Russ Winter wrote this interesting post analyzing the extraordinary amount of debt that will be needed to sustain Blackstone’s bid for Hilton Hotels:

The total purchase including the balance sheet and debt looks to be about $29 billion. Typifying just how loonie these transactions have become, HLT has operating income of about $1.2 billion, or a mere 4.1% of the take out price. Assuming $25 billion in debt, that would place debt service at about $2 billion a year. Blackstone plans no divestitures, so the math is straightforward, and the presumption is as well, just borrow the balance.

The $25 billion of debt that Blackstone is heaping on Hilton far exceeds Hilton’s book value of a bit under $4 billion, which means that there will not be much a recovery, at least immediately, in the event that things don’t go well and Hilton has to be reorganized or liquidated.
That type of debt risk sure sounds like equity-style risk to me. And with a ceiling on the return of about 8% ($2 billion of debt service on $25 billion in debt). My sense is that the Blackstone limited partners are betting on returns substantially higher than that.

The adventures of Carl Icahn are a common topic on this blog, so the following Icahn observations from a WSJ-sponsored conference caught my eye:

At The Wall Street Journalís Deals & Deal Makers Conference, Icahn summed up his approach to executives of companies he takes over this way: ìThe secret is donít manage.î (Okay, he went on to say ìdonít micromanage.î)
And what wonders can be achieved with so little effort. ìThere are few companies I canít go in to today and save 30%. A lot of companies are very wasteful.î (Call it the Seinfeld theory of management, after the sit-com famous for being about nothing.) One company that decided it could do without Icahnís services is Motorola. The billionaire this year unsuccessfully fought to get on the board of the cellphone maker. ìI really didnít care a hell of a lot to be on the board,î he said of the experience.
Icahn isnít the biggest fan of U.S. and Western European CEOs. (ìWhen you get into a lot of corporationsÖtheyíre much worse than you think. I mean, theyíre really terribly run.î) He also discussed his ìDarwin Theoryî of corporate governance, according to which there is a sliding scale of intelligence on corporate ladders. Why? Each manager starting with the CEO ensures that the person below him is dumber so as not to be threatened.
No one will accuse Icahn of not speaking his mind. He was one of the few attendees at the conference to predict that the private-equity market has peaked. Of the leveraged-buyout firms like Blackstone Group that are going public, he said: ìThese guys arenít stupid and thatís one reason why theyíre monetizing.î

Meanwhile, John Carney over at DealBreaker reports the following Icahn anecdote from the WSJ conference:

Carl Icahn tried to short the stock of the Blackstone group immediately after its IPO, the billionaire “corporate raider” told an audience at a conference sponsored by the Wall Street Journal.
“I tried to borrow the stock but I couldn’t do it in time,” Icahn said.
After he spoke to the conference, Icahn asked reporters not to print the story of his attempt to short Blackstone.

The travails of United Airlines over the past several years have been a common topic on this blog, so Professor Bainbridge’s “enough is enough” declaration with regard to flying on post-bankruptcy United caught my eye. And lest you think that the good Professor’s experience was anecdotal, get a load of the following excerpt from this Scott McCartney/WSJ ($) column regarding the dire status of airline travel this summer:

Last Wednesday, an employee at UAL Corp.’s United Airlines made a mistake that crippled a crucial computer system and its backup for two hours in the morning. Because airlines schedule planes so tightly, they can almost never recover from early problems on the same day. On June 20, only 30% of United’s flights arrived on time; about half of all flights were more than 45 minutes late, according to FlightStats.
Even when travelers get to their destination, it doesn’t always mean the woes are over. United lost National Public Radio host Scott Simon’s luggage on a flight from San Francisco to Las Vegas last week. After filling out paperwork in Las Vegas, Mr. Simon was given a phone number and email address to contact the San Francisco baggage office — with the caution that San Francisco never answers the phone or responds to email.
More than 30 calls later, Mr. Simon, an elite-level frequent flier on United, has yet to reach a United baggage official in San Francisco, or learn anything about the fate of his baggage, which includes irreplaceable items after adopting his second child in China. Calls to the airline’s main toll-free line haven’t yielded any information, either. American Express Co. is also trying to track down information, a service for its platinum customers, but hasn’t gotten through to United, either.
“It’s incredibly frustrating,” Mr. Simon said. “I know they are overworked, and it seems they have decided the best way to avoid more work is to not answer the phone or respond to email.” He likened the baggage office to someone deeply in debt who simply stops opening bills that arrive in the mail. A spokeswoman for United says the airline is trying to find Mr. Simon’s lost bag.

At least it sounds as if United is keeping its overhead expense low in the customer service department. ;^)

Harvard Law professor Elizabeth Warren wants to establish a federal commission to regulate subprime mortgages and other “dangerous” financial products that are foisted on unsuspecting consumers. For a number of reasons, that’s a bit like using a sledgehammer on a problem for which a scalpel is more appropriate. But if it comes about, Don Boudreaux informs us about a really dangerous financial product that the new commission needs to examine:

If such a commission does its job, I suggest that the first dangerous financial product that it attacks be Social Security. Not only are Social Security’s returns lousy; not only are its “customers” never vested their “contributions”; not only does the institution providing it have no sound plan to keep it solvent; not only does this institution intentionally mislead its clients about its insolvency (witness its discussions of the illusory “trust fund”) – but its “customers” are forced to buy it. That is a dangerous financial product!

C.S. Hayden. who is serving an internship at Koch Industries, Inc., the world’s largest privately-held company, provides this entertaining interview of Charles G. Koch, the company’s CEO. Koch is the author of The Science of Success: How Market-Based Management Built the World’s Largest Private Company (Wiley 2007), which he expands upon in the interview. Of particular interest is Koch’s view toward Koch’s advantages in the marketplace:

Q: What separates this company from those in the Fortune 500?
Mr. Koch: The MBM culture and management philosophy are key. We are privately held, which gives us tremendous advantages in this business environment of regulation and litigation. Also, we have continuity of leadership. As Deming said, constancy of purpose is a key. A 20% yearly return will make your money double every 3.5 years, which adds up over time. Others try to change their purpose all the time, they have some successes, but they end up bankrupt and have to start all over again.
Q: What are the advantages and disadvantages of the private vs. public ownership structure?
Mr. Koch: In today’s regulatory and litigious society, about every company is better off private. The only reason to go public would be if the shareholders want liquidity or if the business can finance takeovers through public offerings. [I think this is what he said, but I’m not certain about the second point, financing takeovers; the key is that he emphasized the vast benefits of the private structure.]
The equity markets are not free markets, but highly regulated and distorted.

Also impressive is Koch’s analysis of his decision-making:

Q: What have been your best and worst decisions?
Mr. Koch: The best decision was a deal with J. Howard Marshall to gain control of the Great Northern Oil Company, which established the refining business and eventually propelled us into many other industry areas. The worst decisions are way too numerous to recount. Making so many mistakes is definitely a humbling process. The very worst decisions occur when we don’t take advantage of good deals, when we have massive opportunity costs. We get scared and don’t take risks. Fred Koch said, “Don’t take counsel of your fears.”

Koch’s final piece of advice is also insightful:

Finally, if you lose your humility, you’re on your way out.

Read the entire interview.

Geoff Manne (see also here) and Thom Lambert (see also here) over at the Truth on the Market blog are having a field day bashing the misdirected FTC opposition of the Whole Foods-Wild Oats merger. And with good reason.
The latest development in this bizarre episode of excessive governmental regulation is the publication of the unredacted version of the FTC’s complaint against the proposed merger, which relies heavily on comments that Whole Foods CEO John Mackey made to his board about the merits of the merger. Not surprisingly, Mackey told the Whole Foods board members the straight truth as to why it would be good for Whole Foods to acquire Wild Oats and, in do doing, pooh-poohed the ability of other supermarket chains to compete with Whole Foods. This David Kesmodel/WSJ($) article sums it up well:

The lawsuit quotes Mr. Mackey as saying that the company “isn’t primarily about organic foods” but “only one part of its highly successful business model,” citing as others “superior quality, superior service, superior perishable product, superior prepared foods, superior marketing, superior branding and superior store experience.”

What is wrong with that? All Mackey is saying is that other supermarkets are not currently a direct competitor of Whole Foods because they are focused on price rather than the Whole Foods shopping experience. But nothing is stopping those other chains from changing course and imitating the Whole Foods karma if it’s in the interest of their shareholders to do so. The FTC’s theory that Whole Foods is attempting to monopolize the “hip” grocery shopping experience borders on the absurd.
Mackey has fired back with his own blog post, which is well worth reading. Among other things, he points out that Whole Foods’ prices are unaffected by whether it is competing in a particular area with a Wild Oats store and that several other grocery chains are bigger and more direct competitors to Whole Foods than Wild Oats. Frankly, Mackey’s blog post would be an excellent affidavit in support of a summary judgment motion for Whole Foods and Wild Oats.
Wouldn’t it be interesting if Whole Foods could, through discovery, find out why the FTC is pursing this costly regulatory charade in the first place?