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DealBook: Microsoft May Back Dell Buyout

January 23, 2013 by NewsMaker Leave a Comment

Shannon Stapleton/ReutersA Dell Sx2210t touch monitor running Windows 7 in 2009.

The effort to take Dell private has gained a prominent, if unusual, backer: Microsoft.

The software giant is in talks to help finance a takeover bid for Dell that would exceed $20 billion, a person briefed on the matter said on Tuesday. Microsoft is expected to contribute up to several billion dollars.

An investment by Microsoft — if it comes to pass — could be enough to push a leveraged buyout of the struggling computer maker over the goal line. Silver Lake, the private equity firm spearheading the takeover talks, has been seeking a deep-pocketed investor to join the effort. And Microsoft, which has not yet made a commitment, has more than $66 billion in cash on hand.

Microsoft and Silver Lake, a prominent investor in technology companies, are no strangers. The private equity firm was part of a consortium that sold Skype, the online video-chatting pioneer, to Microsoft for $8.5 billion nearly two years ago. And the two companies had discussed teaming up to make an investment in Yahoo in late 2011, before Yahoo decided against selling a minority stake in itself.

A vibrant Dell is an important part of Microsoft’s plans to make Windows more relevant for the tablet era, when more and more devices come with touch screens. Dell has been one of the most visible supporters of Windows 8 in its products.

That has been crucial at a time when Microsoft’s relationships with many PC makers have grown strained because of the company’s move into making computer hardware with its Surface family of tablets.

Frank Shaw, a spokesman for Microsoft, declined to comment.

If completed, a buyout of Dell would be the largest leveraged buyout since the financial crisis, reaching levels unseen since the takeovers of Hilton Hotels and the Texas energy giant TXU. Such a deal is taking advantage of Dell’s still-low stock price and the abundance of investors willing to buy up the debt issued as part of a transaction to take the company private. And Silver Lake has been working with Dell’s founder, Michael S. Dell, who is expected to contribute his nearly 16 percent stake in the company to a takeover bid.

Yet while many aspects of the potential deal have fallen into place, including a potential price of up to around $14 a share, talks between Dell and its potential buyers may still fall apart.

Shares of Dell closed up 2.2 percent on Tuesday, at $13.12. They began rising after CNBC reported Microsoft’s potential involvement in a leveraged buyout. Microsoft shares slipped 0.4 percent, to $27.15.

Lucas Jackson/ReutersDell’s founder, Michael S. Dell, attended the unveiling of Microsoft’s Windows 8 operating system last year in New York.

Microsoft’s lending a hand to Dell could make sense at a time when the PC industry is facing some of the biggest challenges in its history. Dell is one of Microsoft’s most significant, longest-lasting partners in the PC business and among the most committed to creating machines that run Windows, the operating system that is the foundation of much of Microsoft’s profits.

But PC sales were in a slump for most of last year, as consumers diverted their spending to other types of devices like tablets and smartphones. Dell, the third-biggest maker of PCs in the world, recorded a 21 percent decline in shipments of PCs during the fourth quarter of last year from the same period in 2011, according to IDC.

In a joint interview in November, Mr. Dell and Steven A. Ballmer, Microsoft’s chief executive, exchanged friendly banter, as one would expect of two men who have been in business together for decades.

Mr. Dell said Mr. Ballmer had gone out of his way to reassure him that Microsoft’s Surface computers would not hurt Dell sales.

“We’ve never sold all the PCs in the world,” said Mr. Dell, sitting in a New York hotel room brimming with new Windows 8 computers made by his company. “As I’ve understood Steve’s plans here, if Surface helps Windows 8 succeed, that’s going to be good for Windows, good for Dell and good for our customers. We’re just fine with all that.”

Microsoft has been willing to open its purse strings in the past to help close partners. Last April, Microsoft committed to invest more than $600 million in Barnes Noble’s electronic books subsidiary, in a deal that ensures a source of electronic books for Windows devices. Microsoft also agreed in 2011 to provide the Finnish cellphone maker Nokia billions of dollars’ worth of various forms of support, including marketing and research and development assistance, in exchange for Nokia’s adopting Microsoft’s Windows Phone operating system.

Article source: http://dealbook.nytimes.com/2013/01/22/microsoft-may-back-dell-buyout/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: minority stake, private equity firm, shannon stapleton

DealBook: Deep Cuts Raise Questions About Morgan Stanley

January 10, 2013 by NewsMaker Leave a Comment

Shannon Stapleton/ReutersMorgan Stanley‘s headquarters in Manhattan. The bank plans to cut 6 percent of its institutional securities unit staff.

When Morgan Stanley’s top executives gathered in mid-September at the Gramercy Park Hotel in Manhattan to discuss strategy, some participants complained that the room was too small.

Apparently, that was the point: James P. Gorman, Morgan Stanley’s chief executive, chose the cramped quarters to force discussion among the executives, said people briefed on his decision but not authorized to speak on the record.

These days, it is the Wall Street firm that is finding itself a bit boxed in.

Regulatory demands, weak markets and lower credit ratings have weighed on all banks, but perhaps more so on Morgan Stanley, the smallest of the big Wall Street firms. In the three years that Mr. Gorman, 54, has been at the helm, the bank has been progressively shrinking its business of trading bonds, commodities and other investments and expanding into wealth management.

Now the storied company — whose take-no-prisoners trading desks have at times been rivaled only by firms like Goldman Sachs — is cutting even deeper, raising questions among some on Wall Street about whether it should spin off or ditch much of its trading business as its Swiss rival UBS has, a suggestion the firm eschews.

Morgan Stanley is planning another deep round of cuts: 1,600 jobs, accounting for 6 percent of its support work force, and, more telling, 6 percent of institutional securities, which includes its once vaunted trading business.

The planned cuts come just a week ahead of the release of fourth-quarter earnings, which are expected to show the gains the firm has made since the financial crisis in areas like stock trading, banking and wealth management but still will be weighed down by the diminished earnings power of its fixed income business.

Whether the company can avoid shrinking further — and a number of analysts say that additional cuts will be needed — and revive the fixed-income trading business will have significant ripple effects in the financial world.

While the strategy of cutting in some places and building out wealth management may lead to a more stable company, the retreat also means that the fixed-income trading business over all is becoming increasingly dominated by two Wall Street banks — JPMorgan Chase and Goldman — as well as by hedge funds and other investment firms that are more lightly regulated than banks like Morgan Stanley.

Before the financial crisis, the fixed income division at Morgan Stanley, which was created by J. P. Morgan partners when Depression-era laws forced them to split banking from trading, was one of the firm’s biggest moneymakers. Now, it is a drain on operations, producing just 20 percent of its revenue but tying up roughly half of its capital.

In recent years, the fixed-income department has not been able to make enough money to cover the cost to Morgan Stanley of this capital, according to people briefed on the matter but not authorized to speak on the record.

The fallout can be seen in compensation: a year ago, 110 of the roughly 500 managing directors in sales and trading did not get a bonus, and that number is expected to grow next week when bonuses are handed out.

Still, Mr. Gorman has received high marks from some on Wall Street for playing a difficult hand in the wake of the financial crisis. On Wednesday, he received a big vote of confidence when Daniel S. Loeb’s hedge fund told investors that it was taking a stake, saying that Morgan Stanley was “in the early innings of a turnaround.”

Still, hobbled by the new realities on Wall Street, that turnaround has so far proved to be a Sisyphean task.

The stock, said the shareholder Christopher Grisanti, has “languished.” Mr. Grisanti is the owner and co-founder of Grisanti Capital Management, which owns 690,000 shares of Morgan Stanley, valued at $13.5 million.

While the stock has risen since Mr. Grisanti bought it, it is down almost 40 percent since Mr. Gorman took over in January 2010, and big shareholders like the Bank of Tokyo-Mitsubishi UFJ of Japan, which holds a 22 percent stake valued at $8.5 billion, have had little in the way of returns. Morgan Stanley’s return on equity, Wall Street’s main benchmark of profitability, is 6 percent, down from 23.8 percent in 2006.

Morgan Stanley’s board, said people briefed on the matter, has discussed closing its fixed-income department. Instead, the firm is shrinking the unit, arguing that it is important to offer its customers those trading services. By cutting jobs and costs and exiting lines like structured products and other complex financial investments and focusing on less risky, less capital-intensive businesses like the trading of interest rates, executives contended that the division can generate a healthy return.

“We are not going to pull a UBS,” the senior executive Colm Kelleher told a private dinner of Morgan Stanley shareholders at Oceana restaurant in Midtown Manhattan.

A Morgan Stanley spokesman, Wesley McDade, said the firm was optimistic about its prospects.

“In 2013, we expect to benefit from the many strategic decisions we have taken, including an aggressive move into wealth management, a further strengthening of our pre-eminent equities and investment banking franchises, and the repositioning of our fixed income business to meet the realities of the new world,” he said.

Morgan Stanley wants to achieve a return on equity of 10 percent in the near term, and it is making progress as it continues to shed both employees and risky assets. Longer term, Morgan Stanley is shooting for a return on equity in the middle teens, according to people briefed on the matter but not authorized to speak on the record.

Critics said Morgan Stanley executives initially moved too slowly to cut business lines, and set unrealistic revenue goals for the division that were never met.

Recently, Mr. Gorman tapped one of his bankers, John Pruzan, to be his eyes and ears in meetings about the revamping of the department. Even that move was not without controversy, though. Some executives in that department, including the fixed income chief Kenneth deRegt, felt it added an unnecessary layer of management.

At the same time, while trying to squeeze risk out, it has taken some surprising ones, hiring for instance a powerful and controversial trader to run its rates desk, a primary center of growth for the fixed-income department. That trader, Glenn Hadden, is under investigation by a key regulator for his trading in Treasury futures. In 2009, he was put on leave at Goldman because of a separate trading incident.

Through Mr. McDade, the Morgan Stanley spokesman, Mr. Hadden declined to comment. A lawyer for Mr. Hadden also declined to comment, but has said that his client did not engage in manipulative activity.

The firm Mr. Gorman runs bears little resemblance to the one that existed before the financial crisis. Mr. Gorman’s predecessor, John J. Mack, pushed risk-taking, leading to a $9 billion loss in 2007, one of the largest single trading losses in history, as well as billions of dollars in additional losses because of exposure to bond insurers.

These events nearly crippled the firm, and Morgan Stanley was forced to sell a piece of itself to Mitsubishi, which injected $9 billion into the firm. Not long after, in January 2009, Morgan Stanley made another important strategic investment, combining its wealth management operations with Citigroup in a joint venture that gave Morgan Stanley control.

Still, just weeks after taking over as chief, Mr. Gorman took the stage at a Hilton in Midtown Manhattan on a cold winter day to assure a standing-room-only crowd of investors that maintaining the firm’s position as one of Wall Street’s most powerful investment banks was a top priority for him.

Even in early 2010, however, it was clear to many inside the firm that he would have his work cut out for him.

Every Wednesday, executives from various corners of the bank who belonged to what was known as the asset liability committee would meet at noon to examine the cost to the firm of everything from looming credit-rating downgrades to regulatory changes.

“It was the most depressing meeting ever,” said one attendee who spoke on the condition of anonymity. “It was very clear the Morgan Stanley we knew was never coming back.”

Article source: http://dealbook.nytimes.com/2013/01/09/deep-cuts-raise-questions-about-morgan-stanley/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: fixed income, gorman, shannon stapleton

DealBook: In Shift to New Court, Risks for Madoff Trustee’s Case

July 5, 2011 by NewsMaker Leave a Comment

Shannon Stapleton/ReutersIrving H. Picard, the court-appointed trustee in the Madoff fraud case.

When it comes to the Madoff bankruptcy case, the venue matters.

Prominent lawsuits filed by Irving H. Picard, the trustee in the case, will be reviewed in Federal District Court rather than in United States Bankruptcy Court. It is an important shift, one that may result in the dismissal of some claims and limit the amount Mr. Picard can recover for investors.

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Mr. Picard is looking to recover billions of dollars from banks he has accused of aiding Bernard L. Madoff’s huge Ponzi scheme by turning a blind eye to the fraud. He is seeking $19.9 billion from JPMorgan Chase; $1 billion from the New York Mets owners Saul Katz and Fred Wilpon; $10 billion from HSBC; and nearly $60 billion from UniCredit and other banks affiliated with Sonja Kohn.

The bankruptcy court is viewed as a friendlier venue for Mr. Picard, not the least because it has sided with him on important issues regarding who can make claims as part of the liquidation.

The court adopted his approach in holding that those who withdrew more from their accounts than they invested — the so-called net winners — were subject to a lawsuit seeking to have them repay their profits while denying any claim for losses based on their final account statements. The net winners issue was appealed to the United States Court of Appeals for the Second Circuit, and a decision is expected in the near future.

Mario Tama/Getty ImagesBernard L. Madoff

Last week, the bankruptcy court again sided with Mr. Picard in holding that those who invested with Mr. Madoff indirectly through feeder funds were not “customers” under the law. Therefore, the court said, investors can only look to the feeder fund for compensation and are not eligible for a payment of up to $500,000 through the Securities Investor Protection Corporation. There is likely to be an appeal to the Second Circuit on that issue as well.

For some of Mr. Picard’s most important claims, Judge Jed S. Rakoff and Judge Colleen McMahon of United States District Court for the Southern District in Manhattan have temporarily withdrawn the cases from the bankruptcy court since they involve issues outside of bankruptcy law.

Here is a rundown of some of the issues the judges will decide, and their potential effect on Mr. Picard’s recovery efforts.

Sterling Equities
Mr. Picard is seeking $1 billion from Sterling Equities and dozens of other entities controlled by Mr. Katz and Mr. Wilpon, in what is called a “fraudulent conveyance” action, usually referred to as a clawback suit. The lawsuit seeks repayment of $300 million in fictitious profits the two withdrew and an additional $700 million because, the suit claims, they ignored red flags about the fraud.

On July 1, Judge Rakoff decided to withdraw the case from the bankruptcy court to rule on whether Mr. Katz and Mr. Wilpon bear any responsibility for allowing the Ponzi scheme to continue. Under fraudulent conveyance law, the responsibility is based on whether there were “badges of fraud,” which can include circumstantial evidence to infer fraudulent intent. That is a fairly low threshold that would make it much easier for Mr. Picard to establish liability against Mr. Katz and Mr. Wilpon.

Judge Rakoff, however, questioned whether that was the proper standard. In a Bloomberg News article, the judge asked: “How can it be that the law governing someone’s duty to inquire is determined, not by what the governing laws in place were at the time, but by the happenstance that the entity later went into bankruptcy?”

Under federal securities law, proving fraud requires establishing “scienter,” which means intent or at least recklessness. One means of establishing intent is through what is known as “willful blindness,” that a person deliberately ignored signs of misconduct.

The Supreme Court recently explained in Global-Tech Appliances Inc. v. SEB, S.A. that “a willfully blind defendant is one who takes deliberate actions to avoid confirming a high probability of wrongdoing and who can almost be said to have actually known the critical facts.”

Mr. Picard’s lawsuit highlights various warnings signs over the years. But whether that shows that Mr. Wilpon and Mr. Katz had actual knowledge of the fraud is open to question, especially given how Mr. Madoff repeatedly fooled so many others, including the Securities and Exchange Commission.

If Judge Rakoff requires proof of a higher level of intent to establish fraud in dealings with Mr. Madoff, that may also affect other cases by Mr. Picard that seek to hold financial institutions responsible for being complicit in the Ponzi scheme.

The fact that Mr. Madoff succeeded in covering up his scheme for as long as he did may limit what can be recovered from banks and feeder funds that can claim they were misled like everyone else.

HSBC and UniCredit
The lawsuits against HSBC and UniCredit stem from the $9 billion funneled by Ms. Kohn to Mr. Madoff’s firm, transfers that the banks facilitated. The HSBC case seeks $10 billion based on the bank’s alleged breach of common law duties for failing to monitor Mr. Madoff or make any effort to protect investors. The UniCredit suit makes many of the same claims, with the additional twist of seeking nearly $60 billion based on violations of the Racketeer Influenced and Corrupt Organizations Act, better known as R.I.C.O., which authorizes triple damages.

On June 27, HSBC pushed to dismiss the case in a motion before Judge Rakoff. The bank argued that Mr. Picard did not have standing to file a claim on behalf of the investors who lost money in the Ponzi scheme because he only represented Mr. Madoff’s firm.

If that argument succeeds, then Mr. Picard may be limited in whether he can pursue the financial institutions through which Mr. Madoff funneled billions of dollars for anything more than the profits they made from acting as his bankers, almost a pittance compared with the billions of dollars in investor losses.

As for the lawsuit against UniCredit of Italy, it is not clear whether R.I.C.O. can be applied to foreign parties that did not act in the United States. The Supreme Court has ruled that American law cannot extend to activities outside the country unless the statute clearly states otherwise. R.I.C.O. does not contain any explicit reference to extraterritorial application, which may block the claim.

The $60 billion R.I.C.O. claim against UniCredit and other European banks is the trustee’s largest single claim. So if those allegations are dismissed, then the potential recovery will be significantly diminished.

JPMorgan Chase
Mr. Picard recently amended his suit against JPMorgan, which held Mr. Madoff’s primary bank account, to ask for $19 billion for failing to properly monitor his operations. Like other claims, the suit alleges that there were enough indications of fraud that the failure to act made the bank liable to investors.

Judge McMahon has agreed to consider JPMorgan’s argument that a federal law designed to limit private securities fraud claims should block Mr. Picard from pursuing his case.

A federal statute called the Securities Litigation Uniform Standards Act prohibits claims based on state law when the underlying transaction involved trading in securities subject to the federal securities law. Congress adopted it in 1998 to prevent plaintiff class action firms from bypassing the federal courts to pursue claims under more friendly state laws.

JPMorgan argued that Mr. Picard’s claim essentially alleges that it helped Mr. Madoff engage in securities fraud, and therefore, under the federal statute, it must be dismissed.

The same argument for dismissal under that statute is being pursued by HSBC and UniCredit, so Judge Rakoff will also have to deal with this issue along with Judge McMahon. If the state common law claims are blocked by the law, then billions of dollars could be whittled from Mr. Picard’s claims against the banks.

The issues in these cases turn on fairly narrow legal questions, including what is the proper standard to assess intent to defraud and how to determine standing to pursue a claim. As is often the case, legal technicalities may well have the greatest effect. If Judge Rakoff and Judge McMahon rule against the trustee, the potential recovery ultimately available to Mr. Madoff’s investors could shrink drastically.

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

Article source: http://feeds.nytimes.com/click.phdo?i=a03c407f2367caed9538ca268f1f1ebe

Filed Under: Business News Tagged With: jpmorgan chase, picard, shannon stapleton

DealBook: Microsoft May Back Dell Buyout

DealBook: Deep Cuts Raise Questions About Morgan Stanley

DealBook: In Shift to New Court, Risks for Madoff Trustee’s Case

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