Interview: Mergers and acquisitions
>> sullivan & cromwell has worked on 35 deals this year, including procter & gamble buying gillette, s.b.c. buying at&t. it makes it the number one mergers and acquisitions advisory law firm in the world. brian sullivan spoke with him about the climate in the industry.
>> i’m not sure many people are in play. a lot of speculation, for example, that a morgan stanley or merrill may be in play. these investment banks are the ultimate elevator companies, the assets go down every night. hard to put a company like that in play. as for merrill, i think people underestimate the incredible job stan o’neal has done there. he’s really made that company a master of its own fate.
>> you think merrill could be a buyer, then?
>> absolutely.
>> what would merrill look to do? would they follow the citigroup model, get more out of straight retail investing into different types of insurance? where does a firm like merrill have pull?
>> i’m not sure that the model of insurance and banking is all that successful. if you look at city, they have been divesting as quickly as they can what remains of the old travelers. so i’m not sure insurance could be the area. i think where they would want to go is to capitalize on their own strength, which is retail.
>> retail banking?
>> perhaps retail banking but anything which touches the retail customer.
>> what about morgan stanley. i know there is difficulty here because sullivan & cromwell does work for morgan stanley. but as far as the firm itself goes, do you think morgan stanley is more likely a buyer or seller?
>> hard to predict at this point. there is the third option, which is a large merger of equals where they could play a very major role in the combined company. but once again, i think that they will ultimately decide what they want to do themselves and won’t be forced to do anything.
>> do you think that a firm like hsbc could make an aggressive move for a company like a morgan stanley?
>> i think it would be very foolish if they did so. you would wind up losing so many of your top quality people very quickly and there has not been a great history of acquisitions of investment banking organization and i think most people would look at, for example, the credit suisse, b.l.j., as a failure.
>> there’s been so much talk about not only hsbc but companies like abn amro, big european and asian companies wanting to get a foothold in the u.s. market . is that a trend?
>> that could be one element. notwithstanding all the regulatory obstacles here, if you have a smart european buyer, they would look at sarbanes-oxley as far less of a barrier than the labor laws in europe and the informal political pressures in europe which preclude the large cross-border mergers in europe so i think the large europeans will be looking at the u.s. companies.
>> do you think sarbanes-oxley as it is right now discourages u.s. companies from merging with each other?
>> i don’t think it does directly. you will see occasional situations where companies, for example, have material weaknesses under 404. that’s going to be a warning sign against a transaction. but in some ways, sarbanes-oxley is actually positive because it gives buyers more confidence in what they’re getting.
>> what could be the big surprise of 2005?
>> i think the big surprise will be, obviously, a transaction at least in financial services that nobody anticipates and if you go year by year by year, if anybody had, for example, if we were here 25 years ago and had said that two of the four largest banks in this country would be in charlotte, north carolina, you would have had me carried away on a stretcher. if you had said 15 years ago that 4 of the five largest banks in new york city would merge and then merge with the largest bank in the midwest, once again, i would have been committed. so you really don’t know but there will be almost certainly something different and exciting.%
>> are there too many investment banks?
>> i certainly don’t think so. there are actually a fairly small number of the really first-class investment banks. i don’t think we need a lot of consolidation.
>> in five years, hopefully we’ll bring you back on the program, will we see lehman brothers and bear stearns still independent?
>> i think it’s a real possibility. both firms have done splendidly and how does somebody with a 12 p.e. ratio buy somebody with a 17 p.e. ratio.
>> that was rodgin cohen, chairman at sullivan & cromwell, speaking with brian sullivan. they did discuss morgan stanley. we have news on the turmoil at morgan stanley. the former executive seeking to oust chief executive phil purcell wrote again to the company’s board. they want answers to 14 questions about events sparked by a march 28 management shakeup and they’ve offered to meet privately with the board. some investors blame purcell for morgan stanley’s lagging share price as well as profitability. van vanguard group founder john bogle says the current level of uncertainty are a bigger problem for markets than reform.
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warren buffett answered questions for federal and state investigators today at the securities and exchange commission offices in lower manhattan. allan dodds frank was there and joins us with the story.
>> after nearly four hours with state and federal investigators probing the insurance industry, 74-year-old warren buffett emerged from the s.e.c. offices with a smile on his face and his lawyer by his side. buffett told reporters his company was responding to a request for information by the prosecutors investigating the insurance industry. regarded as a cooperating witness by eliot spitzer, buffett’s visit was termed an interview and he was not under oath as he answered questions. as he got into a waiting car, buffett told me “i told them everything i know.” investigators were asking buffett about a deal berkshire hathaway’s general re unit did in 2000 with a.i.g. a.i.g. says that reinsurance transaction may have been improperly accounted for, allowing the company to inflate reserves by $500 million. maurice hank greenberg who ran a.i.g. for nearly four decades is under subpoena to appear at the securities and exchange commission―new york attorney general’s office tuesday morning. david boies, one of greenberg’s lawyers, says greenberg will invoke his fifth amendment right not to incriminate himself. boies said said, “the great number of transactions under inquiry and thousands of documents relevant to the transactions to which mr. greenberg has not been given access have precluded mr. greenberg from adequately preparing for testimony at this time.” the new york attorney general has declined to postpone greenberg’s dropisition -- deposition. greenberg said, “i am willing to accept responsibility and to account for the performance of my duties but i believe that good order and fairness require that i have an adequate opportunity to be advised of the issues to be investigated and my alleged involvement therein.”
>> thank you very much. genentech said first-quarter profit rose 61% on higher sales of avastin and other cancer medicines. net income climbed to $284 million or 27 cents a share. excluding items, genentech earned 29 cents, topping the street estimate by four cents. revenue climbed almost to $1.5 billion from $975 million a year ago. sales of avastin came in at $203 million, falling short of analysts’ estimates of $225 million. checking the shares shows a decline of .1% in extended trading. overall, stocks closed mixed today. the market was withstanding losses tied to ford’s reduced profit forecast as rising oil prices boosted energy shares. in terms of the dow -- here’s bob bowden with more from the big board.
>> usually these light trading days at new york stock exchange are on a friday or maybe even a friday before a three-day weekend but not today, it was a monday, with the lightest trading session of the year. the overall index showing the s&p unchanged, moving less than .01% and the dow jones industrial average down just .1%. there you see the volume at the lowest point of the year, all the way on the left, the last day of 2004. if you take that data point out, the chart showing the lowest point is today’s session, monday, 1.219 billion shares traded. utility and energy stocks were up, material and tech stocks down. ford motor down. after the close of trading on friday, it said it only expects auto operations to break even, at best n.january, it forecast $1.5 billion in pretax auto profit and the tax down 5-- the stock down 5.35% in one session. the auto parts stocks hit on the ford motor news, including delphi, lear, borgwarner and dana moving down. crude oil up .7%, helping marathon oil, amerada hess, b.j. services and o.e.g. resources. circuit city cut prices in december to bring in store traffic and apparently liked the sound of that can circuit city shares up 3%. tech stocks down, including i.b.m., the worst performing stock among the dow industrials today, down 1.6%. the best dow industrial stock, procter & gamble. the company announced increasing its quarterly dividend to 28 cents a share from 25 cents. the best stock in the entire s&p 500, r.r. donnelley, shares up 7%. i’m bob bowden, bloomberg news.
>> bob mentioned the move in energy shares today. crude rose from a five-week low on concern about supplies of gasoline. as you see, those prices at the close, $53.71 a barrel, up .7%. the average u.s. retail price for regular grade gasoline jumped 6.3 cents in the past week to $2.28 a gallon. fuel prices have climbed this year as refiners pass along higher costs for crude. let’s look at the other action today. you see gas did rise .9%, natural gas also higher. heating oil futures down .7%. for the latest in the takeover battle for the number two u.s. long-distance phone company, verizon agreed to buy the 13% stake in m.c.i. owned by the mexican investor, carlos slim, making it the company’s largest shareholder. the move angers other investors because, on a per-share basis, verizon’s offer to buy the block of stock from carlos slim is higher than its bid for the entire company. su keenan has more on the story. su?
>> it gives another definition of what the shares are worth from verizon. verizon’s move to buy a stake in m.c.i. at a premium to its per-share bid for the company could put pressure on the m.c.i. board to seek a higher offer. carlos slim has agreed to sell his more than 43 million shares to verizon at $25.72 a share. that share price is what some of m.c.i.’s other major shareholders are focused on. as you can see there, it’s $2.62 more than verizon’s offer to them through its $7.5 billion bid to buy m.c.i. verizon now becomes m.c.i.’s biggest shareholder, which should make it more difficult for qwest to win support for its almost $9 billion offer. people familiar with the situation say qwest was also in negotiations to buy slim’s stake. while verizon made its latest move with the goal of limiting any increases in its bid, dennis block, a mergers and acquisitions attorney, says it’s now likely verizon pays more.
>> i think they’ve shown they’re very committed. they now have a 13%-plus interest so they’re telling the world they’re going forward. as a matter of strategy, what they really told the world is that they’re going to pay the price at a paid to the larg investor to everybody else.
>> m.c.i. shareholders, such as leon cooper man, says the situation creates two classes of shareholders and they’re demanding the same offer slim received. the rise in m.c.i. stock are another indication that the verizon deal is unlikely to go through under the current terms. frank aquila, partner at sullivan and cromwell, leading firm in m&a, and he says that whether verizon raises the bid is the question on the street today.
>> thank you very much for the story. looking at the bond market , treasury notes rose for a second day. morgan stanley’s head of government bond trading said there is still short covering on the bond market . and here’s what happened in the trade -- a lot of speculation on wall street about likely deals in the financial services industry. we’ll hear from someone else at sullivan and cromwell with perspective on other possible moves.
