Private Equity

This past week CommScope announced that it had reached an agreement with a Private Equity company, the Carlyle Group, to be acquired for $3.9 Billion at a stock price of $31.50 per share, a 36% premium. This newsletter will review what it means when a publicly traded company like CommScope is taken private and agrees to no longer to be traded on a stock exchange. This newsletter will have the usual things like the weekly recap from Vanguard and some trivia.

Vanguard

The economy's continued growth is good news, but the pace of that growth remains unimpressive. While gross domestic product rose for the fifth straight quarter, this wasn't enough to lower the unemployment rate. The housing market is recovering, but still in a rut. Likewise, consumer confidence and durable-goods orders were both up, but nobody was overdosing on optimism. For the week, the S&P 500 Index remained unchanged at 1,183 (for a year-to-date total return—including price change plus dividends—of about 7.8%). The yield of the 10-year U.S. Treasury note rose 1 basis point to 2.60% (for a year-to-date decrease of 125 basis points).

Private Equity

The acquisition by a Private Equity company taking it from being owned by shareholders to a group of investors is very important to understand. Bottom Line: When you see Private Equity Companies buying stock you should too.

First, what is the the Carlyle group and who can invest with them? Because of applicable U.S. securities laws, firms such as Carlyle work only with "accredited investors" and "qualified purchasers" as those terms are defined under the securities laws. These types of investors are highly sophisticated investors with considerable financial resources, such as high net worth individuals and institutional investors. Carlyle is prohibited from offering its products to the general public under applicable securities law regulations.

The federal securities laws define the term accredited investor in Rule 501 of Regulation D for an individual as:

1) a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase
2) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year

An individual who is a Qualified Purchaser as defined by the Investment Company Act of 1940, has at least $5,000,000 in investments.

Why does Carlyle only want these types of investors? To minimize transaction cost and also because these categories of investors can not file a lawsuit.

Why do Investors keep giving Carlyle to invest? This happens when this is the best alternative of getting the highest return with the lowest risk. With the low interest rates for fixed income from treasury bonds these investors are getting a higher return for a fixed income style investment.

What does it mean for us? Carlyle made the investment and paid a 36% premium because the stock price was cheap and the company was consistently generating profits and cash flow from operations. When Private Equity companies start acquiring it means that relative value of stocks is inexpensive. Also, it reduces the total number of shares by publicly traded companies raising the value of stocks.

Halloween Trivia

•Halloween candy sales average about 2 billion dollars annually in the United States.
•Chocolate candy bars top the list as the most popular candy for trick-or-treaters with Snickers #1.
•Halloween is the 2nd most commercially successful holiday, with Christmas being the first.
•Halloween was brought to North America by immigrants from Europe who would celebrate the harvest around a bonfire, share ghost stories, sing, dance and tell fortunes.
•Tootsie Rolls were the first wrapped penny candy in America.