Why I'm In the Wrong Business

I’m a relative newbie to the financial world, but after nearly a year-and-a-half in the M&A space, I’ve come to realize that I (as well as nearly everyone else on the planet, let alone finance) am in the wrong business. Here’s an example why:

You plan on selling your house. Let’s say it’s worth $500K. A group of investors offers to take it off your hands for 3X its value. “GREAT!” you say. You sell it to them, recouping 2X your initial investment and feeling like a winner. You get $1M net (more if you have no mortgage, obviously).

However, the investors actually took out a loan to buy the house, and their loan was made at a much lower rate than a prevailing mortgage would cost. Indeed, they also took out the loan for 5X the cost of the house (and thus set a new valuation for the house), and after paying you your price, they then give themselves the remaining 2X of value as a “reward”. This gives the investors $1M just for being smart enough to buy the house. So now, the house is loaded with debt to the tune of 5X its original value. No sweat, because the market for this house just keeps going up. Indeed, the new owners intend to sell the house again quite soon, maybe as soon as a year from now. Mean time, the owners give themselves a monthly fee for being such good homeowners; this is akin to major league baseball players receiving per diem food expenses.

A year later, the new owners are ready to sell. They decide that the house will be sold at auction to the public, and whoever bids the highest will get it. Given the “value” they’ve put into the house in the last year – mostly putting their name on the mailbox and loading the house with debt – they believe that the house will be worth 3X its NEW value. Plus, they like the house enough that they want to be able to use it some even after it’s sold to its new owners, so they arrange that they will still own big chunks of it – maybe 1 or 2 of the 4 bedrooms, a bathroom, etc. – even after it’s sold. This not only allows them to take advantage of the house when it suits them going forward, but they can also share in any money made if the house continues to appreciate or is sold later.

Auction day comes, and the house is sold – for $7.5M, or 3X the valuation ascribed to the house given the debt investment a year ago. The owners take a “dividend” of $6M and also repay the $1.5M in debt that helped finance their original purchase. Thus, the owners now have reaped $7M in cash AND retain a substantial portion of the house even as it changes hands. Even better, they invested little or none of their own cash to get the deal done in the first place.

I’ve just described how the recent LBO and impending IPO of Hertz works (not to mention numerous other LBOs done by PE firms and the like in the past couple of years – think Burger King as well). Note: this only works in a market that continues to be flooded with cash, relatively low interest rates, and demand from buyers. Still, being a well funded PE firm is where it’s at today. With cash and debt so inexpensive and abundant, deals of immense proportions are being done…and some of these would have even Michael Milkin shaking his head saying, “Wow, THAT takes balls!”

U r grnded

ATLANTA: In the wake of a new report issued by Cingular that describes how parents can connect better with their children through the use of text messaging (http://www.prnewswire.com/mnr/cingular/25194/), parents have required crash courses in order to get their messages across to their kids, most of whom have attention spans of roughly 8 seconds and can spell nothing more than 4-letter words. To aid in this effort, Cingular has published a set of "parent friendly text messaging phrases" - or "prnt frndly txts" - that kids will easily be able to understand. These include:
- "dude nt gud 4 u" (That boy isn't good enough for you)
- "grnded" (You are grounded)
- "no art no prcing" (Do not get any tattoos and don't get anything pierced)
- "l8r on" (You'll be sorry when you get home later)
- "veg out" (Remember to eat your vegetables)
Cingular spokesperson Wendy Overland commented that "We are just happy to enable parents to finally connect with their children in real time and create relationships that will last at least 2 minutes."

Madonna Adopts Britney Spears' Latest Child

LONDON: In the wake of her recent adoption of a Malawi boy, Madonna and her husband, Guy Ritchie, have decided to perform a hostile adoption of Britney Spears' newest child, Jayden. Madonna commented that Jayden "...would surely be unable to live a normal childhood and could really use the love and care that I can provide." While unlike the Malawi child whose siblings had all died from the AIDS virus, Jayden and Sean, Spears' and her husband Kevin Federline's older son, would still be "...devoid of a true family experience and subject to unusual suffering..." at the hands of their parents, Madonna commented further. Both Madonna and Guy Ritchie urged Spears to return to singing and dancing and "...slinking around the stage, lipsynching songs and turning on that weird sex appeal", as they put it. They also made it clear that in their view, the world would be much better off, as would their children, if the couple refocused on the music industry instead of attempting to raise a family.

Skilling Considering Death to Avoid Jail

HOUSTON: In the wake of Ken Lay's conviction being overturned as a result of his death (apparently once dead, a convict has no means of appeal, thus making the conviction unfair in the minds of the courts), Jeff Skilling was said to be mulling over the possibility of his own death as a way to avoid the jail term he should receive after his sentencing. "It doesn't seem fair - Ken dies and gets a 'get out of jail free' card, and I'm here living but having to suffer with likely jail time", said Skilling to a friend. Skilling, who will have to pay a steep fine in addition to serving what will probably be up to 15 years in jail, was interviewing various doctors, mobsters, and others with access to a variety of killing techniques. "Even if death is a good option to avoid jail, I don't really want it to hurt", Skilling continued. "I think I favor something like injection or something that wouldn't, like, include hitting pavement at high speed or cutting holes in my body. Those would really hurt". The courts, however, are working furiously to find a way to offer an appeal capability to a dead convict to ensure that Skilling doesn't get off scott free, even if dead.

Japan Announces New Sanctions against Earthquakes

Tokyo, Japan: Fooled into thinking they were witnessing a second nuclear bomb test from North Korea, Japanese officials retaliated against the Earth and the Ring of Fire today by announcing sanctions against both.

After a 6.0 earthquake hit off the coast of Japan yesterday, Japanese scientists and government officials first thought that North Korea had undertaken a second nuclear test. Instead, "...it was just another stupid, run-of-the-mill earthquake, but shrouded in deceit and intended to goad us into sanctioning North Korea", said one angry Japanese official. As a result, the Japanese government has withdrawn all aid to the Earth and is banning shipments through the Ring of Fire as well as to any other area of seismic activity. Coincidentally, the government also announced sanctions against North Korea, in case they were thinking of a second test.

More on (moron?) Hastert, Foley and Bush

Washington, DC: Amid the growing controversy and clamor of the Foley follies, House Speaker Dennis Hastert has announced that rather than resign or perhaps even castigate Rep. Foley, he would enact "reforms". Here are some of his planned actions:
- The Speaker will review and approve all e-mails containing sexual innuendo, gay or straight
- Pages must pass a strict physical in addition to drug and AIDS testing annually
- Congressmen must spell out all intentions long hand in e-mails - using abbreviated wording in SMS or text messages is not allowed.
- Complaints from or about unwanted physical contact with underage pages (or of age pages, for that matter) will be brought to the attention of the Speaker in not longer than 9 months after they occur (however, the Speaker cannot guarantee that any action will be taken unless the accused is a Democrat).

Further demonstrating his attentiveness and concern for the situation, Hastert reiterated his support for President Bush's "No Child Left Behind", though it's not clear that he or some others in Congress understand the true intent of that bill. Indeed, it is believed that Speaker Hastert believed that the bill would be something of interest to Rep. Foley, though not necessarily as part of his political stance on child abuse.

Foley Jokes

OK, these are just too easy to ignore:

- Congress will leave no page unturned as it tries to determine Foley's guilt.
- He's running a "touchy Foley" campaign
- No other congressmen will take a page from Foley's strategy
- Molested and alcoholic maybe...but gay sex with employees is where we draw the line.
- The only thing that could make former New Jersey Governor Jim McGreevey look good.
- Suddenly, McGreevey is sorry he didn't run for Congress instead.
- Maybe he shouldn't still be referred to as "The Honorable Mark Foley".
- Why do I not take solace in the following statement (by Foley's lawyer): "Mark Foley wants you to know he is a gay man".
- I guess in this case, Dennis Hastert should be called the NON-Speaker of the House.

Former HP Chairwoman: "It was just a big joke!"

SILICON VALLEY, CA: Responding to warrants for her arrest as well as that of several of her cohorts, Hewlett-Packard Chairwoman Patricia Dunn today claimed that the HP board's conspiracy, identity theft (or "pretexting" as the impersonation of the victims was ephemistically characterized) and set of illegal acts was merely "...a big joke! We were just trying to have a little fun with Carly, the press and others to let off some steam during what were otherwise tedious times for the company". Dunn suggested that board members were quite fond of playing practical jokes, including a few "hot foot" incidents for Carleton S. Fiorina at board meetings, prank calls to senior executives ("We tried the 'Prince Albert in a can' call a few times", Ms. Dunn confessed) and phone messages with "silly voices and jokes", according to Kevin Hunsaker, HP's compliance lawyer.

Claiming that they were after "...a few laughs", Ms. Dunn continued to proclaim her innocence and complete lack of knowledge about laws regarding impersonation, identity theft and general good manners. Ms. Dunn, who last week stated that she (the chairwoman of a $90B company) thought that private phone records were readily available to those that simply called and asked the phone company for them, continued incredulously about the illegality of her and her board's acts. "I just can't believe that our state government and the press -- the press, for chrissakes -- has no sense of humor. Who hasn't made a few crank calls? Who hasn't tried to 'one up' their pals by beating them to the punch on, say, tickets to the ball game?" Ms. Dunn then held up a whoopee cushion and described with great glee how often that particular stunt was used on Ms. Fiorina as well as Mark Hurd, the current CEO of HP, when board meetings tended to go a little long.