given that the Nasdaq and NYSE are chief rivals, it makes you wonder how easy a deal between the NYSE and LSE would be.

NYSE in talks with a rival regarding a merger

It could be any number of exchanges, so speculation is mounting.

New York Stock Exchange operator NYSE Group Inc. confirmed that it is holding preliminary merger talks with more than one exchange-industry participant, according to a regulatory filing.
The exchange made the disclosure in an amended filing in preparation for its secondary stock offering, expected early next month. Two people briefed on the bellwether offering -- the first by NYSE to the public -- said they expected NYSE to hold a roadshow starting around April 24, a sign that NYSE wants to finish that deal and focus fully on a possible merger. NYSE will hold an analyst meeting this coming Friday, after it releases earnings Wednesday.

Here is the link to the WSJ article

NYSE's next move

Interesting WSJ article.

Thoughts on the Piper - UBS Deal

Well it seems like everyone loves this UBS - Piper deal. If you don't remember, Piper announced a few days ago that it would be selling its "private client"(i.e. retail brokerage operation) to UBS for $500 million.

Piper's shares have risen quite a bit, amid analyst upgrades and renewed interest in the investment bank's operations.

It seems that Piper's retail brokerage division was a drag on earnings relative to the high growth capital markets business of equity and debt underwriting and M&A advisory services. Piper also stated that it expects to inject the cash received from UBS back into its capital markets business so it can grow this segment. This seems to make logical sense. You sell a division that isn't performing well and you invest the proceeds from the sale into higher margin, more profitable business.

But think about how middle market investment banking works and where Piper's historical place has been. When I think of middle market investment banking, I think of a pretty even split between fees from underwritings and fees from advisory services. Historically the breakout of fees from capital raising and M&A advice may vary from 50/50, but, for the most part, I think it's about half and half. Now, the primary reason a middle market firm is brought on a deal for capital raising purposes is because the firm selling shares often wants to sell some of the stock to retail customers. If you want to sell your shares insitutionally (to Putnam or Janus portfolio managers), it makes sense to use the wirehouse firms like Goldman or Morgan Stanley. This is where I think Piper will "suffer" post deal. How will they do underwritings? They may still be on a lot of offerings because of relationships, but they won't be viewed as having the ability to distribute shares to people that Lehman or Morgan Stanley can't distribute to.

So Piper will now be like a Jefferies in a lot of ways. But then again, Jefferies has a much more diversified business than Piper. So maybe Piper will be like a Greenhill or Gleacher or Lazard or Houlihan or Blackstone. But then again, Piper doesn't have the reputation or rolodex of those NY firms and those firms concentrate on bigger deals. So maybe Piper is like a Harris Williams, but even Harris Williams has a better "niche."

That's why I think Piper is going to suffer following this deal. While the private client group wasn't profitable on its own, the offerings it allowed them to pursue were themselves lucrative. Piper is going to have a tough time surviving in the already crowded world or pure-play middle-market investment banks. As competition gets tough, its natural to see the Wall Street firms come downstream to fish for middle-market deals as well.

So then the other question is, what will Piper do with the cash they get from the sale? Well first of all, the $500 million number is a little low. SNL stated the following: "The transaction, which SNL Financial values at $875 million, including consideration for the branch network's client margin loan portfolio and contingency payments, is expected to produce after-tax proceeds of about $510 million and an after-tax book gain of approximately $170 million."

The cash is expected to be used to reinvest in the business as well as pay off debt and buy back shares. I think the extinguishment of debt and purchasing of shares are great ways to use capital, as it would improve the company's balance sheet. I'm assuming also that the share repurchase is justifiable because the retail brokerage operation was eating up/tying up a lot of the capital. But with regards to investing money back into the business to try to build out the M&A practice, I'm unsure of the results. You see, investment banking , more so than any other business, is a relationship business and not really scalable. Look at Greenhill or Lazard. They are a finanial services company but capital is not insignificant to them. Their value is their employee relationships, brand, and reputation, and, in my opinion, no reinvestment into an investment banking operation can grow that.

It's yet to be determined what will happen to Piper and it's shares. For now, the ride continues for the Company's shareholders.

More insight on the Nasdaq purchase of 15% of the LSE

This BusinessWeek article provides more insight on Nasdaq's purchase of 15% of the LSE.

I think this is another sign of just how important consolidation is and will be in the financial exchange industry. And it's clear the extent that the Nasdaq wants to be a bona fide player.

The Buzz on the Insider Trading Scheme

Every banker's email was hit with the email from banker buddies regarding the ridiculous insider trading scheme that some young bankers at wall street shops were involved in.

Apparently the young men were getting tips from a Merrill Banker about bending M&A deals and also convinced an employee that worked at a printer for BusinessWeek magazines to divulge the names revealed in the "Inside Wall Street" column (Gene Marcial's weekly column). Inside Wall Street historically has "driven the market" and sensitive information like this could have resulted in massive opportunities for speculative insider trading for these guys.

The group allegedly profited in total about $6.4 million from the insider scheme. Seems like small potatoes, and it is, but it's the draconian measures that will be taken to warn others that will be the groundbreaking result of this whole situtation.

Scary GM Situation

Scary, and yet compelling, arguments made in this interesting Street.com article.

Insider trading scheme with investment bankers and BusinessWeek production employee

Pretty Ridiculous.

A Merrill Lynch (MIJ) analyst, two former Goldman Sachs (GS) employees and a printing plant worker conspired in an international insider trading scheme that netted more than $6.7 million, prosecutors alleged Tuesday.

Prosecutors charged that the conspiracy involved two widespread and highly lucrative trading schemes created by Eugene Plotkin and David Pajcin, both formally of Goldman Sachs.

Also named as defendants in the case were Stanislav Shpigelman, an investment banking analyst in the mergers and acquisitions division of Merrill Lynch, and Juan Renteria, who worked at a printing plant where Business Week magazine was produced.

LBO market keeps getting hotter

See the article from Marketwatch.

NASDAQ buys 15% stake in LSE

"The Nasdaq on Tuesday disclosed that it had acquired slightly less than 15 percent of the London exchange’s shares, paying a total of $782 million. Most of the shares came from Threadneedle Asset Management. Threadneedle had previously been the London exchange’s largest shareholder, making it an important power broker in any attempt to acquire the exchange. Now, Threadneedle is out of the picture, with its entire stake in Nasdaq’s hands."

Yahoo! Finance Now With RSS Feeds for Message Boards

Check it out. Now there are RSS feeds for Yahoo! Finance Message Boards.

Yahoo! Finance Now With RSS Feeds for Message Boards

Check it out. Now there are RSS feeds for Yahoo! Finance Message Boards.

UBS buying Piper's private client arm

In another sign of consolidation in the brokerage space, UBS is expected to announce that it will acquire Piper Jaffray's private client arm for approximately $500 million. Piper's Private Client arm includes "more than 800 financial advisors and 550 branch support personnel in approximately 90 retail offices in 17 Midwest, Mountain and Western states."

"The consideration includes $500 million in cash for the branch network plus the potential for additional cash consideration of up to $75 million after the sale closes, dependent on business performance. In addition, Piper Jaffray will be paid for the net assets of its branch network at the time of the close, which are expected to be valued at approximately $300 million."

Another boutique bank going public?

First Greenhill, then Lazard, then Thomas Weisel, and now perhaps JMP Securities will pursue an IPO as a boutique investment bank.

"JMP has grown quickly since it was founded in 2000 by a group of former executives from Montgomery Securities, a boutique that was acquired by Nationsbank in 1997. Revenue reached $94.7 million in 2005, up from $5.6 million in 2000, and profits have grown too, according to Johnson.

"We've grown quickly and are very profitable," he said. "Because of that, an IPO would be sooner than I would have thought a few years ago."

JMP focuses on the so-called middle market of small and midsize companies in the technology, health-care, consumer, real-estate and financial-services industries. The firm does equity research on more than 260 companies and also provides sales and trading and investment-banking advice."

Goldman's Private Equity Group and a Canadian Pension are buying part of a JPMorgan Partners fund

Check it out.

More Leveraged Sellout Hilarity

More hilarity from the great blogwriter at Leveraged Sellout.

Bauer will be back for 3 more seasons

24 fans can rejoice, as Kiefer Sutherland signed a 3 year contract with Fox and the 24 producers. Estimates are that the package is worth $40 mm over the 3 years. Not too shabby.

Disney / ABC to offering some prime-time shows episodes online for free

This is exactly what should be happening. See the WSJ article link here or, if no subscription, see it pasted below. With Disney/ABC's venture people can watch tv shows at their leisure on the net, but are forced to view the commercials. I am surprised it took this long for anyone to break into this idea. One negative to all this is that tivo is going to get crunched pretty bad if others networks follow. Why use tivo when you can watch it all online at your leisure anyway?

Disney Will Offer
Many TV Shows
Free on the Web

ABC's Prime-Time Hits
And Zap-Proof Commercials
Are Pillars of Bold Strategy

By BROOKS BARNES
April 10, 2006; Page A1

Walt Disney Co. plans to make much of its newest and most popular programming on ABC and other channels available free anytime on the Web, in a move that could speed the transformation of television viewing habits and help revive the struggling TV advertising business.

On April 30, ABC will unveil a revamped Web site that will include a "theater" where people with broadband connections can watch free episodes of "Desperate Housewives," "Lost" and other hit shows on their computers. Episodes will be available the morning after they air and will be archived so people can eventually view a whole season. A Disney Channel version with five shows will start in June, and an ABC Family version is also planned. Disney's Soapnet cable channel will start offering programs free on its Web site, Soapnetic, on April 17.

Episodes of the ABC shows -- which can be paused, rewound and fast-forwarded -- will contain commercial breaks that viewers can't skip, making Disney hopeful it has figured out a way to turn the delivery of programs over the Web into a profit-generating business. Ten advertisers, including Ford Motor Co., Procter & Gamble, Universal Pictures and Unilever, already have signed up.

The initiative, to be announced today by Anne Sweeney, president of the Disney-ABC Television Group, marks a watershed: the first time a TV company is offering major prime-time shows free online without restriction. Until now, networks have brokered limited piecemeal deals in a bid to keep business partners happy and their traditional business models intact. CBS Corp. has come the closest to what Disney is planning, offering rentals of "Survivor" episodes on CBS.com for 99 cents.

But so far, none of the other big TV networks have hinted at plans comparable to ABC's. The strategy at CBS is to make its TV shows available on as many platforms as possible -- including cellphones -- while General Electric Co.'s NBC Universal is developing unique programming for the Internet. News Corp.'s Fox is seeking to move shows online in a way that shares revenue with affiliates.

Nearly anyone with a computer and a broadband connection will be able to watch Disney's TV offerings online. Still, Disney is putting such a huge volume of programming online that some analysts say it could spur sales of media-rich computers, as well as devices that transmit Internet content to be watched on most types of TV sets. "All this area needs to explode is enough top-notch content," says Brad Adgate, senior vice president at Horizon Media, a New York consulting firm.

Online streaming -- the technology of broadcasting video programming over the Web -- has been an area of great untapped potential for the TV industry. The possibilities were underscored by the success of CBS's online streaming of the NCAA basketball tournament in recent weeks. The "cable bypass," as CBS Chief Executive Leslie Moonves calls it, could have dire implications for cable and satellite purveyors because it has the potential to cut off the revenue they receive for delivering programming. Making shows available online also could undercut the on-demand services cable operators are rolling out.

The ABC initiative reflects a sharp turnaround at Disney's television unit. Two years ago, ABC was the last-place network, and cable properties such as ABC Family were in a slump. Then Chief Executive Robert Iger, who has become unexpectedly aggressive in digital media, grouped all of the company's TV units under one umbrella.

Disney's Ms. Sweeney installed a new management team and streamlined operations from creative development to marketing and publicity. The result has been the launch of monster hits across the division, from "Grey's Anatomy" on ABC to the Disney Channel's "High School Musical." Just two new shows -- "Desperate Housewives" and "Lost" -- are expected to generate $1 billion in syndication revenue over the next five years.

The group has also emerged as the leader of the TV pack in digital media. Disney was the first to offer both broadcast and cable shows for download on iPods, cutting a deal with Apple Computer Inc. in just three days last fall.

"It would have required excruciating coordination before the merger," Ms. Sweeney says. "When you take down the walls and everybody on the team is living in the same world, things can happen quickly."

Offering so much content online will probably ruffle some feathers. ABC affiliates, long accustomed to exclusive broadcast rights to new shows, are already griping that they don't profit from the network's deal with Apple. It could also fuel a fight with Hollywood unions, which are starting to talk strike over how artists are compensated as the networks' business models evolve.

Other networks and studios with more conservative philosophies about opening their film and TV vaults might feel pressured to emulate Disney. Apple, by contrast, is unlikely to feel much of a threat because consumers won't be able to download the free programs onto portable devices.

Though Disney doesn't believe offering shows online will undercut DVD sales, big retail partners such as Wal-Mart Stores Inc. may argue otherwise. Disney's strategy also includes eventually offering permanent downloads. Albert Cheng, executive vice president of digital media for the Disney-ABC Television Group, says the company is exploring allowing viewers to download shows for various fees. For example, a show with no ads might cost $1.99, while a show with fewer ads might cost 99 cents.

Disney refers to the ABC.com launch on April 30 as a test, starting with a handful of programs, including "Alias," "Commander in Chief," and "Lost," eventually expanding the menu.

As part of an effort to engage the online community, viewers from around the country will be able to gather in "rooms" online to watch an episode of, say, "Lost" and chat about it. Disney will also promote the creation of fan sites for various shows. "We want to tie all of these fan sites closer to our brand," Mr. Cheng says.

The ads won't look like typical TV commercials. For starters, instead of five commercial breaks during an hourlong episode, there will be three breaks lasting a minimum of one minute each -- all of them from the same advertiser. Mike Shaw, ABC's president of sales, says viewers will have a choice of what type of ad to watch -- for instance, a traditional video commercial or an interactive "game" commercial.

Mr. Cheng says the company is looking for ways to give affiliates a piece of the action. "Do we share ads? Do we try and push traffic to each other's Web sites? We just haven't nailed down the right formula for that yet," he says.

Key to Disney's online TV strategy is to keep tight control of programs, which rules out partnerships with companies such as Google Inc. that are moving into video on demand. Disney's decision to manage streaming of its programming was reinforced when Google had technical trouble when first offering episodes of CBS's "CSI: Crime Scene Investigation" for rental in January.

"The worst thing you can do is put up one of your great franchises and then have the technology not work and your viewers frustrated," Ms. Sweeney says. CBS has said it considers the experiment to be a low-risk success.

While its ABC hits have the highest profile, Disney wanted to move quickly with Disney Channel and Soapnet offerings, too, because both cable networks have been sizzling of late.

"High School Musical," an original Disney Channel movie that premiered in January, has given the network the best ratings in its 23-year history. Five series will be available in the DisneyChannel.com "theater" at launch, including "Power Rangers" and "Kim Possible."

Soapnetic, the soon-to-launch streaming portal for Soapnet, will offer "I Want to be a Soap Star" and portions of nine soaps, including "Days of Our Lives" and "General Hospital." Deborah Blackwell, general manager of the channel, says offering soaps online is partly aimed at a "huge audience" -- until now, untapped -- of office workers.

Write to Brooks Barnes at brooks.barnes@wsj.com

More Exchange Merger Talk

More exchange merger talk from the Chicago Tribune.

The article discusses the likelihood of tie-ups between the NYSE and LSE, NYSE and CME, CME and CBOT, and the possible IPO of the CBOE (and the problems that this IPO might run into before coming to market).

Harvard and Wharton MBAs fail test of S&P index funds

In an interesting study that aimed to analyze how well "smart" people could discern between similar index funds, Wharton undergrads and MBAs as well as Harvard MBAs failed. The test was simple: would people choose the index fund with the lowest fees associated with it, given that each would produce the same "pre-fee" return (tied to the S&P 500)?

The Economist on Rising Merger Activity

The Economist had a nice article on rising M&A activity.

Pritzker Family's Hyatt hotels ready to IPO?

The Pritzkers, likely Chicago's richest family, and owners of Hyatt hotels, may be ready to go public, according to the Financial Times.

"Hyatt, the hotel group owned by the billionaire Pritzker family, will be in a position to launch an initial public offering "by the end of the year", according to Tom Pritzker, the company's chairman and chief executive.

In a rare interview, Mr Pritzker said Hyatt would be compliant with Sarbanes-Oxley rules for quoted companies by the end of 2006, following a three-year restructuring and consolidation of the family's hospitality investments on a single balance sheet."

"Amit Kapoor, a research analyst with Gabelli & Co, the US fund manager, said a Hyatt IPO could value the group at as much as $11bn."

Interesting analysis of Imperial Sugar, a sugar refining Company based in Texas

Imperial Sugar, a TX-based sugar refiner has seen its shares triple in the past twelve months. The shares' rise has been due to a rapid increase in the price of sugar as well as the difference in price between unrefined and refined sugar (the margin Imperial can make). However BusinessWeek had an interesting piece that says that shares may fully reflect the best of times at Imperial, and holders may have to prepare for a correction if the sugar boom fades.

The Economics of Illegal Immigration

The buzz in Washington and likely cocktail parties across America has been the issue of illegal immigration. The issue at hand is figuring out what to do with current illegal, undocumented immigrants and making plans to strengthen border security. BusinessWeek published a nice summary that the S&P put out on the economics of illegal immigration.

Buy-out shops want to create a trade group

Financial Times is reporting that buy-out shops may be trying to create a trade group to represent their interests. Blackstone, KKR, TPG, and Carlyle are said to be spearheading any possible initiative.

Youtube won't stop growing

As mentioned before, Youtube.com just raised $8 million in A-list VC shop Sequoia capital. Associated Press had a nice article on just how fast Youtube is growing. It's been quite a run for the young website and its owners, and all signs point to more growth. The big question is, what will happen legally? Copyright infringements are abound, which makes many feel as though this could be the next Napster.

BusinessWeek makes a decent case of the Blue Chips

BusinessWeek's cover this week is on the lagging blue chips, and more importantly, how their day in the sun may be due. Check it out.

Barron's interview of Sam Lieber

Sam Lieber of Alpine Woods Capital Investors gives his impressions of the housing market as well as some real estate picks. Very nice Barron's interview.

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Bubble? What Bubble?
By CHRISTOPHER C. WILLIAMS
FROM HIS PERCH AS PRESIDENT of Purchase, N.Y.- based Alpine Woods Capital Investors, Samuel Lieber sees slivers of sunshine stealing through the gloom enveloping the U.S. housing market.
Speculative buying has driven housing prices to nosebleed levels -- giving rise to fears that there's a bubble and that rising interest rates will be the pin that makes it explode.
But housing's fundamentals remain strong, argues Lieber, who directly manages or helps oversee some $3 billion of assets through nine mutual funds, including chart-topping Alpine U.S. Real Estate Equity (ticker: EUEYX), Alpine International Real Estate (EGLRX) and Alpine Realty Income & Growth (AIGYX). The portfolio manager says that he won't retract his horns unless the job market tanks, and he sees little chance of that happening soon.
Based on his record, his opinion is worth heeding.
Eschewing pricey real-estate investment trusts for the most part, Lieber has guided the U.S. fund to an annualized 29% return in the past five years, through April 4, beating 99% of his rivals, according to Morningstar. His International offering was up 26% over five years, while Realty Income, managed by Robert Gadsden, is up 23% for that span.
Samuel Lieber
Late last month, Lieber visited Barron's offices in New York, where condo prices are flattening. Drawing on 25 years of real-estate experience, including stints as a broker and urban planner, he discussed many topics, including the U.S. property market, what he views as blossoming investment opportunities in Hong Kong, Germany and Sweden, and some stocks to avoid.
Barron's: Thirty-year mortgages are still pretty low, interest rates aren't spiking; the economy is still relatively robust, and the job market remains solid. Yet we have this doom and gloom over housing. Is it that folks are just tired of a good thing after years of crazy growth?
Lieber: We've seen a number of [housing] cycles globally, and this one is not that different. We've just gone through a 14-year up cycle for housing, and prices were up because of supply-demand considerations. But, fundamentally, we'll get to a point where, all of a sudden, the market will say: "The Fed is basically done. They will go from a tightening mode to neutral." When that happens, the bond market will do well, and housing will start to take off again. That is going to happen, in all likelihood, within the next nine months.
How many more rate hikes will the Fed do?
At most, we're going to get two more moves. So rates get up to the 6 3/4% to 7% range on mortgages and, as a result, we think the market stabilizes. We do not expect to see a robust recovery, as we saw in 1995. But home-building stocks are trading at just 6 1/4; times earnings multiples, in spite of having had 35% annualized compounded earnings growth over the past seven years. We're going to go through a transition in which the market will look forward to sustainable earnings growth in the mid-teens over the next three to five years. The stocks will be revalued higher by 50% to 100%, in terms of their multiples, in 18 to 20 months.
So there's no housing bubble bursting?
We don't see a bubble. Historically, home prices just don't go down nationwide unless we are in a significant recession. The last time home prices fell nationwide was in 1990. It's employment that really counts. The underlying fundamentals of real estate are still very positive. Job creation and household formation drive housing.
How high can rates go before you'd consider them dangerous for housing?
An 8% mortgage rate would be a problem. My guess is that the Fed will stop short of crippling the housing market. They simply want to slow it down.
What does all this mean for the home-building stocks?
The next six months are going to be a little volatile, because we don't know exactly how they are going to come through this cycle. But after that, I expect the stocks to be up 20% to 30% from here by year end. Going into the second quarter of 2007, it is quite possible we are going to see these stocks trading at significantly higher multiples. My worst-case scenario is that they are basically dead money, that the earnings growth doesn't come through.
What is the hot trend in real-estate investing now?
Interest in international property. Many investors are a little cautious about putting more money into real estate and trying to get to their target allocation because of the high cost of property in the U.S. So, many are looking abroad. Not only can they get added diversification, but many of the real-estate markets abroad are enjoying prices and rents well below historical highs.
Since 2003, many foreign economies have been strengthening. From 1997 through '02, for example, home and office prices in Hong Kong were declining. They finally started to improve a little in 2003, and 2005 was a very good year. There are opportunities in Europe, as companies are restructuring, improving operating fundamentals across the board as vacancy rates are coming down. Vacancy rates in Paris are 5% now. Add to that the potential that the dollar will weaken. The currency winds could be at your back, too.
Retail is probably still a very strong place to be internationally, irrespective of country, as long as the economies continue to grow and add jobs. We've made tremendous money in Europe and in Asia on residential builders. We're seeing a gradual strengthening in the office markets.
The other area abroad that has lagged the U.S. is hotels. Hotels are going to be a very interesting play, particularly in Asia, but also, to a lesser degree, in Europe, over the next couple of years. In fact, hotels are still a great place to be in the U.S. They are actually among the cheapest sectors in commercial real estate right now.
So, what's next?
More money managers want to participate in the international property. So, over the next three years, we expect to see an initial-public-offering boom the likes of which transformed the U.S. REIT industry between 1992 and 1995. Everybody is racing around, trying to find somebody who has experience in the international area.
And since you run one of the oldest international funds around, you see yourself in the catbird seat here.
Yes, of course, but it is a brave new world. There will be great opportunities, but there will also be heightened risks.
OK, let's get to specifics about stocks you like and don't like.
Well, again, one has to appreciate that we have three distinct mutual funds, and they are really run in different ways. Let's start with U.S. Real Estate Equity, which could be characterized as an opportunistic value-oriented fund, focused on long-term capital appreciation. There are times when this fund has been 50% in real-estate investment trusts. But our REIT exposure is only about 12% now.
That sounds very low.
It is historically low. But REITs are trading at 18 to 24 times Ebitda [earnings before interest, taxes, depreciation and amortization]; they're priced to perfection. We have over 50% in home builders, where there is an opportunistic purchase opportunity available. And we have over 35% in hotels, where we perceive a once-in-a-decade supply-demand imbalance.
What's your REIT outlook?
REITs will be flat at best over the next 12 to 15 months. Total return over two years could be in the single-digits.
U.S. Real Estate Equity has about $472 million in assets and your top five holdings are Lennar [ticker: LEN], Hilton Hotels [HLT], Starwood Hotels & Resorts [HOT], Hovnanian Enterprises [HOV] and Standard Pacific [SPF].
Lennar is a great balance-sheet company that happens to be in the home-building business. It's also a great buyer of land. This company is effectively trading at about 6 1/2 times earnings for this year, and those earnings are pretty much in the bag in terms of new orders already achieved. We think the earnings will grow moderately next year, about 10%.
Is the valuation still reasonable? The stock is at 62 now.
This stock has always been one of the group's moderate performers, in part because they've allowed the balance sheet to strengthen; they didn't leverage the company. So the stock didn't get as high as some other companies on the upside. It's also why, on the downside, it hasn't gotten as low as others have. It's a much less volatile stock. We want to own companies that get acquired. We also want to own the companies that can grow through consolidation; that's where Lennar fits in. I would be surprised if this stock in 18 months is not somewhere between 75 and 80 bucks. I think that's conservative.
Let's talk about Toll Brothers, a company Barron's has written about favorably.
Toll [TOL] has a unique market niche: The average price of its homes is around $700,000. Plus, they've also been very active land developers. Like Lennar, they have fabulous land positions. Toll has developed a strong brand reputation. That in itself is valuable to any company that wants to get into the business. Eventually, Bob Toll will sell the company. I'm not suggesting that it will happen this year, but over the next few years, it is quite possible.
Table: Lieber's Picks
Who might be a likely buyer?
Lennar, in part because of its balance-sheet strength but also because there is a natural fit in terms of the land position. Lennar does a few homes at the price levels at which Toll operates.
What would be a reasonable price?
Lennar wouldn't pay a big premium. Right now, they would use their shares, but their shares are trading at just 6 1/2 times earnings.
As we speak, Toll is at 35, well off its 52-week high. Why wouldn't now be a good time to buy it?
Because Toll wouldn't sell. There has to be a friendly deal. It is too difficult to integrate these sorts of companies without a friendly deal.
Are you buying Toll stock now?
This is one you should load up on. We've got almost a 5% position. We've been buying selectively in the downturn, yeah. We were active buyers in October; the group bottomed on Oct. 27. We bought more shares this year, especially when we were getting into mid-March, when the shares were getting very depressed.
Absent an acquisition, if an investor gets in at 35, what's the upside?
You could easily see the stock at $50 over 18 months to 24 months, when I think the group again will be trading at a premium.
You have a number of hotels in your top holdings. Why do you like the group?
Hilton and Starwood are well-positioned for the long term. However, short term, we have been very keen on DiamondRock Hospitality [DRH], a hotel REIT. It was partially created by entrepreneurs from Marriott, who are also still tied into Marriott. They have historically bought very nice hotels that have had problems. Then, they'd reposition them or plug them into the Marriott system. They buy the hotels, and Marriott gets long-term franchise agreements.
What is particularly appealing here is that this is a company that trades at a dividend yield of about 5 1/2%. And we think they are going to be in a position to start growing that dividend over the next six to nine months. They've had very strong double-digit revenue growth over the past year in their portfolio, and we think that is going to continue this year.
The hotel industry is benefiting from a supply-demand imbalance. Effectively, from the onset of the 2001 recession through 9/11 through the effect of SARS [a respiratory ailment prevalent in Asia a few years ago], no one wanted to travel.
We've seen the impact on airlines. But it also hurt the hotel business, which fell from a record year in 2000 to a very, very difficult recession level in 2003. As a result, no one built new hotels. Growth in the number of hotel rooms coming online each year went from 3.5% in 2000 to less than 1% in 2004. It will gradually start to ramp up and approach the 2 12% that's been the U.S. average since 1945.
Diamond, at 13.58, is near a 52-week high. How much upside do you see?
A lot of these companies trade on Ebitda multiples. These guys should move from the 12-times range up toward around 14. We could very well see this stock trade roughly up in the $16 range.
In 12 to 18 months?
Or even a little more. They also will be increasing the dividend. This stock could really put up very significant total returns.
Any other picks, Sam?
Orient-Express Hotel [OEH]. This stock is trading around 38, near its high.
And its forward P/E is around 31.
Yeah, the price-earnings ratio is high, but the price-to-Ebitda is around 14 times -- the company's historical average. The whole hotel group is undervalued. And it's easier to generate growth with individual acquisitions for smaller companies, such as DiamondRock and Orient. The unique aspect of Orient-Express is that 70% of its income comes from abroad. Some of its income is depressed, because they have assets in New Orleans. They have a big hotel there.
Are you putting new money in this one?
I have not paid this price. But it's a great long-term story. I think there is a potential to see this over time in the high-40s-to-50 range. It's not inconceivable that this company could trade over 50 within 18 months, especially if someone takes them out. If they sell out, it'd be a number with a six in front of it.
What's the likelihood of that?
You should call Prince Alwaleed [owner of the George V in Paris, among other posh hotels]. He's the most likely sort of buyer for truly high-end, unique assets like this company.
Hilton is in all three of your major real-estate funds' portfolios. Why?
Management is taking their company in the direction of Marriott's business model, being a brand and distribution company. They get 30% of business overseas. Hilton could easily get to the mid-30s [from the mid-20s now] in the next 18 months.
What do you like overseas?
The largest holding in the international fund is a Swedish company called JM. It trades in its local market. JM is around 526 Swedish krona [about $69]. We started buying this one back in '03. They are the predominant builder of high-end condos in Stockholm. They have 50% market share in Stockholm, 30% of the high-end housing market in Sweden. They also build offices in other countries, but primarily they are a housing developer of mid- to high-rise buildings.
We were able to buy it under 100 because the market in Sweden was very depressed after 2000, when the high-tech bubble burst. We've been selling. I don't want to eliminate my position because this is an excellent company, but more than the easy money has been made here.
What's the geographical breakdown of the international fund, which has assets of around $550 million?
We have been over 40% to 45% in Europe, and we are bringing that down. We think there are opportunities in Eastern Europe, and there are still companies that we like in Western Europe as well as the U.K. But Asia, of course, is where the growth is. So we are gradually shifting a higher proportion to Asia; we have about 35% there now. The balance would be in the Americas, both Latin America and Mexico. We do keep some in the U.S., about 12%. From our perspective, Hong Kong is still very attractive.
We've built a pretty good-sized position, including some recent purchases in a company called Far East Consortium [35 HK]. They are in Hong Kong and are a play on everything from China, where they have housing developments outside of Shanghai, to hotels in Hong Kong, where they have a lot of business-class hotels.
They also are a play on Macau. They are developing much of the Cotai Strip on behalf of and in conjunction with Las Vegas Sands [LVS]. Macau is where there's legal gambling, and Wynn Resorts [WYNN] and Las Vegas Sands are trying to effectively recreate a Las Vegas adjacent to China. Macau is near Hong Kong, on the other side of the Pearl River Delta.
How well has this stock done for you?
It's up 32%, year to date. We've been buying this since back in 2004 -- I think in the high $1.80 to $1.90 [Hong Kong dollar] range. We bought much more after it spiked in 2004, and we have been buying it ever since, on dips. It is now 3.73.
In the U.S., what sectors would you be cautious about?
Rental-housing companies have good fundamentals for the next three to four years, but they are very, very expensive. We'd be cautious on the higher-end companies, like AvalonBay Communities [AVB] and Archstone-Smith [ASN]. They are two of the best companies in the group; we just don't want to pay 24 times cash flow for them.
Let's talk a bit about your third major fund, Alpine Realty Income & Growth. What have you added to that lately?
Sure. But, first, let me give you one more international story, one in Europe, Dawnay, Day Treveria [DTR LN]. This is listed on the U.K. exchanges, but it's basically a company set up to buy German retail property. Its prospects are very good, with Germany [launching REIT-friendly legislation]. It will reach a certain scale and will either be acquired over the next three years or will gradually benefit from rising rents in Germany.
OK, in the income fund, one stock that maybe offers a little more yield is iStar Financial [SFI], which is trading around 38. Its dividend yield is 8.1%, and we think it will start increasing the dividend growth rate over the next couple of years. They specialize in mortgages through commercial-property companies, and are the largest player in the sector.
It has underperformed dramatically, year to date. The markets have been concerned about mortgage REITs in general. And they felt that iStar was actually giving up market share to more aggressive companies. But frankly, I think that the stock should be easily 15% higher.
Thanks, Sam.
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