http://www.bloomberg.com/apps/news?pid

=20601208&sid=a3Oy9hjFlxBE&refer=finance

Lehman Plans EU1.1 Billion CLO to Cut Buyout Loans (Update1)
By Pierre Paulden and Neil Unmack

April 29 (Bloomberg) — Lehman Brothers Holdings Inc. is seeking investors for a collateralized loan obligation that would buy 1.1 billion euros ($1.72 billion) of high-yield debt from the securities firm, said two people with knowledge of the deal.

Lehman’s Thalia European CLO includes loans that the fourth- largest U.S. securities firm provided for leveraged buyouts, said the people, who declined to be identified before the transaction is complete. CLOs package loans and channel the income to investors in portions of varying risk and credit ratings.

Lehman was the fourth-biggest arranger of LBO financing in Europe last year, providing loans for the buyouts of ProSiebenSat.1 Media AG, Germany’s biggest private broadcaster, and French phone directory business PagesJaunes SA, according to data compiled by Bloomberg. The New York-based firm cut its backlog of unsold LBO loans by $6.1 billion to $17.8 billion this year, Chief Financial Officer Erin Callan said last month.

“It helps Lehman if they can show they can remove illiquid assets from the pipeline so they can trade with that capital,” said Christopher Whalen, managing director of Hawthorne, California-based Institutional Risk Analytics. “Lehman is adapting the way it does business to suit counterparties. It’s a step forward.”

Lehman, Deutsche Bank AG in Frankfurt and Credit Suisse Group in Zurich have created CLOs, helping to cut the amount of unsold LBO loans to $91 billion from $230 billion in July, according to Bank of America Corp. data. Banks got stuck with the debt after losses on securities tied to subprime mortgages caused investors to shun all but the safest government bonds.

Lehman spokesman Mark Lane in New York declined to comment on the Thalia European CLO.

Backlog Reduced

Lehman said this month it used a “small part” of a $2.8 billion CLO called Freedom as collateral to borrow from the Federal Reserve’s Primary Dealer Credit Facility, a lending program set up in March after the near-collapse of Bear Stearns Cos. threatened to spread to other banks. Some collateralized debt obligations are eligible as backing for loans from the European Central Bank, according to the ECB’s Web site.

Leveraged loans are made to buyout firms, who borrow to finance about two-thirds of the cost of acquisitions. The debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

Banks are stepping up sales of the debt as prices for actively traded high-yield loans have risen 4.8 cents to 92.1 cents on the dollar since March, S&P data show. The debt may have its best month after losing 5.7 percent in the first quarter, Lehman analysts wrote last week.

Citigroup Inc., Deutsche Bank and Royal Bank of Scotland Group Plc have also offered financing to investors including private-equity firms to purchase the loans.

Blackstone Group, Apollo Management LP and Kohlberg, Kravis Roberts & Co., all based in New York, were among buyout firms that borrowed more than $370 billion to back acquisitions before losses on mortgage securities spread to loans, bonds and collateralized debt obligations.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Neil Unmack in London at nunmack@bloomberg.net

Last Updated: April 29, 2008 13:19 EDT

Sweet Day for Candy Deal Advisers

April 28, 2008, 1:55 pm

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Mars’s $23 billion deal to buy candy maker Wm. Wrigley Jr. Company is the second-largest merger announced so far this year, and that means some tasty fees for JPMorgan Chase and Goldman Sachs if the deal goes through.

JPMorgan was financial adviser to Mars in the transaction, a role that helped solidify the bank’s position as No. 2 in the merger league tables for the year to date. According to Dealogic, JPMorgan has advised on global deals announced in 2008 with a combined volume of $257 billion, including the Mars-Wrigley transaction.

That is less than top-ranked Goldman, which advised Wrigley in Monday’s deal; Goldman’s total stands at $302 billion. But it is more than Lehman Brothers, in third place, whose total as of Monday stood at $217 billion.

(Goldman and Lehman both got a lift from their roles as advisers to Yahoo, for which Microsoft bid $44.6 billion earlier this year — the biggest deal of 2008 so far.)

Simpson Thacher & Bartlett was legal adviser to Mars in Monday’s deal.

In addition to advising Wrigley, Goldman Sachs is also providing a $5.7 billion debt facility to help finance the transaction, Wrigley said in a press release Monday. William Blair provided Wrigley with a fairness opinion, and Skadden Arps Slate Meagher & Flom was Wrigley’s counsel in the deal.

Go to Press Release from Wrigley »

U.S. Investors Face
An Age of Murky Pricing

Values of Securities
Tougher to Pin Down;
Discord at Dillon Read

By SUSAN PULLIAM, RANDALL SMITH and MICHAEL SICONOLFI
October 12, 2007

Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world’s most transparent financial markets.

The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets.

These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors.

The hazards of this new age of uncertainty became clear at Dillon Read in March, when rising defaults by homeowners were hammering the value of mortgage securities. John Niblo, a hedge-fund manager at the firm, acted fast. He twice slashed his fund’s valuation of securities tied to “subprime” mortgages, knocking them down by about 20%, or nearly $100 million, say traders familiar with the matter.

But managers at UBS AG, Dillon Read’s parent company, were irate. The Swiss banking giant was carrying similar securities on its books at a far higher price, the traders say. In conference calls, the UBS managers grilled Mr. Niblo on his move. “I’m marking to where I could reasonably sell them,” Mr. Niblo responded during one call, according to the traders familiar with the conversations.

UBS later shut down the in-house hedge fund, and Mr. Niblo was let go in August. Last week, UBS announced a $3.7 billion write-down on $23 billion of securities with mortgage exposure, including securities from the shuttered fund.

Such pricing problems have become common in some of Wall Street’s biggest markets. The burgeoning universe of complex securities based on mortgages and other assets has turned the once-simple task of getting a price quote into a confounding undertaking.

Today, “way less than half” of all securities trade on exchanges with readily available price information, according to Goldman Sachs Group Inc. analyst Daniel Harris. More and more securities are priced by dealers who don’t publish quotes.

As a result, money managers can no longer gauge with certainty the value of some assets in mutual funds, hedge funds and other investment vehicles — a process known as marking to market. An official at the Securities and Exchange Commission said recently that some bond mutual funds might be using outdated or unrealistic prices to value their portfolios.

The growing uncertainty over what assets are really worth could wreak havoc on the efforts of both individuals and money managers to invest rationally. During this summer’s confusion over bond valuations, for example, it was especially difficult to know whether to buy or sell. Investors forced to fly blind sometimes resort to panic selling, which can produce wild swings in the markets.

Billionaire investor Warren Buffett advocates more transparency in pricing. “Some marks can be pretty imaginative,” he says. “They call it ‘marking to market,’ but it’s really marking to myth.” He says that before funds publish financial statements, they should sell 5% of hard-to-value positions to gauge values.

For years, one of the bedrocks of U.S. financial markets had been that clear prices were available to all. When prices went up or down, investors knew it right away, and they could usually figure out why. The credit crunch that struck earlier this year highlighted a danger lurking in markets for newfangled securities: When buyers pull back and nothing trades, investors can be in for unpleasant surprises.

During this summer’s credit crunch, more than 80% of investors in bonds tied to the mortgage market said they had trouble obtaining price quotes from their bond dealers, according to a survey of 251 institutional investors by Greenwich Associates, a Connecticut consulting firm.

Sheets listing prices for bonds — known on Wall Street as the “daily axe” or “daily run” — are being produced much less frequently these days, even for the most actively traded debt securities. “There is a general reluctance on the part of dealers to be publishing prices, because it is so uncertain and there is not a lot of liquidity,” or ease of trading without large price swings, says Greenwich consultant Timothy Sangston.

Over the years, nonexchange-traded investments have produced plenty of pain for investors. Some go-go mutual funds dabbled disastrously in illiquid investments in the late 1960s and early 1970s; a 19 94 meltdown in the mortgage-securities market toppled Wall Street titan Kidder Peabody; and giant hedge fund Long-Term Capital Management collapsed in 1998 after bad bets on opaque bond markets.

But investing in securities that are difficult to price is far more widespread today. Between 2000 and the end of last year, the market value of bonds outstanding, most of which don’t trade on exchanges with readily available prices, rose 75% to $25.2 trillion, according to Citigroup Inc. That’s more than triple the 23% growth rate over that period of the DowJones Wilshire 5000 index, which tracks all U.S.-listed stocks. The stocks in that index carried a $17.7 trillion market value at year end.

Losses connected to hard-to-value securities have been piling up. In the past month, eight major financial firms — UBS, Merrill Lynch & Co., Citigroup Inc., Deutsche Bank AG, Morgan Stanley, Goldman Sachs, Lehman Brothers Holdings Inc., and Bear Stearns Cos. — disclosed a total of more than $20 billion in write-downs for mortgages, leveraged loans and other assets that have plunged in value. Some said their assets had become harder to value.

Merrill announced last week the largest recent Wall Street write-down — $4.5 billion for exposure to mortgage-related securities. Two top bond executives were ousted after the firm concluded they had been valuing the firm’s holdings too highly.

Michael Vranos, a veteran mortgage-bond trader, recently told investors in his large hedge-fund company, Ellington Management Group, that he was suspending investor redemptions at the end of September because he couldn’t figure out values for some of the fund’s mortgage-related investments. “There is no way to determine [values] that would be simultaneously fair both to investors redeeming from these funds and to investors remaining in the funds,” he wrote in a Sept. 30 letter. A spokesman for Mr. Vranos declined to comment.

J.P. Morgan Chase & Co. analyst Kedran Panageas estimates that 29% of lower-quality “collateralized debt obligations” — thinly traded investments that package pools of loans — will eventually lose all of their value due to the recent mortgage shakeout. In the case of quality CDOs, she estimated, 12% will be reduced to zero. The lost value, she says, represents roughly $85 billion of the $475 billion of such securities outstanding. So far, she believes investors have recognized only a fraction of those losses.

Some Wall Streeters have a motive to inflate marks: Their bonuses often are tied to the value of their holdings. A Lipper & Co. hedge-fund manager, Edward Strafaci, earned bonuses of $3.9 million between 1998 and 2001 based on improperly marked convertible bonds, according to the SEC. Mr. Strafaci overstated the value of the bonds he managed, despite warnings from his traders, according to a civil complaint charging securities fraud. The value of a $722 million Lipper hedge fund later was cut in half, and Mr. Strafaci pleaded guilty to criminal securities fraud.

“Everyone has an incentive in the short run to put the best face” on valuations, says Peter J. Solomon, a former Lehman vice chairman who now heads an investment bank. “Their compensation is totally based on it. In securities that don’t have ready markets, particularly when the markets are troubled, it makes one totally suspicious.”

The SEC is examining how accurately mutual funds and other investors “value their hard-to-value” securities, according to Douglas Scheidt, an associate director in the SEC’s division of investment management. The commission is asking funds that get price quotes from Wall Street dealers what they’re doing “to satisfy themselves that the quotes they’re getting reflect what they could get in a current sale,” he says.

Investment funds are supposed to adjust their price marks if they sell assets at a different price level, says Mr. Scheidt. But when turmoil hit the market for subprime-mortgage securities, some funds were either “obtaining quotes that didn’t seem to reflect what was going on in the market, or the dealer they had been using stopped providing quotes, yet the funds continued using stale quotes for several weeks,” he says. Investors could be misled or harmed if the practice resulted in inaccurate fund values or performance claims, Mr. Scheidt says.

Some investment funds find that the price marks they get from brokers don’t match what they get when they sell. In September, Balestra Capital Partners, a New York hedge fund, made a profit of $6.7 million when it sold an investment in credit-default swaps, says Norman Cerk, a Balestra portfolio manager. Yet before the sale, one of Balestra’s brokers had provided a much more pessimistic valuation of $2.3 million, he says. “Everything we’ve sold has been higher than the brokers’ marks,” he says. Mr. Cerk declined to identify the broker or to speculate on why the discrepancy was so wide.

Methods for gauging shifts in values vary greatly. A bond trader at J.P. Morgan Chase says that bonds he trades are marked sometimes based on an estimate from a third party, particularly if the bonds are actively traded. Harder-to-value securities are marked to “model,” he says, which can refer to any number of methodologies, depending on the security. Other municipal bonds he trades are marked differently if they are considered long-term investments.

Hedge funds, which largely are unregulated, can conduct private sales to each other of hard-to-value securities, just to set prices.

“Even selling a portion of a position can be gamed by getting four or five investors involved to buy each others’ positions” at beneficial prices, says Janet Tavakoli, a former trader and now a consultant. Since the recent market turmoil, some traders seem to be trying to set prices simply by offering them for sale, according to some investors who say they’ve talked to traders. The position is then marked at the “offer” price, these investors say. That’s akin to a homeowner valuing a house based on how much he wants for it — not how much a buyer is willing to pay.

Some financial firms have sought in recent weeks to avoid write-downs by selling mortgage positions to hedge funds, with an agreement that allows the hedge fund to sell them back after a set period. A hedge-fund trader says his firm recently bought $1 billion of risky subprime mortgage loans from Bear Stearns with a one-year pact, known as a “mandatory auction call,” under which Bear agrees to participate in an auction for the loans that will provide the hedge fund with a minimum rate of return, according to a person familiar with the situation. “They didn’t want the mortgages on their books,” the hedge-fund manager says.

Such financial arrangements typically are considered proper if there’s an economic purpose to the trade and if risk is taken on by both parties. Legal problems could arise if such trades are part of an attempt to conceal a company’s financial picture, regulators say.

Securities regulators also are examining whether financial firms are valuing assets consistently and fairly. Differing valuations have been accepted at some Wall Street firms in some circumstances. For example, some dealers provide “valuation marks” to investors who own bonds outright, and different “collateral marks” on bonds that dealers accept as collateral on loans to investors, traders and investors say. But dealers aren’t allowed to assign higher values to securities they themselves own than to the same securities owned by clients.

As the value of some debt securities has collapsed, financial players have struggled to keep pace with the markdowns necessary to reflect plunging prices. When Wachovia Corp. took onto its books this summer a risky slug of a CDO with a $600,000 underlying value, it initially marked the value at $297,000 to reflect the meltdown in the CDO market, according to one person familiar with the matter.

When Wachovia tried to sell the position, which was difficult because of its small size, it reduced the mark even more, to $138,000, this person says. Yet in an email to a potential buyer on Sept. 5, a Wachovia salesman indicated that the bank was willing to sell the position for $30,000 — just five cents on the dollar. “The head of the group just told me they will hit a 5 cent bid just to move it,” the email said.

In the end, the position sold for $60,000, or 10 cents on the dollar, according to the person familiar with the matter, leading the bank to lose $237,000 on the position. The transaction “involved a small position and a very small loss,” says a bank spokeswoman.

In August, Thornburg Mortgage Inc. also discovered how unstable pricing had become when it had to liquidate $22 billion worth of high-quality mortgage securities, at a loss of $1.1 billion, to reduce its short-term debt.

Larry Goldstone, the mortgage lender’s president and chief operating officer, complains that some Wall Street dealers that were financing his company’s activities sold his firm’s mortgage securities at fire-sale prices to make sure they were repaid. In some cases, he says, dealers sold AAA-rated mortgage-backed securities at a much lower price than he was able to get for comparable securities at the same time, worsening his company’s losses by tens of millions of dollars. “It was panic,” he says. “Completely irrational.”

For Mr. Niblo, the Dillon Read hedge-fund manager, the problems began early this year. Mr. Niblo managed a portfolio of about $1 billion in CDOs and mortgage-backed securities. By February, rising mortgage defaults by homeowners with poor credit were taking a toll on the mortgage-backed market.

Seeing the turmoil, Mr. Niblo, 47 years old, sought prices from more than a dozen Wall Street dealers, and in April marked down the portfolio of subprime mortgages by about $20 million, according to the traders with knowledge of the situation. Ramesh Singh, a UBS executive, scoured trading positions and asked Mr. Niblo how he was coming up with the prices to re-mark his portfolio, these traders say.

The mortgage-backed market continued to deteriorate. Again, Mr. Niblo sought prices from dealers and marked his portfolio down — this time by $75 million, the traders say.

A series of tense conference calls followed. Ramesh Chari, another UBS manager, complained about Mr. Niblo’s valuations; they were lower than UBS’s marks on similar securities, the traders say. He asked Mr. Niblo to explain his decision.

In response, Mr. Niblo asked how UBS could value the securities at a higher level “if we can’t sell them at these prices?” according to traders.

Messrs. Singh and Chari declined to comment, referring questions about the matter to a UBS spokesman. The spokesman says UBS doesn’t discuss “specifics of the valuation of individual trading books and positions. Obviously the characteristics of securities and the make up of portfolios differ from book to book and there is no single standard valuation model for all securities.”

In June, Mr. Niblo was put on administrative leave as UBS sorted out the losses and valuation issues at Dillon Read. Mr. Niblo had priced many of the mortgage-backed securities in the range of 50 to 80 cents on the dollar, while UBS valued similar securities in the 80s, the traders say.

Last week, when UBS announced its write-down, Chief Executive Marcel Rohner said the firm had done the best it could. “We feel that we have applied a prudent valuation” that “reflects the current expectation of what’s going to happen.”

Still, Mr. Rohner himself highlighted the bigger issue clouding the financial markets. The trouble, he said, arose because UBS had to mark a price on mortgage-related securities “where there is no market price, where there is no trading.”

Write to Susan Pulliam at susan.pulliam@wsj.com and Randall Smith at randall.smith@wsj.com

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•  A Decade Later, John Meriwether Must Scramble Again  Mar. 27, 2008

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ISDA: Credit Derivatives Increase By 81% in 2007!!

On April 16^th 2008, the International Swaps and Derivatives Association, Inc. (”ISDA“) released the results of its Year-End 2007 Market Survey of privately negotiated derivatives. In that report, IDSA reports “The notional amount outstanding of credit default swaps (CDS) grew 37 percent to $62.2 trillion in the second half of 2007 from $45.5 trillion at mid-year. Further CDS notional growth for the whole of 2007 was 81 percent from $34.5 trillion at year-end 2006. The survey monitors credit default swaps on single names and obligations, baskets and portfolios of credits and index trades.” [Emphasis added]

Holy crap! No wonder there was so much concern about counter-party risk a month ago when a “run on the bank” which led to the acquisition of Bear Stearns by JPMorgan. Toomre Capital Markets LLC (”TCM“) now even more appreciates the efforts of the President of New York Federal Reserve, Timothy Geithner, to clean up the credit default swap middle and back office operational issues. With growth this explosive, the major investment and global banks are particularly interconnected. From a moral hazard perspective, due to their derivatives exposures, are not all of these banks “too big to fail”? Or does this explosive growth suggest that the Capital Markets finally needs a global clearing mechanism so that there is more price transparency on what specific derivatives are worth and that there is less counter-party risk in the financial system?

The survey further states “Notional amounts of interest rate derivatives outstanding, grew almost 10 percent to $382.3 trillion in the second half of 2007 from $347.1 trillion at mid-year 2007. For the year as a whole, interest rate derivatives notionals rose 34 percent from $285.7 trillion. For the purposes of the survey, interest rate derivatives include interest rate swaps and options and cross-currency interest rate swaps. Notional amounts of equity derivatives reached $10 trillion at year-end 2007, which represents an annual growth rate of 39 percent from $7.2 trillion at year-end 2006. This number remained flat between mid-year and year-end 2007. Equity derivatives for purposes of t Does anyone elsehe survey comprise equity swaps, options, and forwards.”

Submitted by Lars Toomre on Wed, 04/16/2008 - 5:08am. categories [

• Capital Markets
• Credit Derivatives
• Operational Risk
• ISDA

]

• Lars

http://www.toomre.com/ISDA_2007_Market_Survey

http://seekingalpha.com/article/74461-sell-into-the-financials-rally-morgan-stanley

Sell Into the Financials Rally - Morgan Stanley

by: Freund Investing posted on: April 28, 2008

Morgan Stanley advised clients on Monday to sell into the rally in financial stocks. Morgan analysts Betsy Graseck, Cheryl Pate and Justin Kwong anticipate further dividend cuts, increased dilutive equity offerings and the continued deterioration in the credit markets. (more…)

 

Financial Stocks: Where Will They Go Once Investors Sober Up?

by: Graham Summers posted on: April 28, 2008 |

Financial stocks, like homebuilders, have become a favorite investment for contrarians. Drawn by the large dividend yields and low P/Es, investors have begun piling into the sector even as sovereign wealth funds — the guys who bailed out these stocks last fall — tell the banks to take a hike. (more…)

http://www.nytimes.com/2008/04/29/business/29sorkin.html?_r=1&ref=business&oref=slogin

Dealbook

Junk Bonds, Mortgages and Milken

By ANDREW ROSS SORKIN

Published: April 29, 2008

LOS ANGELES

“The financial crisis we’re in today stems from the invention by Drexel Burnham Lambert of the junk bond,” Martin Lipton, the superlawyer who co-founded Wachtell, Lipton, Rosen & Katz, said derisively at a conference last month. “You can draw a straight line from Drexel Burnham to the financial world today.”

Was Mr. Lipton right?

On Monday, I found myself sitting across from Michael R. Milken, the onetime “junk bond king” of Drexel. Dressed in a blue suit, lavender shirt and reddish power tie, Mr. Milken was presiding over his annual conference at the Beverly Hilton. He was also offering his opinions on the credit mess — and rebutting critics like Mr. Lipton.

“We’ve had plenty of trillion-dollar losses before,” Mr. Milken said nonchalantly. Then, playing the role of a Zen master, he added: “The question is whether the future will be like the past.”

Frankly, Mr. Milken, who is undoubtedly brilliant, can be a pretty bland speaker. But what caught my attention was a 10-page paper he wrote last week that dissects the current state of the markets. It reads like an impassioned defense of himself.

Critics who compare the subprime debacle to the bubble in high-yield, high-risk corporate bonds that Drexel helped inflate two decades ago are “people who don’t understand markets very well,” Mr. Milken said. He suggests that “their rationale is that both types of financial instruments are risky.”

And he says junk bonds, or those rated below investment grade, “have little in common with mispriced subprime mortgages,” which he says are the real culprits.

“Having financed several of America’s largest home builders, I know a few things about the housing industry,” Mr. Milken said. “What happened to housing was not a failure of securitization, but rather a disastrous lowering of underwriting standards and other unfortunate practices.”

Criticizing securitization — the slicing and dicing of debt that he helped popularize — is “like condemning scalpels because a few unqualified surgeons have injured patients,” he said.

Mr. Milken is playing the role of Master of the Universe again — the master of ceremonies at his conference, held just blocks away from the former Drexel office where he had barked orders from his X-shaped trading desk.

He has spent the past two decades trying to rehabilitate his image after pleading guilty to six felony counts of securities fraud and conspiracy, paying $600 million in fines and spending 22 months behind bars. He has remade himself as a thought leader and impassioned crusader against prostate cancer, a disease he battled. His former nemesis Rudolph Giuliani, the man who prosecuted him, is now singing his praises. (Mr. Giuliani is another prostate cancer survivor.)

The high powered conference is itself a testament to the good will that Mr. Milken has generated on and off Wall Street over the years. The speakers include everyone from Gov. Arnold Schwarzenegger to Steve Wynn, the Las Vegas impresario whom Mr. Milken backed in the 1980s with, yes, junk bonds.

By Milken standards, this is a sedate affair. It’s certainly no Predator’s Ball, the lavish poolside party that Mr. Milken used to throw at the Beverly Hills Hotel back in his Drexel days.

But despite everything Mr. Milken has done to rehabilitate his reputation, he is still dogged by questions about his legacy in the financial markets, especially now, given the role that Wall Street financial engineers played in fostering the spread of risky, subprime lending.

Indeed, Mr. Lipton’s sneering assertion is not uncommon, even in the halls here.

But Mr. Milken’s detractors are misinformed. Did he invent the junk bond? Yes. Did he help make securitization popular? Yes. Did he have anything to do with the current mess? Absolutely not.

Blaming Mr. Milken for today’s credit crisis is like blaming the inventor of paper money.

He may have made some mistakes along the way, but Mr. Milken helped create a new generation of companies and an entirely new way to finance nascent ideas that have helped fuel the global economy far beyond his exit from Drexel. The list of companies that would not exist without him is long: MCI, CNN and Turner Broadcasting (now part of Time Warner), Barnes & Noble and Occidental Petroleum, just to name a few.

Toward the end of every bubble, people misuse the financial tools at their disposal, and then a witch hunt begins for the villain. Then, of course, the regulators jump in and try to fix things — and often go a bit overboard.

That’s exactly what Mr. Milken said worries him most: that excessive regulation will send the economy into an even deeper funk. The biggest financial companies have every motivation to push for more regulation to quash competition, the way they did of him in 1990, he said.

Using a somewhat strained analogy of medieval class conflicts, Mr. Milken said: “In England and other monarchies, the king enjoyed the allegiance of the nobles, who lorded it over the mercantile class. But with the spread of knowledge through the new technology of printing, the precursor of modern banking and capital markets began to develop. Eventually, some merchants acquired enough wealth to challenge the standing of the nobles.”

So what did the nobles do? “Turned to the king” — that is, the government. In the early 1990s, Mr. Milken said, similarly unwise regulation, urged in part by large vested interests, helped push the economy into a full-blown recession.

Still, Mr. Milken is an optimist. For all the carnage in the market recently, he said the worst is probably over. “When you read the newspapers, it sounds like Charles Dickens,” he said referring to a “A Tale of Two Cities.” He said, “I would stress that these times are good times, not bad times.”

The latest news on mergers and
acquisitions can be found at
nytimes.com/dealbook.

Mars’s Takeover of Wrigley
Creates Global Powerhouse

Closely Held Firm
To Pay $23 Billion;
Kitchen-Table Talks

By JANET ADAMY, MATTHEW KARNITSCHNIG and JULIE JARGON
April 29, 2008

Discussions between Wm. Wrigley Jr. Co. and Mars Inc. to blend two of the best-known names in sweets into the world’s largest candy maker began, like any important family gathering, around the kitchen table.

On April 11, Bill Wrigley Jr., executive chairman of the chewing-gum empire that bears his name and the fourth consecutive Wrigley to lead the company, went to McLean, Va., to meet with Mars Global President Paul Michaels and Chief Financial Officer Olivier Goudet. They had called Mr. Wrigley to request the meeting, and before long the three men were sharing sandwiches over Mr. Michaels’s kitchen table.

WSJ’s Matthew Karnitschnig and Dennis Berman discuss plans by Mars to acquire Wrigley for about $23 billion.

By the early hours of Monday morning, the two sides had finalized a deal. Mars, together with Warren Buffett’s Berkshire Hathaway Inc., agreed to acquire Wrigley for about $23 billion. The transaction, expected to close in six to 12 months, joins two of America’s ubiquitous brand names: Wrigley, maker of the eponymous chewing gum, and Mars, the closely held company behind Snickers chocolate bars and M&M’s.

Under the agreement, Wrigley shareholders will receive $80 in cash for each share held, a 28% premium to Friday’s price. On Monday, shares rose 23% to close at $76.91 in 4 p.m. composite trading on the New York Stock Exchange.

The deal was a big surprise across Wall Street late Sunday, but the effects are clear: a colossal candy-and-gum company investing in new markets around the globe, without having to answer to public shareholders. That freedom and market power pose a threat to the other major food companies — particularly Hershey Co. and Cadbury Schweppes PLC — that have been weighing merger plans for years. Both Hershey’s and Cadbury’s shares rose Monday.

While both Mars and Wrigley tout the comfortable fit of products and cultures, Mars has no experience with a deal of this scale. And it’s moving into Wrigley at a very high price, paying 32 times Wrigley’s expected earnings for 2008. That means that even if Mars is successful in integrating the company, it may be difficult for it to turn a decent profit without substantial revenue growth in the years ahead.

A FAMILY MATTER

 

•  Who: Two of America’s leading business families, uniting two of the best-known consumer brands, Wrigley gums and Mars candy bars.

•  Why: Wrigley Chairman Bill Wrigley Jr. concluded it wasn’t certain the company would be worth $80 a share in the future.

•  What Now: Mars has paid a rich price, but with Wrigley becoming a separate unit of a private company, the success or failure of the deal will be harder to measure.

Though the Mars-Wrigley deal was completed in a matter of weeks, it had been contemplated for years. Mars, which is 100% owned by the Mars family, had known for some time that it would one day woo Wrigley, people familiar with the matter say. “It was a matter of when, not if,” said one person involved in the deal.

Like many families that own businesses for generations, the Wrigley family, which controls at least two-thirds of Wrigley’s supervoting B shares, had become less engaged in the company. Mr. Wrigley — who controls 45% of the B shares through trusts and is the only member of the family who’s deeply involved in the business — said he didn’t have much discussion with relatives during the negotiations.

The move is a bold one for the Mars family, led by brothers John Mars and Forrest Mars Jr., both former presidents of the company. Today some of the Mars brothers’ children hold various management positions at the company, according to a Mars spokeswoman. A message left at the Mars family ranch in Wyoming was not returned.

Meeting in the Kitchen

At the meeting in Mr. Michaels’s kitchen, Messrs. Michaels and Goudet walked through their rationale for combining the two companies, but they made no offer. One of the keys to the strategy is distribution, pushing more gum and more candy in more spots around the globe, such as India, China and Russia. Joined together, they could reach these markets more effectively. “I basically did a lot of listening at that point,” Mr. Wrigley said in an interview Monday.

Mr. Michaels, Mars global president, said plans to buy Wrigley first came together about three months ago. Getting the phone call “was a surprise,” Mr. Wrigley said. “I wasn’t sure, and they were not very specific even when they called me, what they wanted to meet about. I just came in cold.”

After his return to Chicago, Mr. Wrigley briefed his company’s board, and it gave the go-ahead to continue talks.

Longtime Mantra

He said he kept in mind his longtime mantra of respecting the past but doing what was right for the future.

DOUBLE THE PLEASURE

 

WM. WRIGLEY JR. CO.

Founded: 1891

Headquarters: Chicago

Global sales: $5.4 billion

Notable brands: Juicy Fruit, Spearmint, Big Red, Extra, Freedent, Doublemint, Hubba Bubba, Orbit gums; Altoids mints, Life Savers candies

MARS INC.

Established: 1911

Headquarters: McLean, Va.

Global sales: $22 billion

Notable brands: Dove, Milky way, Snickers, Mars candy bars; M&M’s chocolates; Uncle Ben’s Rice; Pedigree and Whiskas pet-care products.

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10/23/06

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03/11/06

• Wrigley to Buy Life Savers, Altoids
11/15/04

“When you cling to beliefs of the past too much, you end up making the wrong choices,” Mr. Wrigley said. He also felt that the regulatory pressures and disclosure requirements make publicly held companies less competitive, and that going private would relieve many of those pressures. Wrigley, which has annual sales of $5.4 billion and employs about 16,000 people, has been a public company since 1923.

In discussions with Mr. Wrigley, Mr. Michaels argued that the two companies would fit well together because of their similar histories and shared values, according to people familiar with the matter. Mars was willing to pay a hefty premium, while also preserving the Wrigley name and the company’s presence in Chicago, but Wrigley pressed for a better offer.

Wrigley’s board was concerned about the certainty of the financing for the deal given the tight credit markets, said William Perez, Wrigley’s president and CEO. The Mars clan knew early on that it would need a partner to complete the transaction. Mr. Buffett fit the bill, both for his deep pockets and reputation for discretion.

Mr. Wrigley said that part of the reason Mr. Buffett got involved was because “he’s one of the few people in the world with access to large sums of capital” and because “he tends to do things very quickly and very efficiently.”

A key figure behind the transaction was Goldman Sachs partner Byron Trott. Mr. Trott has worked for Mars and Wrigley and is a favorite of Mr. Buffett, who said of the banker in his most recent investor letter: “I trust him completely.” People involved in the transaction say these relationships were crucial to its success.

Mr. Trott, representing Wrigley, approached Mr. Buffett about joining with Mars. A longtime admirer of Mars, Mr. Buffett readily agreed. In an interview with CNBC, Mr. Buffett said he got involved in the deal because the two companies have great brands. “I’ve been conducting a 70-year taste test…and they met the 70-year taste test,” Mr. Buffett said. “The Mars people asked me about participating in this, and we are financing. But we are a very, very junior partner, although we will have about $6.5 billion in it.” He said he does not anticipate tying the Mars and Wrigley brands with any of his other investments in sweets, which include See’s Candies and Dairy Queen.

As the deal came together, a roughly 12-person team on the Wrigley side was calling each other so frequently that Mr. Perez kept with him a small laminated card with each of their phone numbers.

Last week, Mr. Wrigley went to Wyoming to meet with members of the family that controls Mars to get to know them, he said.

Negotiations got “more active” over the weekend as the two sides pulled together the details. Wrigley got Mars’s final offer at 5 p.m. Sunday, and Wrigley’s board approved the deal in a phone meeting that concluded an hour later. The two sides were still exchanging documents to finalize the agreement at 2 a.m. Monday.

Mr. Michaels said that speculation of deals involving candy players Hershey and Cadbury did not prompt his company to buy Wrigley.

“What came into play more was, when you look at an offer as a director of a company…you say, ‘OK, I could get this amount per share now versus some number, kind of guessing in the future,’” Mr. Wrigley said. “If that number gets big enough now, there’s risk in any company of something happening that won’t enable you to get to a bigger number in the future.”

Mr. Wrigley said he plans to stay involved in the business and will remain its executive chairman.

While Wrigley started in the late 19th century on the strength of chewing gum that Mr. Wrigley’s great-grandfather originally gave away to sell baking powder, Mars has its roots in the home-made butter-cream candies Frank C. Mars and his wife, Ethel Healy, made out of their kitchen in Tacoma, Wash.

Mars is now a diversified, global food company that sells everything from pet-food brands such as Whiskas and Pedigree to food and beverage brands such as Uncle Ben’s rice and Flavia coffee. The company has $22 billion in annual revenues, about 70% of which is generated outside of the U.S.

The company is 100% owned by the Mars family. In addition to holding management positions, members of the family sit on the company’s supervisory board. Mr. Michaels is an outsider who joined Mars more than 10 years ago and has been global president for the past four years.

First Move

The Wrigley company made its first move away from family control in October 2006, when Mr. Wrigley announced he would step down as CEO to become executive chairman. The company named Mr. Perez the first non-Wrigley family CEO in the company’s then 115-year history.

Mr. Wrigley has been much more of a risk-taker than his father, who died suddenly in 1999. He has pushed to diversify the company beyond just a gum maker and transform Wrigley into a broader confectionery company. He dabbled in medicinal gum and bought the Altoids and LifeSavers brands from Kraft Foods Inc. while also holding to traditions, like hiring a new pair of Doublemint twins.

His boldest move never saw fruition. In 2002, Wrigley beat out Nestlé SA and Cadbury with its $12.5 billion bid to buy Hershey. But the trust that controls Hershey got cold feet and the deal fell through at the last minute. Some analysts and investors, though, felt Mr. Wrigley was a bit too risky at times and that he and his board realized they needed the expertise of a more seasoned consumer-products executive.

Mr. Perez was brought on at a time when the Wrigley company was struggling to integrate LifeSavers and Altoids — its biggest acquisition ever. Some analysts felt the company paid too much for the ailing brands. After initially telling investors that the deal would boost earnings in 2006, Mr. Wrigley later admitted that the brands — acquired for $1.46 billion in 2005 after the deal was announced in 2004 — needed more investment and would sap 2006 profits.

Though it’s public, Wrigley has some operating practices of a private company. It does not hold quarterly earnings calls and only addresses its shareholders once a year at the annual shareholders meeting.

The Federal Trade Commission is expected to review the deal but is unlikely to challenge it on antitrust grounds, lawyers said. While both companies are market leaders in the candy business, investigators are likely to focus on the companies’ individual product lines, which are largely complementary.

Write to Julie Jargon at julie.jargon@wsj.com

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