When The Dog's Bite Is Worse Than Its Bark

November 26, 2007

You know the couple. The perfect couple, the enviable couple, the loving, adoring, lustful couple who suddenly find themselves clawing and snarling their way through a dogfight of a divorce. At which point friends and family scratch their heads and say, Hmmm, they seemed pretty happy to me.'

What we see isn't necessarily what we get, financial markets included. One day, business buzzes along, booms even, while underneath foundations crack and break away. Weeks later, skies come tumbling down on markets that, for the most part, remain fundamentally solid.

Take, for example, the case of United Rentals'. The deal for the Greenwich, Conn.-based equipment-rental company appeared sound, seeing as it was brokered during the credit markets' dog days of summer, so it isn't as if current market conditions come as a surprise. Moreover, United Rentals' financial results have been strong and the company's last quarter was one of its best ever.

So why would buyout firm Cerberus Capital Management pay a $100 million breakup fee to back out of the deal?

According to The Wall Street Journal, a little piece of information, i.e. a significantly lower counterbid, caused Cerberus to balk. It was after the buyout firm learned that a rival bidder had offered $3.50 a share less for United Rentals that it began to reconsider its offer to invite the company into its den. Aha.

Broken deals rarely qualify as positive for the market, but another surprise recently revealed does constitute good news for some. Apparently, with all the talk (read headlines) of write-downs related to losses from subprime mortgages and hung-up LBO debt deals, many have failed to notice that banks have fetched record profits in other divisions. According to Banc of America analysts, 2007 just might break records for investment-banking revenue. The analysts estimate that investment banks, independent of other businesses such as retail brokerage and corporate lending, have pulled in $60.8 billion in fees this year, down just 3% from their earnings for all of 2006. And they estimate that number will reach $70 billion by year end, which would mean an 11% rise from the record set last year.

Not entirely unconnected is a recent report from Bloomberg, which says that bonuses at the five biggest U.S. securities firms will total roughly $38 billion for 2007, up $2 billion from last year. In other words, it does in fact appear that despite tumultuous times, many, if not all, dogs do still have their day.

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