Winning by Losing?

Am I the only one who’s beginning to think it’s in Blackstone’s best interest to lose the Equity Office deal? It has now raised its bid to $55.50 per share, which is 14.4% higher than its initial offer. So assume for a moment that Blackstone was originally expecting a 25% ROI from the deal – which is based on no inside info, just supposition for the sake of argument. That would be an exit at $60.63 per share (I know it’s not quite so apples-to-apples easy, but please keep indulging me). That same exit would now be just a 9% ROI based on the revised bid price.

It is certainly true that 9% on such a mega-deal is huge from a cash-on-cash perspective, but Blackstone’s track record indicates that it could find better places to put its money. Moreover, the breakup fee now stands at a whopping $720 million. Since Blackstone splits fees 50/50, that would be $350 million for the firm and $350 million for LPs (assuming around $20m in out-of-pocket expenses).

We can certainly argue over whether an LBO firm deserves that kind of capital for just doing its job (i.e., bidding with its LPs’ money) — and I’ll probably do that later today — but the best option might now might be to take the free cash and plug the fund capital into new deals with better return expectations.