Posts Tagged ‘Morgan Stanley’

Chinese Conglomerate Buys AMC to Create World’s Largest Theater Chain

Tuesday, June 5th, 2012

Chinese conglomerate Dalian Wanda Group Company is buying the movie theater chain AMC Entertainment Holdings, for $2.6 billion in China’s biggest takeover of an American company.  The purchase reflects the global ambitions of a wave of cash-rich Chinese companies that are speeding their expansion by obtaining foreign skills and brand names.  According to Wanda, the transaction will create the world’s largest movie theater operator.  The Beijing-based company will invest $500 million to fund AMC’s development.  AMC operates 346 movie theaters, primarily in the United States and Canada, and has 23 of the 50 highest-grossing U.S. outlets.

We support AMC becoming bigger, not only in the United States but in the global market,” said Wanda chairman Wang Jianlin.  The deal reflects increasing Chinese investment in U.S. corporate assets.  The transaction is the third-largest Chinese corporate investment in the United States, according to financial research firm Dealogic.  It ranks behind investments by Beijing’s sovereign wealth fund, the China Investment Corporation, of $5 billion in Morgan Stanley and $3 billion in Blackstone Group LP, both for minority stakes in 2007.  Chinese companies had invested $34.8 billion in the United States by the end of 2011 in industries such as auto parts, agriculture and steelmaking, according to Derek Scissors, a China analyst at the Heritage Foundation.

Globally, mergers and acquisitions by Chinese companies total $16.8 billion so far in 2012, a six percent increase over the same period last year, according to Dealogic.  Wanda said AMC’s American management will remain in place and the headquarters will stay in metropolitan Kansas City.  It said the firm’s 18,500 employees would not be affected.

Established in 1988, the privately owned Wanda operates hotels, department stores, tourism and other businesses and had 2011 revenue of $16.7 billion.  The company employs 50,000 and its assets include 86 theaters in China.  AMC’s previous owners were Apollo Global Management, Bain Capital, the Carlyle Group, CCMP Capital Advisors and Spectrum Equity Investors.  AMC has reported losses for the past three years but its CEO, Gerry Lopez, said it has been profitable again this year due to strong ticket sales.

Wang said AMC’s financial problems were due to the high cost of servicing its substantial debt and that conditions should improve once Wanda’s cash allows it to pay off some of that.  “We are confident that after the merger, AMC will turn positive,” he said.  “We have absolute confidence in the future of the company.”

The acquisition comes as Hollywood is looking to China both for its fast-growing audience and for production partners.  Walt Disney Company’s next “Iron Man” movie will be co-produced with a Chinese partner and “Chinese elements” will be added to the story.  DreamWorks Animation SKG Inc., announced a venture in March with three Chinese companies to make animated and live-action films.  Wang said Wanda has applied to China’s government for a license to import movies.  He said the AMC acquisition concerned only film exhibition and not production or distribution.  “We have no plans to promote Chinese films in the United States,” Wang said.  “Mr. Lopez will decide what movies will be shown” in AMC theaters.

Wang and Lopez said the two companies will share experience in the film business.  Wang said Wanda is considering more overseas acquisitions for its entertainment, hotel and retail units.  “We want to be a big company, not just in China but in the world,” he said.

Wanda has been the largest theater owner in the second-largest film market in the world Now, the deal makes it also the owner of the second-largest theater chain in the largest film market,” said Chen Zheng, manager of Saga Cinema in Beijing.  Statistics from the State Administration of Radio, Film and Television indicate that Wanda Cinema Line generated 1.785 billion yuan ($282.4 million) in box office revenue in 2011, ranking first domestically.  Ticket sales totaled 13.12 billion yuan that year.

Writing for Slate, Richard Beales says that “Landing the largest purchase ever of an American target by a private acquirer from the People’s Republic will make waves.  And becoming the world’s biggest owner of cinemas will also boost Wanda’s global profile.  That is part of the motivation, and both the parent company — which claims $35 billion of assets — and its domestic cinema unit have explored the possibility of initial public offerings, according to news reports.  But the bigger rationale is surely to learn more about how to attract China’s increasingly affluent and urban citizens to giant movie complexes and sell them junk food to munch on.  Adding entertainment options to property developments is all the rage in the Middle Kingdom, and Wanda is a leading proponent.  The exchange of information on its high-grossing U.S. theaters, and potentially on technology like IMAX, will help Wanda.”

Federal Reserve Asks for Comments Before Implementing the Volcker Rule

Monday, October 24th, 2011

Federal regulators have requested public comment on the Volcker Rule – the Dodd-Frank Act restrictions that would ban American banks from making short-term trades of financial instruments for their own accounts and prevent them from owning or sponsoring hedge funds and private-equity funds.  The Volcker rule, released by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency, is intended to head off the risk-taking that caused the 2008 financial crisis.  The rule, which is little changed from drafts that have been leaked recently, would ban banks from taking positions held for 60 days or less, exempt certain market-making activities, change the way traders involved in market-making are compensated and assure that senior bank executives are responsible for compliance.

Analysts say the proposed rule could slash revenue and cut market liquidity in the name of limiting risk.  Banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc., have already been winding down their proprietary trading desks in anticipation of the Volcker Rule kicking in.  Banks’ fixed-income desks could see their revenues decline as much as 25 percent under provisions included in a draft, brokerage analyst Brad Hintz said.  Moody’s Investors Service said the rule would be “credit negative” for bondholders of Bank of America Corporation, Citigroup, Inc., Goldman Sachs, JPMorgan and Morgan Stanley, “all of which have substantial market-making operations.”  The rule, named for former Federal Reserve Chairman Paul Volcker, was included in the 2010 Dodd-Frank Act with the intention of reining in risky trading by firms whose customer deposits are insured by the federal government.

John Walsh, a FDIC board member and head of the Office of the Comptroller of the Currency, said that he was “delighted” that regulators had reached an agreement on the proposed rule, “given the controversy that has surrounded this provision — how it addressed root causes of the financial crisis.”  “I expect the agencies will move in a careful and deliberative manner in the development of this important rule, and I look forward to the extensive public comments that I’m sure will follow,” Martin J. Gruenberg, the FDIC’s acting chairman, said.  The rule will be open for public comment until January.

Not surprisingly, Wall Street opposes the rule, saying it will cut profits and limit liquidity at a difficult time for the banking industry.  Moody’s echoed those concerns, saying the current version of the Volcker rule would “diminish the flexibility and profitability of banks’ valuable market-making operations and place them at a competitive disadvantage to firms not constrained by the rule.”  Some Democratic lawmakers and consumer advocates are pushing to close loopholes in the rules, especially the broad exemption for hedging.  Supporters of the Volcker rule take issue with a plan to excuse hedging tied to “anticipatory” risk, rather than clear-and-present problems.  “Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute,” said Marcus Stanley, policy director of Americans for Financial Reform, an advocacy group.  Additionally, the Securities Industry and Financial Markets Association raised concerns about whether the exemption for trades intended to make markets for customers is too narrow.

According to Moody’s, the large financial firms all have “substantial market-making operations,” which the Volcker Rule will target.  The regulations also will recreate compensation guidelines so pay doesn’t encourage big risk-taking.  Derivatives lawyer Sherri Venokur said restrictions on compensation are “intended to create a sea change in the mindsets of those who create the culture of our banking institutions — to value ‘safety and soundness’ as well as profitability.”

Equity analysts at Bernstein say that the Volcker Rule — if implemented in its current form – will slash Wall Street brokers’ revenues by 25 percent, and cut pre-tax margin of their fixed income trading businesses by 33 percent.  According to Bernstein, the Volcker Rule’s potential limitations are a surprise because it appears to prohibit flow trading in “nonexempt portions” of the bond-trading business.  Bernstein says inventory levels – and, in all probability, risk taking – must be based on client demands and not on “expectation of future price appreciation.”

A Bloomberg.com editorial offers support to the Volcker Rule, while admitting it won’t be perfect.  According to the editorial, “This week, the first of several regulatory agencies will consider a measure aimed at ending the practice.  Known as the Volcker rule, after Paul Volcker, the former Federal Reserve chairman, the measure would curb federally insured banks’ ability to make speculative bets on securities, derivatives or other financial instruments for their own profit — the kind of ‘proprietary’ trading that can lead to catastrophic losses.  Whatever form it takes will be far from perfect.  It will also be better than the status quo.  The bank bailouts of 2008, and the public outrage over traders’ and executives’ bonuses, laid bare a fundamental problem in big institutions such as Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co.

“They attempt to combine two very different kinds of financial professionals: those who process payments, collect peoples’ deposits and make loans, and those who specialize in making big, risky bets with other peoples’ money.  When these big banks run into trouble, government officials face a dilemma. They want — and in some ways are obligated — to save the part of the bank that does the processing and lending, because those elements are crucial to the normal functioning of the economy.  But in doing so, they also end up bailing out the gamblers, a necessity that erodes public support for bailouts and stirs enmity for banks.  Separating the bankers from the gamblers is no easy task. Commercial banks’ explicit federal backing — including deposit insurance and access to emergency funds from the Federal Reserve — is attractive to proprietary traders, who can use a commercial bank’s access to cheap money to boost profits.  Bank executives like to employ traders because they generate juicy returns in good times that drive up the share price and justify large bonuses. In effect, both traders and managers are reaping the benefits of a government subsidy on financial speculation.  The Volcker rule will not — and probably cannot — fully dissolve the union of bankers and gamblers.”

Potential Facebook IPO Could Value Company at $100 Billion

Monday, June 27th, 2011

Facebook is likely to file for an initial public offering (IPO) as early as October or November that could value the popular social networking site at more than a whopping $100 billion.   Goldman Sachs is the top candidate to manage the lucrative offering, which could come in the 1st quarter of 2012.  Facebook, whose chief operating officer last month called an IPO “inevitable,” made no comment on the report.

The company’s IPO likely would probably be prompted by a section of the 1934 Securities and Exchange Act known as “the 500 rule” At heart, the rule mandates that once a private company has more than 500 investors, it must release quarterly financial information to the Securities and Exchange Commission, just as public companies do.  Facebook, which is likely to cross the 500-investor threshold this year, would probably launch a formal IPO in advance of a public-company reporting obligation that would be required next April.  Another factor motivating the IPO, according to people familiar with the plans, is Facebook’s wish to increase employee compensation.  Early in 2010, Facebook curbed employees’ ability to sell their company shares privately to other investors — a move that may now be prompting employees to quit Facebook so they can monetize their shares.  If the company goes public, however, employees will be able to sell their stock on the open market, allowing them to cash in on their holdings.

“Unable to sell their private shares, Facebook employees are growing restless,” according to Kate Kelly at CNBC.   “An initial public offering is expected.  A factor in the company’s IPO timing is the Securities and Exchange Commission’s requirement that some companies like Facebook must disclose financial information if they have more than 500 private investors.”  The IPO speculation and record high valuation is comes on the heels of recent numbers showing declining user-ship in some of Facebook’s leading markets.

Writing in the Wall Street Journal, Shira Ovide says that “Facebook is on track to exceed $2 billion in earnings before interest, taxes, depreciation and amortization for 2011.  That’s even higher than the expected 2011 profit circulated in the early part of the year when Goldman Sachs and Russian investment house Digital Sky Technologies invested in Facebook at a $50 billion valuation.  If Facebook ends the year with $2 billion in Ebitda, would IPO investors stomach a 50 times trailing multiple valuation?  Seems bubble-like.  Trust us.  Wall Street bankers, lawyers, P.R. mavens, caterers and everyone else are slobbering for a slice of the Facebook IPO magic.  Facebook has been meeting with potential bankers that want to shepherd the IPO.  Goldman Sachs is thought to have an inside track to lead the IPO thanks to its recent investment in Facebook, but don’t count out big banks such as J.P. Morgan and Morgan Stanley, which have led recent big tech IPOs.  Facebook CEO Mark Zuckerberg has been non-committal about an IPO for a long time.  As recently as December, Zuckerberg gave his weird deer-in-headlights stare when ’60 Minutes’ asked him whether he would ever push his baby into the public markets.  ‘Maybe’ was Zuckerberg’s answer.  But momentum is taking over.”

Not so fast, says Fortune magazine’s Dan Primack. According to Primack, “Pay attention to news that Facebook is planning its IPO.  But take its proposed valuation with a grain of salt.  First, the most recent private trades of Facebook stock came in at around $85 billion, and private trades are meant to be done at a discount to public valuations.  LinkedIn shares, for example, traded at $23 per share on the private markets six months before going public at $45 per share.  At that velocity, Facebook actually would be valued at $165 billion next January.  More importantly, it’s impossible to intelligently speculate on an Internet company valuation 6-10 months out.  Will the bubble still be inflating?  Will it have popped?  Will macro trends have continued their anemic recovery, or double-dipped back down?  Facebook is probably immune to the timing issues related to IPO windows, but it does not stand apart from the economy at large.  If we experience a massive advertising pullback, for example, then Facebook could take a hit in its largest revenue pot (or at least a growth slowdown).  Not saying that will happen, but obviously it could.  To me, the only value in today’s ‘$100 billion’ report is in referring back to it when the company has an actual public valuation.”

Volcker Rule Is Giving Big Banks Headaches

Wednesday, August 25th, 2010

Volcker Rule implementation is scaring the big banks.  Curiosity is growing about which Wall Street banks will be the first to get out of proprietary trading or the private equity business as they restructure to come into compliance with new financial regulatory reform legislation. The Volcker Rule – named for former Federal Reserve chairman Paul Volcker – limits banks from these practices and sets new levels on the size of private equity or hedge fund investments.  In other words, the banks are not allowed to hold more than three percent of their Tier 1 capital – a measure of their financial strength — in private equity or hedge fund investments.

Bank of America is almost in compliance, though Goldman Sachs must act more aggressively and is reported to be weighing several options to comply with the increased regulation.  The good news for the Wall Street banks is that they have several years in which they can reduce their holdings.  “They have time to adjust,” said Mark Nuccio, partner at Boston-based Ropes & Gray.  “I don’t think there’s any intention on behalf of the regulators to create economic dislocation at financial institutions.”

The new rules are driving certain banks to rethink their business, while others see the new law as a welcome excuse to distance themselves from unwanted hedge or private-equity funds.  “If you were leaning toward a strategic change anyway then now is a good time to re-evaluate the business because you have a regulator saying you shouldn’t be in this business anyway,” said Thomas Whelan, chief executive of Greenwich Alternative Investments.  This is particularly true for banks that quickly acquired hedge fund operations during the boom years.  At that time, having a hedge fund was essential to the strategic mix.  Since 2008, however, when hedge funds posted their worst-ever returns and clients tried to cash in assets, the math changed for many banks.

Fed Governor: U.S. Faces “Significant Economic Challenges”

Thursday, April 29th, 2010

With unemployment “stubbornly” high and government deficits rising, Fed warns of upcoming dangers.  The United States still faces “significant economic challenges”, with unemployment at “stubbornly” high levels and businesses that are reluctant to spend as government deficits rise.  This is the opinion of Federal Reserve Governor Kevin Warsh, who said “Taking account of the broad range of economic and financial conditions, there is no wonder that the electorate in the United States and abroad is unnerved.”  Nevertheless, Warsh feels “much better about the state of the real economy” than he did at this time last year.

Speaking at a symposium hosted by the Shadow Open Market Committee, Warsh, a former Morgan Stanley banker, noted that “Unemployment remains high and stubbornly so.”  Fed policymakers “still have tough times ahead” as they work to prove that their long-term goals are not being compromised.  The Senate Banking committee, under the leadership of its Chairman Christopher Dodd (D-CT), has proposed a financial rules overhaul that would result in the most significant restructuring of Wall Street oversight since the 1930s.  The Senate bill would limit the Fed to supervising bank holding companies with assets in excess of $50 billion.  Smaller and mid-sized banks would be regulated by other agencies.

According to Warsh, the Fed must act with “consistency” to protect its credibility.  “The Federal Reserve must do its utmost to stay foursquare within its role as liquidity provider,” Warsh said.  “The Fed, as first responder, must strongly resist the temptation to be the ultimate rescuer.”  Warsh believes that even though securitization has become a dirty word, the financial vehicle ultimately will return to the market.

Bank of America Throws a Lifeline to Underwater Homeowners

Tuesday, April 20th, 2010

BofA is writing down mortgage principal for thousands of underwater homeowners.  Bank of America (BofA) is taking steps to write down mortgage principal owed by thousands of underwater homeowners in what has been termed “the mortgage industry’s boldest move yet” to resolve the nation’s foreclosure problem.  Bank of America can well afford the initiative.

According to Betsy Graseck, a Morgan Stanley analyst, the ultimate cost of principal reductions is “immaterial” because the majority of the $10 billion pool of loans that are eligible for the write-downs are no longer carried on Bank of America’s balance sheet.  BofA holds just $1.5 to $2 billion of eligible loans and has already reserved against expected losses on these mortgages.  The loans are among the most exotic and risky subprime products that were available during the housing boom.  One is the Option ARM, which originated with an extremely low interest rate and resets at a significantly higher level after a few years.  The rest of the eligible loans – inherited by BofA through its 2007 acquisition of Countrywide Financial – are already securitized and investor owned.

Although the move is giving BofA valuable free publicity, it results from a settlement between the attorney generals of several states and the bank.  Even though some investors complained it wasn’t fair for BofA to agree to the modifications since they were not assuming the majority of the losses, the AGs refused to give up.  BofA is trying to placate the investors by assuring that the modification amounts will be reduced if house prices recover in the next few years.  Additionally, the BofA program is being called a archetype for other lenders.

Kenneth Feinberg Widens Review of Rescued Bank Compensation

Thursday, April 1st, 2010

The nation’s pay czar is widening his review of how much money hundreds of banks paid their top executives during Pay czar is asking for details on compensation at U.S. banks that took TARP money.  the 2008 financial crisis. Kenneth R. Feinberg, officially the Special Master for Executive Compensation, is asking for details on compensation at 419 banks that were bailed out by the Treasury Department’s Troubled Asset Relief Program (TARP).  Because Feinberg’s authority over compensation only started on February 17, 2009 – when President Barack Obama signed the $787 billion stimulus bill into law and gave Treasury the ability to shape compensation at bailed-out companies – he can do nothing about bonuses paid at the end of 2008.

The standards for deciding that compensation is excessive must be “contrary to the public interest.”  Feinberg’s “look back letter” gives the firms 30 days to provide the information requested.  The compensation review applies only to managers who earned upwards of $500,000 during the four-month period that is under assessment.  Scott Talbott, senior vice president of the Financial Services Roundtable, said the big banks “will work with Mr. Feinberg to demonstrate that the industry has eliminated pay practices that encouraged excessive risk-taking.”

Last fall, Feinberg cut executive paychecks by approximately 50 percent for the seven biggest bailout recipients.  Of those, Citigroup and Bank of America have since repaid the government.  Feinberg was able to pressure AIG employees to return a percentage of their compensation.  James Angel, a finance professor at Georgetown University’s McDonough School of Business, said, “On one hand, some of these banks were effectively forced to take TARP money.  But you could also argue that the executives of surviving banks should not be compensated highly because it wasn’t really their particular skill, it was their luck that they were in an institution that survived when the government bailed out the financial system.”

The Federal Government Takes First Steps to Bail Out Banks

Tuesday, October 21st, 2008

The Treasury Department is spending the first $250 billion of the $700 billion rescue bill that Congress recently approved in an attempt to defuse the financial crisis that has dominated the headlines for weeks.  According to a recent article on GlobeSt.com, the move – which partially nationalizes the banking system – is seen by some as conflicting with the free-market principles that typically have characterized the American economy. To shore up the United States banking system, the Treasury Department is partially nationalizing nine banks by using $125 billion to purchase minority stakes in major financial institutions.  Although the banks haven’t been named, they are believed to include Citigroup, Goldman Sachs, Wells Fargo, J.P. Morgan Chase, Bank of America, Merrill Lynch, Morgan Stanley, State Street and Bank of New York Mellon Corporation.  The Treasury Department is also expected to make the remaining $125 billion available to banks and thrifts across the country to purchase their preferred shares.

According to Treasury Secretary Henry Paulson, “Today’s actions are not what we ever wanted to do, but are what we must do to restore confidence to our financial system.  The needs of the economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”  Just weeks before the presidential election, outgoing President George W. Bush sees the move as a short-term measure.  “The government’s role will be limited and temporary.  These measures are not intended to take over the free market, but to preserve it,” Bush said.

The question now is whether the banks will use the capital as the government intends – lend it to businesses and consumers again – or will they use it to sweeten their own balance sheets?  The government, no doubt, intends to exert significant pressure on the institutions to loosen credit so that people can start buying big-ticket items like houses and cars again.