Countrywide is no surprise; Ceridian no big fight; Lewis Bear investment no big deal as markets await the Fed

By Evan Weinberger

New York, Sept. 10 - News Friday that Countrywide Financial Corp. will lay off up to 12,000 workers in the next three months was bad but not unexpected. The same can be said about the drop in the company's stock Monday.

Not much was happening on the mergers and acquisitions front Monday morning as it appears the push for private equity has slowed and other deals were simply not announced. Widening credit spreads have most market players waiting to hear what the Federal Reserve is set to do at its next meeting next week.

What was beginning to look like an ugly proxy fight between Ceridian Corp., a Minneapolis-based business services provider, and Pershing Square Capital Management, LP, an activist hedge fund based in New York, turned into an amicable compromise. Pershing Square had been pressing for the total replacement of Ceridian's board of directors because the hedge fund thought a proposed merger price was too low, at first. Then the fund wanted the Ceridian board gone because it was afraid the board would botch the merger.

The purchase of 7% of the Bear Stearns Cos. Inc. by billionaire investor Joseph Lewis generated hardly more than a shrug in most quarters. But one trader said that it could foretell a takeover at some undetermined point down the road.

Markets had a case of the blahs Monday, except for a brief rally in the Dow Jones Industrial Average that was mostly given back by the end of the day. Many investors were holding tight, market watchers said, after Friday's drubbing and in anticipation of the Fed meeting. Hopes remain pinned on a rate cut.

"We've been in a quiet mode. We haven't broken out of the summer doldrums yet," one analyst said. "I think people are just waiting for some news to get them to go one direction or the other."

Of course, there was some opportunistic trading, as there always is.

The Dow picked up a meager 14.47 points, or 0.11%, for a close at 13,127.85.

The Nasdaq and Standard & Poor's 500 didn't fare as well. The Nasdaq slipped 6.59 points, or 0.26%, for a close of 2,559.11. The S&P 500 sank 1.85 points, or 0.13%, to close at 1,451.70.

Countrywide cuts no surprise

At the end of last week, Calabasas, Calif.-based Countrywide announced that it would lay off somewhere between 10,000 and 12,000 employees within three months. The layoffs are part of its restructuring in the face of stiff losses in their subprime lending unit.

In a letter to employees, Countrywides chairman and chief executive officer Angelo Mozilo and president and chief operating officer Dave Sambol estimated that mortgage origination would be down 25% in 2008 compared to 2007 levels. The job cuts represent as much as 20% of Countrywide's 61,000 work force.

"It's as bad, if not worse, than everyone thinks," one trader said.

A second trader had a more positive outlook. He said that even with the current trouble facing Countrywide, the company continues to make money. In fact, the company hired 1,000 sales people in its consumer markets division. Lending practices have also tightened up, with 75% of new originations now in the prime lending category.

Countrywide, the trader mused, would rise again and become a good merger target. "Earnings will be lower, then stock will rise - but [Countrywide will] probably get taken over," the trader said.

It appeared that more people were taking the negative view of America's largest home lender, as the stock tumbled to $17.21, a drop of $1, or 5.49%.

Collateral damage from Countrywide's stock fall is being felt at Bank of America, which bought a 15% share of the mortgage lender in a $2 billion convertible preferred stock deal. The conversion price on the deal was set at $18. Countrywide stock (NYSE: CFC) closed $21.82 on Aug. 22 and at $22.02 Aug. 23.

The deal was in the money from the start. "Well, that's disappeared and then some now," one analyst said.

Ceridian, Pershing Square make nice

An ugly proxy fight turned into a veritable love-fest Saturday as Ceridian Corp. and Pershing Square holstered their weapons and agreed to a compromise. In return for Pershing Square giving up its bid to replace the entire Ceridian board, Ceridian agreed to expand the board to 11 members from eight.

Ceridian provides human resources, transportation and payroll services to business in 38 countries.

Pershing Square, led by activist investor William Ackman, wanted the board replaced because he felt that a $36 per-share offer for Ceridian from Thomas H. Lee Partners LP and Fidelity National Financial, Inc. was too low, at least at first. That deal was agreed to in May, and Pershing Square quickly opposed the deal.

After reviewing the deal for several months, Pershing Square agreed that the $5.3 billion merger was the best Ceridian could do given credit spreads and the general market tenor. But Ackman and his hedge fund, which own a 15% stake in Ceridian, still wanted to replace the board because, he claimed, they put the merger at risk.

When Proxy Governance, Inc., an independent research organization, on Friday not only supported the merger but recommended that investors re-elect the board at its Sept. 12 meeting, the jig was up.

Ceridian and Pershing Square issued a joint statement Saturday morning announcing the truce.

"This agreement represents a win for all Ceridian stockholders and allows us to move forward decisively in closing our $36 cash merger with Thomas H. Lee Partners and Fidelity National Financial," Ceridian president and chief executive officer Kathryn V. Marinello said in the statement.

"We are delighted to have brought this situation to an amicable conclusion, and look forward to a prompt closing of the merger," added Ackman.

Ceridian stock picked up 21 cents, or 0.60%, to close at $35.01 on Monday. The merger with Boston-based private equity firm Thomas H. Lee Partners and Jacksonville, Fla.-based insurer Fidelity National Financial is expected to close in the fourth quarter.

Market watchers said Pershing Square wasn't necessarily looking to replace the entire Ceridian board. Instead, it was just looking to gain a larger voice in decision making. "I think they achieved what they wanted," one trader said. "I think there were some concessions certainly made."

The trader added that there were still questions remaining about whether the Ceridian-Thomas H. Lee-Fidelity National Financial deal will get done. "We're keeping a close eye on that one," he said.

Lewis's Bear buy no biggie to most

Usually a tycoon buying 7% of a major financial institution would raise some eyebrows. Not so in the case of Joseph Lewis amassing 8.1 million shares in New York-based investment bank Bear Stearns since Aug. 6.

The holdings make Lewis possibly the largest shareholder in Bear, with an even larger percentage than the firm's chairman and CEO Jimmy Cayne's 5.3%.

Although Lewis filed with the Securities and Exchange Commission Monday as an activist investor, few expect the Bahamas-based billionaire to be much of a thorn in Bear management's side.

"Nothing significant there," one trader said. "He's not a traditional activist."

Just because Lewis doesn't appear to be an activist investor doesn't mean another future investor won't be. "The momentum has started to either get a large equity investor or a takeover," another trader said.

Whatever Lewis does, the precedent has been set, the trader added. "More important it is a sign of what others are [or] will be doing," he said.

Investors were pleased with the takeover, as Bear Stearns stock (NYSE: BSC) sprinted $2.13, or 2.02%, to $107.50 in trading Monday.

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