Backing into the future: 2004

Looking forward always feels different than peering back. In retrospect, 2004 was a year that all kinds of virulent trends planted themselves in the financial system. Interest rates were low, and the machinery to peddle subprime mortgages was gearing up. Americans were not saving nearly enough -- or at all. The first signs of a buyout boom surfaced, fueled by low, post-bubble share prices. And banks continued to consolidate, fattening up like a duck's liver.

But living 2004, responding to it, and squinting into the murky future was another thing entirely. What we saw at The Deal was the stirring of life in the deal economy after an era of gloom, scandal and miserable share prices. We were in no mood for euphoria. We were skeptical of everything from nanotechnology hype (May 3) to bank consolidation (Feb. 23) to "frenzied" deal auctions (March 15). The recession was over, but there was chronic distrust of everyone from CEOs -- Kozlowski, Rigas, Skilling and Ebbers, the Incarcerated Four -- to Wall Streeters. Eliot Spitzer, gearing up for a gubernatorial run, still swaggered as New York attorney general. Dick Grasso had been forced out over lavish pay at the New York Stock Exchange in September 2003, and Spitzer sued him in 2004 to get the money back. Shockingly, Grasso defied Spitzer, one of the first cracks in the sheriff's
blustery facade.

Socially and politically, 2004 still looked back. Sept. 11 was two years in the past. Afghanistan and Iraq seemed to be quieting down. There were no weapons of mass destruction, and Osama bin Laden was free. George W. Bush and John Kerry jostled for the presidency, with Bush squeaking to victory in November. The worst seemed over, and yet anxiety, while fading, lingered.

The recovery struck different groups differently. Throughout 2004, strategic M&A suffered from an often ferociously negative critique whose touchstone was the by-then titanic mess of the AOL-Time Warner deal. In the scuffling ethos of the post-dot-com-bubble era, "transformative" deals were condemned as the height of hubris and irresponsibility. Bankers were blamed for bullying CEOs; CEOs were blamed for bullying boards; and boards were blamed for screwing shareholders. M&A was portrayed as a tool of CEO greed. In fact, the M&A critique -- all M&A was ipso facto bad -- verged on cliché. Like any cliché, there was, tucked inside, a truth: Many big deals paid for with overpriced stock had occurred in the bubble, and M&A often inflated pay packages (in 2004 Delaware's Court of Chancery tackled a series of comp cases, including the Mike Ovitz, Michael Eisner imbroglio at Disney). But few critics saw M&A as part of a dynamic cycle, ranging from smaller, rationally priced deals to risky excess as the cycle topped out.

One result of the attack on CEOs, not to say M&A, was that corporates grew risk averse. Throughout 2004 they focused on cleaning up balance sheets, hoarding cash and unloading noncore assets. The recipients of this largess were mainly buyout firms, which had suffered through the tough years, but which were stuffed with investor capital. Buyout shops suddenly discovered an array of targets, often at low prices, with almost no competition from corporates. Indeed, when strategic acquirers struck a deal, shareholders often rejected it; perhaps the biggest non-deal of 2004 was Comcast's failed $66 billion run at Disney.

Then there were hedge funds. Swollen with institutional money -- much of it from pensions desperately trying to amp returns -- hedge funds exploded. This catalyzed a social phenomenon, particularly in gilded playgrounds like Greenwich, Conn., though true outrageousness was still in the future. More importantly, hedge funds began to reshape governance. They circled wounded, suffering or adrift companies in packs, couching their demands (sell, restructure, cut salaries) in the language of shareholder-centric governance. Like the M&A critique, the analysis was often one-sided and simplistic. But there was just enough truth that even Carl Icahn donned an activist toga. Synergies between private capital, hedge funds and buyout shops emerged. Hedge funds pressured corporates to sell or frightened them into passivity, providing targets and a clear path for the buyout crowd.

In October we celebrated our fifth-year anniversary with a cover that said: "Boom, Bust, Bounce." Two months later, we finished the year with "Party favors of 2004." We were making a joke about the political season, of course. But there was a further sense that the financial party was just beginning. They hadn't broken out the hard stuff yet, but you could feel it coming.