7 CLOs quickly came: Statistics in PowerPoint presentation provided by Meredith Coffey, senior vice president, Research and Analysis, Loan Syndications & Trading Association, June 17, 2009, in response to a query.
8 In 2004 the average large company: Standard & Poor’s / Leveraged Commentary & Data figures, June 9, 2009, provided in response to query.
9 “Inevitably when people look back”: Carmel Crimmins, “Carlyle’s Rubenstein Sees No Buyout Crash,” Reuters, Jan. 25, 2006.
10 That year private equity firms initiated: Dealogic data compiled for the authors on May 28, 2009.
11 “It’s not that you see”: Tony James interview.
12 It began in May 2006: Paul Schorr IV interview. The account of the negotiations for the buyout, through “no one emerged to trump Blackstone’s offer,” is based on that interview and the Freescale proxy statement cited below.
13 Freescale agreed to let Schorr’s team: Schedule DEFM14A proxy statement, Freescale Semiconductor, Oct. 19, 2006, 19–31 (“Background of the Merger”). The filing includes a day-by-day account of the offers, demands, negotiations, and board of directors meetings from the company’s perspective.
14 “We were prepared to sign”: Schwarzman interview.
15 It was a steep price: Freescale annual reports for 2006 and 2008.
16 To give the company: Freescale annual report for 2007, Mar. 13, 2008, 59–60.
17 “Semiconductors, you knew, was cyclical”: James interview.
18 Even with the hefty equity investment: Balance sheets in Freescale’s report for the quarter ended Sept. 29, 2006, and in its annual report for 2007.
19 “It was frustrating sometimes”: Chu interview.
20 In late August: The identities of the bidders and their bids, as well as the chronology of the bidding war, come from the original proxy statement for the merger: Schedule DEFM14A, Clear Channel, Jan. 29, 2007, 24–36.
21 “The banks were offering”: James interview.
22 Bain and Lee’s agreement: Schedule DEFM14A, Clear Channel, 6–7.
23 After a group of hedge funds: Chris Nolter, “Clear Channel Warms to Bid,” Deal, May 18, 2007.
24 Similar scenarios played out: E-mail from Blackstone partner Prakash Melwani, Aug. 28, 2008. Blackstone confirmed the companies’ identities and provided its offer price for each. In some cases, its bid was disclosed in the proxy statements of the targets.
25 “We lost seven out of eight”: Prakash Melwani interview.
26 Blackstone outspent rivals: Blackstone annual report for 2008, Mar. 3, 2009, 70, 72; Amendment No. 6, Form S-1A, KKR & Co., LP, Oct. 31, 2008, 25 ($6.7 billion of limited-partner capital invested in 2006); Amendment No. 2, Form S-1A, Apollo Global Management, LLC, Nov. 3, 2009, 32 ($2.9 billion of limited-partner capital invested in 2006).
27 “It’s very hard”: James interview.
Chapter 21: Office Party
1 Chapter 21: Portions of this chapter were adapted from a Nov. 30, 2007, story in the Deal by the authors titled “New Kids on the Block.”
2 “You should buy EOP”: The conversation with Kaplan and other exchanges involving Jonathan Gray in this chapter, and the details concerning EOP not otherwise footnoted, are based on interviews with Gray.
3 In 1998, for instance: Chad Pike interview.
4 The private equity approach: IPO Prospectus (average return); confidential private placement memorandum for Blackstone Real Estate Partners VI, Blackstone, Jan. 2007 (few losses).
5 They had also learned: Frank Cohen and Kenneth Caplan interview.
6 “Sam’s a trader”: Douglas Sesler interview, Nov. 1, 2007.
7 Blackstone now had a target: Cohen and Caplan interview.
8 Leventhal happily launched: Alan Leventhal interview, Nov. 15, 2007.
9 By November 2, Gray’s team: The sequence of events, including offers, counteroffers, and the substance of key meetings involving EOP officials, are laid out in detail in the proxy statement and supplements sent to EOP shareholders: Definitive Proxy Statement, Schedule 14A, Equity Office Properties Trust, Dec. 29, 2006, 29–36 (“Background of Mergers”); Definitive Additional Materials, Schedule 14A, Jan. 29, 2007, S-9–S-14 (“Update to Background of Mergers”); Schedule 14A, Feb. 2, 2007, S-7–S-9 (“Update to Background of Mergers”).
10 Zell drove a hard bargain: Sam Zell interview, Nov. 19, 2007.
11 It took Blackstone just five days: Background interview with a person involved in the deal, confirmed by Blackstone.
12 Blackstone was offering just a small: Richard Kincaid interview, Oct. 30, 2007.
13 At one real estate conference: Zell interview; Roy March interview, Nov. 5, 2007.
14 “I like Steve very much”: Zell interview.
15 Zell grew alarmed: Zell and Gray interviews.
16 Finally, in mid-December … “Of course, we immediately went back to Blackstone”: Zell and Kincaid interviews.
17 “You know how when”: Background interview with a person involved in the deal.
18 Zell hadn’t managed: Cohen interview.
19 Gray and Frank Cohen were caught: Cohen interview.
20 The inquiries and offers: March interview.
21 “We had a big timing advantage”: Brian Stadler interview, Nov. 1, 2007.
22 To Zell and Kincaid: Zell and Kincaid interviews.
23 Vornado’s nickel-and-diming: Tony James interview.
24 From February to June: Blackstone.
25 With the benefit of leverage: Interview with Michael Knott of Green Street Advisors, Nov. 2007; a background interview with a source with knowledge of Blackstone’s estimate at the time. Blackstone declined to confirm the $7 billion valuation.
Chapter 22: Going Public—Very Public
1 “I’m not going to get beat twice”: Michael Puglisi interview.
2 While it was hard: Background interview with a person who knows them both.
3 The previous December: Stephen Schwarzman interview.
4 Michael Klein, a senior Citigroup banker: Schwarzman interview; Michael Klein interview, Nov. 14, 2008.
5 James meanwhile was batting around … “Then we created a fictional”: Tony James interview; Ruth Porat, Edward Pick, and Michael Wise interview, Oct. 22, 2008; Porat and Wise interview, Nov. 19, 2008.
6 In fact, she and her team: Schwarzman and Puglisi interviews; e-mail from Robert Friedman in response to a query.
7 “I was fixated on confidentiality”: Schwarzman interview.
8 Joshua Ford Bonnie: Joshua Ford Bonnie interview, July 15, 2008.
9 Under his original 1985 agreement: Puglisi, Schwarzman, and Robert Friedman interviews.
10 To begin with: Bonnie and Friedman interviews; IPO Prospectus.
11 Schwarzman and James had many qualms: Schwarzman and James interviews; Porat, Pick, and Wise interview.
12 “If we don’t do it”: Puglisi and Porat interviews, Oct. 22, 2008.
13 GSO Capital: Bennett Goodman interview.
14 James also saw other, less obvious payoffs … “A couple of times a week”: James interview.
15 For all his concerns: Puglisi and Schwarzman interviews.
16 By the end of the summer: Bonnie interview.
17 James devised an end run: James interview; background interview with a person involved in the IPO; Form S-1 (preliminary IPO prospectus), Blackstone Group LP, Mar. 22, 2007.
18 By October 11: Porat, Pick, and Wise interview.
19 Project Puma: Bonnie interview.
20 “I had run a public”: Peter Peterson interview; background interview with a person familiar with his thinking.
21 Adding bankers was: IPO Prospectus (amounts); date of Citigroup’s hiring confirmed by Blackstone; two background interviews.
22 Schwarzman and James were still: James interview; interview with Phyllis Korff, underwriters counsel at Skadden, Arps, Slate, Meagher & Flom, Aug. 6, 2008.
23 Deutsche Bank: Background interview with a source involved in the IP
O.
24 That January at the World Economic Forum: Andrew Ross Sorkin, “A Growing Aversion to Ticker Symbols,” NYT, Jan. 28, 2007.
25 The potential political fallout: Henry Silverman interview, May 13, 2008.
26 Just a week after the party: Fortune, Mar. 5, 2007; background interview with a source familiar with the story. Issues of Fortune are mailed and go on sale roughly two weeks before the cover date.
27 Going into February: James and Robert Friedman interviews.
28 By then, a number of other partners: Three background interviews with partners; date confirmed by Blackstone.
29 On March 22, Blackstone: Form S-1.
30 Through friends, Antony Leung: Antony Leung interview.
31 Schwarzman wasn’t sure: Friedman interview.
32 On May 20, barely three weeks: Leung and Friedman interviews; IPO Prospectus (Beijing Wonderful Investments); background interview ($15 billion in new reserves).
33 In exchange for Peterson’s selling: Peterson interview and written response to a query; IPO Prospectus (individuals’ stakes).
34 While Blackstone was negotiating: Amended Registration Statement Form S-1, Blackstone Group LP, May 21, 2007; background interview with a source familiar with the SEC comments.
35 The press was filled with stories: Jenny Anderson, “Scrutiny on Tax Rates That Fund Managers Pay,” NYT, June 13, 2007; Amendment No. 4 to Form S-1, Fortress Investment Group, Feb. 2, 2007, 5.
36 Changing the law: “They realized this wasn’t just a fat-cat Wall Street issue,” says a private equity source in Washington. If the problem were dealt with across the board, “you hit the pocketbook of every doctor in the country who invested in a strip mall.”
37 Even former U.S. treasury secretary: Anderson, “Scrutiny on Tax Rates.” Between the potential complications of altering the law and the fact that private equity’s profits dried up in late 2007, the various proposals went nowhere in Congress that year. The Obama administration favors treating carried interest as ordinary income, and new bills to change the law were presented in Congress again in 2010.
38 Though the pressure tactics: Silverman interview; three background interviews; “The Blackstone Tax” (unsigned editorial), WSJ, June 20, 2007.
39 Senator Max Baucus: Two background interviews with sources in Washington who monitored the developments.
40 As it happened, June 11: Amendment No. 4 to Form S-1, Blackstone Group LP, June 11, 2007.
41 It was nine times: Schedule 14A, Goldman Sachs Group, Feb. 21, 2007, 14.
42 A cascade of headlines: Henny Sender and Monica Langley, “How Blackstone’s Chief Became $7 Billion Man,” WSJ, June 13, 2007.
43 The next day, Thursday: U.S. Senate Committee on Finance, “News Release—Baucus-Grassley Bill Addresses Publicly Traded Partnerships,” June 14, 2007.
44 In practice, that meant: “The Blackstone Tax,” WSJ.
45 The evening Baucus and Grassley: James interview.
46 Early Saturday morning: James interview.
47 When the news got back: Porat interview, Nov. 19, 2008.
48 Schwarzman got into the act: David Blitzer interview.
49 After one last day of meetings: Blitzer interview; written response from James in response to a query.
50 “Every gun was pointed at us”: Jonathan Gray interview.
51 The SEC had already: Porat and Wise interview; Friedman interview.
52 When the accounts were tallied up: IPO Prospectus.
53 The offering was not simply: Dealogic data compiled for the authors on July 8, 2009.
54 The very day that Blackstone: Julie Creswell and Vikas Bajaj, “$3.2 Billion Move by Bear Stearns to Rescue Fund,” NYT, June 23, 2007.
Chapter 23: What Goes Up Must Come Down
1 On June 30: Peter Moreira and John E. Morris, “Teachers’ $48.5B bid wins BCE,” Deal, July 2, 2007.
2 In early June: “Spreads Recover; Heavy Supply Ahead,” Reuters, June 8, 2007.
3 But suddenly they couldn’t: Jennifer Ablan, “CDO Market Near Halt Amid Subprime Worries,” Reuters, June 26, 2007.
4 The first LBO: SLM Corp. press releases, July 11, 2007, and Jan. 28, 2008.
5 A few weeks after: John E. Morris, “Price Cut for HD Supply,” Deal, Feb. 28, 2008.
6 Bain Capital and Thomas H. Lee Partners’ mammoth: Clear Channel press release, Mar. 26, 2008; Don Jeffrey and Phil Milford, “Clear Channel, Bain, Lee Sue Banks Over Buyout Plan,” Bloomberg News, Mar. 26, 2008.
7 From 2001 to 2005: The Subprime Lending Crisis, Report and Recommendations by the Majority Staff of the Joint Economic Committee, U.S. Congress, Oct. 2007, 10, 18.
8 In Britain, which had seen: “Ten Days That Shook the City,” Sunday Times, Sept. 23, 2007.
9 In one notorious case: John E. Morris, “Paying for splitsville,” Deal, Feb. 19, 2009.
10 One, to buy the mortgage: PHH Corp. press release, Jan. 1, 2008.
11 It had a much harder time: Opinion, Alliance Data Systems Corp. v. Blackstone Capital Partners, Delaware Court of Chancery, C.A. No. 3796-VCS (Jan. 15, 2008, Vice-Chancellor Leo Strine) (dismissing Alliance’s suit).
12 Still, it was a costly episode: PPM for BCP VI.
13 In a coda for the age: Peter Moreira, “BCE Buyout Collapses,” Deal, Dec. 11, 2008.
Chapter 24: Paying the Piper
1 Apollo had been particularly aggressive: Private Equity: Tracking the Largest Sponsors, Moody’s, Jan. 2008; John E. Morris, “Double Trouble,” Deal, July 17, 2008; Vyvyan Tenorio, “The Dividend Debate,” Deal, Apr. 16, 2009.
2 Two of them: Company financials.
3 Blackstone, too, had engineered: Travelport—Paul Schorr IV interview; Jeffrey Clarke, Travelport CEO, Aug. 27, 2009; Form S-4, Travelport, Ltd, May 8, 2007, 88; Health Markets—confirmed by Blackstone.
4 Furthermore, even the most extreme: Katia d’Hulster, “The Leverage Ratio: A New Binding Limit on Banks,” Crisis Response Note No. 11, World Bank, Dec. 2009.
5 By the time Bain Capital: Clear Channel financials.
6 Apollo, which had loaded up … Another Apollo casualty: Morris, “Double Trouble.”
7 Blackstone’s buyout and real estate funds: PPM for BCV VI.
8 Blackstone’s due dates: Blackstone.
9 Cerberus led a consortium: Jui Chakravorty Das, “GMAC Bailout Could Give Cerberus a Floor and Exit,” Reuters, Dec. 30, 2008; Louise Story, “Cerberus Tries to Get Chrysler out of a Ditch,” NYT, Mar. 31, 2009.
10 Cerberus’s buyout of the automaker: Ibid.
11 Even Cerberus’s investors were kept in the dark: Background interview with a prospective investor approached by Cerberus.
12 KKR lost Masonite: David Carey, “KKR Holdings Jump 34% in Value,” Deal, Feb. 25, 2010; François Shalom, “Aveos Creditors Agree to Debt Swap for Equity,” Montreal Gazette, Jan. 27, 2010; Tiffany Kary and Bill Rochelle, “Masonite Files for Bankruptcy to Restructure Debts,” Bloomberg News, Mar. 16, 2009.
13 Carlyle had five complete: Chris Nolter, “Hawaiian Telcom Files for Bankruptcy,” Deal, Dec. 1, 2008; Andrew Bulkeley, “Carlyle’s Edscha Collapses,” Deal, Feb. 3, 2009; John Blakeley and David Carey, “Sem-Group Slides into Ch. 11,” Deal, July 23, 2008; Alison Tudor, “Carlyle Group-Owned Willcom Inc. Files for Bankruptcy,” LBO Wire, Feb. 18, 2010; Neil Sen, “IMO Car Wash Ruling Crushes Mezzanine Lenders,” Deal, Aug. 12, 2009.
14 TPG lost Aleris: Carol Vaporean, “Aleris Files for Bankruptcy as Aluminum Mart Slides,” Reuters, Feb. 12, 2009.
15 Thomas H. Lee Partners: Vyvyan Tenorio, “It Could Have Been Worse,” Deal, Jan. 7, 2010; Vyvyan Tenorio, “The Fallen,” Deal, Feb. 19, 2009.
16 Forstmann Little: Tiffany Kary and Don Jeffrey, “Citadel Broadcasting Can Use Cash During Bankruptcy,” Bloomberg News, Dec. 21, 2009.
17 In Britain, Terra Firma Capital Partners: Devin Leonard, “Battle of the Bands: Citigroup Is up Next,” NYT, Feb. 6, 2010.
18 The deals done: David Carey, “Buyouts
and Banks,” Deal, Nov. 30, 2008.
19 The rescue of Washington Mutual: Geraldine Fabrikant, “WaMu Tarnishes Star Equity Firm,” NYT, Sept. 27, 2008.
20 Executives at two other: Background interviews.
21 One of Blackstone’s coinvestors: SVG Capital plc Interim Report 2009, 13.
22 TXU, the record-breaking buyout: David Carey, “Future Shock,” Deal, Nov. 24, 2009; Jenny Anderson and Julie Creswell, “For Buyout Kingpins, the TXU Utility Deal Gets Tricky,” NYT, Feb. 27, 2010.
23 A $900 million mortgage debt fund: Peter Lattman, Randall Smith, and Jenny Strasburg, “Carlyle Fund in Free Fall as Its Banks Get Nervous,” WSJ, Mar. 14, 2008; Henny Sender, “Leverage Levels a Fatal Flaw in Carlyle Fund,” Financial Times, Nov. 30, 2009; home page of Carlyle Capital, www.carlylecapitalcorp.com.
24 KKR Financial: KKR Financial Holdings LLC press releases, Sept. 24, 2007, and Mar. 31, 2008.
25 Apollo Investment Corporation: Apollo Investment Corporation Annual Report 2009, 24.
26 The steady profits: Craig Karmin and Susan Pulliam, “Big Investors Face Deeper Losses,” WSJ, Mar. 5, 2009.
27 “By December [2007]”: Background interview with an adviser to limited partners.
28 CalSTRS, was so cash-strapped: Karmin and Pulliam, “Big Investors”; background interviews with an adviser to limited partners and an executive at a private equity firm.
29 More than $800 billion: “The Leveraged Finance Maturity Cycle,” Credit Sights, Apr. 29, 2009; “Refinancing the Buyout Boom,” Fitch Ratings special report, Oct. 29, 2009; Mike Spector, “Moody’s Warns on Deluge of Debt,” WSJ, Feb. 1, 2010.
30 Peterson felt so badly: Confirmed in e-mail from Peter Peterson, Feb. 25, 2010, in response to a query.
31 That month the firm announced: Blackstone annual report for 2008, Mar. 3, 2009, 158.
32 Motorola’s cell phones were eclipsed: Freescale and Motorola annual reports.
33 “In every fund”: Stephen Schwarzman interview.
34 In early 2008: Freescale press release, Feb. 8, 2008; background interviews with two sources familiar with the change.
35 Chip sales … nose-dived: Freescale financial reports.
King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone Page 40