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Deals, deal makers dominate 2006

Record mergers and acquisitions overshadow the downside: options backdating scandals and a hedge fund collapse.

January 02, 2007|Courtney Dentch | Bloomberg News

Goldman Sachs Group Inc. and investment bankers were winners in 2006 as a record $3.7 trillion in mergers and surging stock prices pushed Goldman's profit and Wall Street bonuses to new highs.

Amaranth Advisors topped the losers list after bad energy trades drove it out of business in the biggest hedge fund collapse to date. More than 190 companies, including Apple Computer Inc., were caught in an options backdating scandal that has led to earnings restatements and government probes.

The year was dominated by deals and deal makers. Buyout firms such as Blackstone Group and Carlyle Group announced a record $718 billion in private equity and management takeovers, including the two biggest leveraged buyouts.

"It's been a boom year for M&A, private equity and for the financial services world," said John Challenger, chief executive of Chicago-based executive search firm Challenger, Gray & Christmas.

Corporate winners included Exxon Mobil Corp., the world's biggest energy company, whose shares rose the most in 26 years. AT&T Inc. claimed a victory on the last business day of the year when the Federal Communications Corp. approved its $86-billion purchase of BellSouth Corp.

On the other side of the ledger: U.S. automakers General Motors Corp., Ford Motor Co. and Chrysler Group lost money and market share. Yahoo Inc., operator of the most-visited U.S. Internet site, gave up a third of its market value. And Wal-Mart Stores Inc., the biggest retailer, lost sales momentum.

In other highlights of 2006:

Wall Street records. Fueled by trading profit, underwriting and investments, Goldman's earnings rose 70% to $9.54 billion in the fiscal year ended Nov. 24, the most ever for a Wall Street firm. Chief Executive Lloyd Blankfein was rewarded with a record $53.4-million bonus in cash, stock and options.

His Morgan Stanley counterpart, John Mack, pocketed $40 million, and Bear Stearns Cos. CEO James Cayne received about $34 million, according to data compiled by Bloomberg.

Bonuses at the five largest U.S. investment firms -- Goldman, Morgan Stanley, Merrill Lynch & Co., Lehman Bros. Holdings Inc. and Bear Stearns -- rose 30% to $36 billion.

U.S. stocks posted their best annual gain since 2003. The Dow Jones industrial average rose 16.3% and closed at an all-time high of 12,510.57 on Wednesday.

Largest earnings. Exxon Mobil shares rose 36%, their biggest gain since 1980, as crude oil prices averaged a record $66.25 a barrel for the year even after sliding from their July peak of $78.40. The Irving, Texas-based company's net income is forecast to reach $38.5 billion for the year, based on analysts surveyed by Bloomberg, topping last year's $36.1 billion, the most ever earned by a U.S. corporation.

AT&T shares rose 46% and closed the year at a four-year high. The San Antonio-based company's acquisition of BellSouth is the biggest takeover in the U.S. telephone industry.

Big buyouts. In July, Bain Capital, Kohlberg Kravis Roberts & Co. and Merrill Lynch joined in buying hospital chain HCA Inc. with company co-founder Thomas F. Frist Jr. The $33-billion price, including debt, surpassed the previous leveraged buyout record of $31 billion, Kohlberg Kravis' purchase of RJR Nabisco Inc. in 1989.

Four months later Blackstone, which raised the world's biggest buyout fund of $15.6 billion in July, said it would buy billionaire Sam Zell's Equity Office Properties Trust for $36 billion, including the assumption of $16 billion in debt.

Option scandal. The backdated option scandal escalated, claiming at least 65 executives and directors who resigned or were fired, according to data compiled by Bloomberg. The Securities and Exchange Commission is investigating about 200 companies and whether they manipulated the date on which options were granted to make them more valuable to holders.

William McGuire stepped down as chief executive of UnitedHealth Group Inc. in November after an independent inquiry found evidence that company options were backdated during the last 12 years.

Jacob "Kobi" Alexander, former CEO of Comverse Technology Inc., was a fugitive in Namibia after he was charged in August with securities fraud related to backdating.

Corporate criminals. Jeffrey K. Skilling, who headed energy giant Enron Corp. before it collapsed into bankruptcy proceedings, was found guilty of accounting fraud and sent to prison for 24 years. L. Dennis Kozlowski, who made $300 million from 1998 to 2002 as CEO of Tyco International Ltd., was making a dollar a day at a New York state prison.

Tech setbacks. Patricia C. Dunn, chairwoman of Hewlett-Packard Co., resigned and is facing California charges of fraud and conspiracy for her role in a spying scandal to uncover boardroom leaks. She pleaded not guilty in November. The Palo Alto-based company agreed to pay $14.5 million to settle an investigation by the California attorney general's office, which said private investigators used fake identities to gain access to telephone records of employees and reporters.

Yahoo shares fell 35% after it recorded the slowest advertising sales growth in four years. The Sunnyvale, Calif.-based company also lost out to Google Inc. in the race to buy video-sharing website

Dell Inc. founder Michael Dell watched third-quarter sales fall to their lowest point in four years, and shares of the Round Rock, Texas-based company fell 16% for the year.

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