When times are bad, it is time to buy booze. It is also, apparently, the time to buy gum and soft drinks, or at least the makers of such products.

Deal Journal was wondering after we saw how much asset-management deals are booming: What sector has shown the biggest jump in mergers and acquisitions recently?

It is the asset-management sector, where the dollar volume of deals has jumped 214% this year from last year, according to Dealogic.

Right behind is the consumer-products sector as well as food and beverages. Deals such as InBev’s takeover of Anheuser-Busch and Mars’ recently completed acquisition of Wm. Wrigley Jr., as well as Coca-Cola’s acquisition of a Chinese juice-maker, sent the volume of mergers and acquisitions in those sectors soaring 184% in the third quarter from a year earlier.

It seems incredible, but all the forced deals in the financial sector–we’re looking at you, J.P. Morgan Chase, Bear Stearns and Washington Mutual, and at you, Bank of America and Merrill Lynch–haven’t helped the sector beat last year’s volume. Financial sector M&A is down 15% this year, according to Dealogic.

Was Lehman Brothers Holdings CEO Dick Fuld driven to distraction by short-sellers as the company’s stock price plunged this year?

Well consider Fuld’s congressional testimony Monday and internal Lehman documents released by lawmakers, which paint a picture of an executive so intent on bringing down short-sellers that, in the words of one skeptical Congressman, Fuld’s judgment may have been “clouded” as to the financial standing of his securities firm.

Reuters

Fuld didn’t let up on his hatred for short-sellers–primarily David Einhorn–even after his company filed for bankruptcy last month, and he believed the shorts were part of a cabal driven by Goldman Sachs Group.

In April, Fuld reported back to general counsel Thomas Russo about a dinner with Treasury Secretary Hank Paulson that Lehman had a “huge brand with treasury,” which “loved our capital raise” and, in perhaps an oblique reference to short-sellers, that Treasury “want to kill the bad HFnds + heavily regulate the rest.”

Still, it seems Lehman was as worried about short-sellers as about a need for more capital. And as The Wall Street Journal reported today, when Lehman was in talks to take $5 billion of capital from Korea Development Bank in the spring, executive David Goldfarb suggested Lehman should spend about half the money to buy back Lehman stock, “hurting Einhorn bad!!!” “I agree with all of it,” Mr. Fuld responded.

Fuld’s obsession with the shorts prompted him to demote executives dealing with short-sellers such as finance chief Erin Callan, who had jousted with Einhorn for several months. Later, Callan told Fortune magazine she hadn’t wanted to confront Einhorn, but that the rest of the management team–including Fuld–forced her to.

In July, a former Lehman executive named Jarret Wait stopped by Lehman’s offices and said, according to an email by Lehman executive Thomas Humphrey, “that in just a few weeks on the ‘buy’ side,…it is very clear that GS is driving the bus with the hedge fund kabal& greatly influencing downside momentum,Leh & others!” Fuld responded to the executive who forwarded him the email, “Should we be too surprised. Remember this though–I will.”

In his prepared Congressional testimony, Fuld wrote, “The naked shorts and rumor mongers succeeded in bringing down Bear Stearns. And I believe that unsubstantiated rumors in the marketplace caused significant harm to Lehman Brothers.” When Fuld was questioned about the shorts’ connection to Goldman, he grumbled that he had no evidence but didn’t sound convinced.

It isn’t clear, though, how Fuld rationalized that with the appearance that the shorts were attacking Goldman, too. In his prepared Congressional testimony, Fuld said, “On September 15, when the market opened after the collapse of Lehman, naked shorts appeared to turn their attention to Morgan Stanley and Goldman Sachs. In the three days between the announcement of Lehman Brothers’ bankruptcy and the SEC instituting an emergency ban on short selling, Goldman Sachs’ and Morgan Stanley’s share prices fell 30% and 39% respectively. None of this was a coincidence.”

The financial crisis that is enveloping the global economy has taken another turn for the worse.

The Dow has fallen about 700 points the past two days as money-markets have seized up and investors are questioning the ability of governments to contain the crisis. Even the Federal Reserve’s decision today to backstop the commercial paper market has failed to provide a lift.

Portfolio.com’s Felix Salmon, for one, is unconvinced that expanding the Fed’s lender-of-last-resort role further is necessarily a great idea.

“A line has to be drawn somewhere: we’re never going to see the Fed issuing personal credit cards. I do appreciate that now’s not a great time to be drawing lines. I just wish that the policy response to this crisis was a bit more strategic and coordinated, rather than looking ever more confused, ad hoc, and panicked.”

Of course, the Fed’s decision to purchase commercial paper is exactly what Pimco’s Bill Gross called for in his most recent missive. All this has Paul Kedrosky asking: “Not that I’m necessarily objecting to doing something about the CP problems, but does the Fed have to leap to action so quickly every time Pimco’s Gross writes a column?”

The biggest beneficiary of the Fed’s action may well be General Electric, writes Clusterstock’s Henry Blodget.

Meanwhile, Yves Smith at Naked Capitalism excerpts a VoxEU paper looking at modern economic crises. The key paragraph doesn’t bode well for a quick recovery.

”The episodes of credit crunches and housing busts are often long and deep. For example, a credit crunch episode typically lasts two and a half years and is associated with nearly a 20 percent decline in real credit. A housing bust tend to last even longer: four and a half years with a 30 percent fall in real house prices. And an equity price bust lasts some 10 quarters and when it is over, the real value of equities has dropped to half.”

Tidbits

• Justin Fox on his Curious Capitalist blog provides seven reasons the stock market tumbled Monday.

• Throughout the past year or so of the financial crisis, Nouriel Roubini has been right, writes Salmon.

• Mergers & Inquisitions weighs in on the bankers vs. consultants debate. Now if you can just get an offer from either.

• Some Bostonians are pining for the more austere habits and disciplined investing style of an earlier time, writes the Boston Globe.

• Also from the Globe: Some Boston firms want a shot at managing part of the government’s $700 billion fund.

• Lehman Brothers has notified some former employees that their severance payments were cut off because of the company’s bankruptcy, Bloomberg reports.

• Warren Buffett doesn’t equal J.P. Morgan, writes Dealscape.

Deal Journal question: As the financial crisis takes another turn for the worse, how are you coping? Join the discussion over at WSJ Community by clicking here.

Toby Lewis, a reporter for Private Equity News, reports from a conference sponsored by that Dow Jones publication, which is a contributor to Deal Journal.

Richard Sharp, who played a big role in developing Goldman Sachs Group’s European buyout operations into one of the biggest in the business, Monday said private-equity firms’ “incontinent investment behavior”–fueled by excess liquidity–contributed to his decision to leave the industry two years ago. In April, Sharp took on a nonexecutive chairman role at public-relations agency Huntsworth.

Speaking of that decision, Sharp, who worked at Goldman for 23 years, said: “I felt it was as good as it was going to get and it wasn’t going to get any better.” He added that mega buyouts led to lumpy investments and were made at valuations he believed were unattractive so he decided to not commit to a $20 billion fund Goldman raised last year. “The amount of money pouring into the industry was causing incontinent investment behavior that I was no longer willing to participate in with my own money.”

Private Equity News reported this week 25 buyout firms, including Goldman Sachs Capital Partners, did three quarters of the record $1 trillion of buyouts from August 2006 through July 2007, according to data provider Dealogic. Investors are concerned these deals are going to result in worse-than expected returns.

In the run up to the credit crunch Sharp said he found it increasingly difficult to recommend investments to investors due to the amount of credit available. “It came to be somewhat difficult in an era where I was finding bank debt being offered to us at higher valuations than I believed the entire capital structure warranted.”

Sharp said he now is more hopeful for the prospects of private equity than when he left Goldman. He said, quoting investor Warren Buffett: “When you’re in the business of eating hamburgers, you do not celebrate when the price of meat rises. Similarly I’m positive because I see valuations approaching more rational levels than when I left.” He said private-equity firms would now be wiser and more careful with investors’ money in future than they had been in the boom years.

He said large global funds may not be as successful in investing in the aftermath of the credit crunch as other more niche players. “The scale of transactions they will do require leverage and so they may be later to the party than some others.,” he said, adding that while firms benefited from permanent capital they also would have to manage out legacy investments.

Goldman said Sharp’s views didn’t reflect the bank’s perspective.

In times of crisis, people often look for comfort foods that remind them of stability.

Financial institutions are no different, except they often seek out businesses that manage assets, not carbs, in search of stable revenue and more assets that stick around in a crisis.

From July to September alone, the number of deals for asset-management businesses rocketed up a third from the year-earlier period. And nearly $1 trillion of assets changed hands when asset managers were sold in the second quarter, triple the year-earlier amount, according to Jefferies Putnam Lovell, an investment bank that advises fund management businesses.

Still, the total value of asset-management deals in the second quarter was just $6.4 billion, which Jefferies Managing Director Aaron Dorr attributes both to the kinds of deals that were convenient to do then as well as to falling valuations. “A lot of them right now are minority transactions. Those transactions that have come down are forced sellers and are part of a capital-constrained universe. Valuations have come down. Buyers aren’t looking to pay top dollar; they’re looking for pennies on the dollar,” Dorr said.

Still, the current financial crisis is expected to shake loose asset-management businesses that have been “captive” in companies like Lehman Brothers Holdings and Wachovia that may have wanted to stay in the business but need to raise cash.

And many private-equity firms are waiting to enter the sector. TA Associates and Hellman & Friedman have long been players in asset management. Rival private-equity firms, with a lot of money to put to work and wary of risk, are looking at the robust returns believed to have been posted at TA and Hellman. Of course, Lehman already sold its Neuberger Berman asset-management division to private-equity firms Bain Capital and Hellman. This year has seen several private equity firms dip a toe into the water, with Pharos and TPG buying American Beacon for $480 million and the Carlyle Group acquiring a $75 million stake in Boston Private.

Not every private-equity firm has been as fortunate. Kohlberg Kravis Roberts invested $1.25 billion in Legg Mason convertible senior notes in January that had the right to convert to common stock at $88 a share; Legg Mason shares closed Monday at $34.10.

Banks have been busy, too, mostly buying up small stakes. Allianz took over Cominvest as part of a swap of its Dresdner Bank unit to Commerzbank. Fortis–now in the midst of a bailout–bought the minority stake it didn’t already own in Artemis Asset Management. And Lazard acquired the remaining interest in Lazard Asset Management that the unit’s executives owned. Many expect Wachovia’s Evergreen to go to Wells Fargo after a legal tussle with Citigroup ends.

The U.S. government may have played a role in driving asset-management deals. On Sept. 29, the Treasury, trying to stabilize money-market funds, offered to guarantee for three months the share prices of retail and institutional money-market mutual funds for any asset manager that agreed and paid a fee. That fee, of 0.01 to 0.015 percentage point of assets, may be too steep for smaller players in the money-market fund business and may put pressure on their revenue, according to Buckingham Research analyst William R. Katz. With nonparticipation an unattractive option, Katz believes “industry consolidation will likely pick up as players look to further drive scale.” The biggest players in money markets right now are Federated Investors, which has about 7% of the $3.5 trillion industry, trailed by Invesco, BlackRock and Legg Mason.

Conventional asset managers won’t be the only ones looking for deals; alternative asset managers, a category that also includes hedge funds, are experiencing pressure on their returns, which can spur investor redemptions. That could prompt a shakeout in the business and many deals, according to Keefe Bruyette & Woods analyst Robert Lee.

Tomio Geron writes this dispatch about the venture capitalists behind Bill Me Later. Geron is a reporter for VentureWire, a Dow Jones publication and contributor to Deal Journal.

Bill Me Later’s agreement to be acquired by eBay for $945 million in cash and options is the third-largest acquisition of a venture-backed company this year and looks to have earned its venture investors some sizable returns.

Bill Me Later’s first venture investor was Crosspoint Venture Partners, which in 2000 put $17 million into the company, a service that enables Web shoppers to extend payment for products for a fee. James Dorrian, a general partner at the firm, said the investment was “very successful,” especially given the tough environment at that time. “For anybody making any investment in early 2000, there was no exit strategy really,” Dorrian said. “You had to say, ‘Can this be a good company?’ And let the market take care of itself.”

Azure Capital Partners was Bill Me Later’s largest venture investor, first investing in the Timonium, Md., company at a valuation below $100 million, according to Mike Kwatinetz, general partner at Azure. Kwatinetz declined to specify his firm’s overall return, though the return from the initial investment would be at a multiple of about eight. Azure returned to invest in later rounds.

Later institutional investors included T. Rowe Price and Legg Mason, while strategic investors included Amazon.com, First Data and Chase Paymentech Solutions.

The third venture-capital firm to invest in Bill Me Later, GRP Partners, expects a return of five to six times its investment, according to Steve Lebow, managing partner and co-founder of GRP. “I loved the deal,” Lebow said. “(CEO) Gary Marino and his team are brilliant.” Bill Me Later was ahead of its time in figuring out how to quickly provide credit to consumers, he said. It just took time to build the company to where it is today, Lebow said.

Venture capitalists have endured a tough environment for exiting investments, with the industry on track for the lowest number of M&A deals involving venture-backed companies this decade. The only bigger venture-backed M&A deals this year were Dell’s purchase of EqualLogic in January for $1.4 billion and Sun Microsystems’ purchase of MySQL for $1 billion in February.

The stock market’s deep, month-long funk continues to take a toll on the stocks of many companies with planned mergers or acquisitions. But a select few of those companies see salvation within reach because their deals have closed or are certain to close soon.

Monday, the Dow Jones Industrial Average closed below 10,000 for the first time in four years. And while the damage has included the stocks of companies waiting to be acquired, it could have been a lot worse as the market rout has changed investors’ perspective on some deals–acquisition prices once considered simply a fair value now look like windfalls.

Shareholders of Wm. Wrigley Jr., for instance, bucked the 3.6% market downdraft, with the confectioner’s stock rising 20 cents to $79.97. Shareholders get $80 a share now that the stock is delisted and Wrigley’s acquisition by Mars was made official Monday.

Meantime, Anheuser-Busch fell $2.01, or 3.1%, to $63.09, well below the $70 a share InBev is offering. Still, A-B also set the date–Nov. 12–for its stockholder meeting to vote on the deal, fueling the belief that the deal will go through as expected by year end.

Another company whose deal is to close soon took a relatively glancing blow from the market rout. DRS Technologies fell 2% to $73.69. DRS shareholders are spared any doubt about the company’s future because its merger with Finmeccanica was approved Oct. 1 by shareholders, and regulators don’t plan to hold up the deal. That means shareholders will be getting the agreed to $81 a share in the deal.

The flip-side is that those companies whose deals remain cloaked by uncertainty are taking a beating. Merrill Lynch fell 10% to $24.20, well below the $29-a-share acquisition price offered by Bank of America. Merrill is right in the thick of the storm: BofA announced dismal earnings today, and the entire financial sector is out of favor.

By Stephen Grocer and Heidi N. Moore

Deals of the Day includes all the major news of the morning related to mergers and acquisitions and financing. For breaking deal news, turn to the WSJ’s Deals & Deal Makers page, or click here to automatically sign up for Deals Alert emails.

Today in 11th-Hour Economic Rescues

Here’s how it’s going to work: Treasury officials, including $700 billion man Neel Kashkari, are outlining how this whole bailout thing is going to go down. [WSJ]

Markets around the world tumbled: Governments around the world are pulling out the stops to contain the financial crisis, but investors are expressing serious doubts that the efforts will succeed. [WSJ, Times of London]

Related: Hank Paulson, Ben Bernanke and Jean-Claude Trichet are considering more advanced measures to encourage banks to lend to each other and to keep the commercial paper market moving. [Bloomberg]

Related: Investors surrendered to the fact that the crisis gripping the financial sector will start spilling over into the broader economy. [WSJ]

Related: Feel like quitting the markets? The Intelligent Investor columnist Jason Zweig offers some advice. [WSJ]

Related: The more a government commits taxpayer funds to shore up banks, the more responsibility it must take for running them, writes Damian Reece. [Daily Telegraph]

Across the Atlantic: Bankers scrambled to complete mergers and win government backing for emergency rescue packages. [Times of London]

Down Under: The Reserve Bank of Australia slashed its official cash rate target by one percentage point to 6% in response to a cooling in the local economy and fears of a global recession. [WSJ]

Related: Economists say the RBA’s rate cut reflects the intensity of the global credit crisis, saying it will shore up the economy. [Sydney Morning Herald]

Mergers & Acquisitions

To your corners: Wachovia and suitors Citigroup and Wells Fargo agreed to a two-day truce as negotiators attempt a resolution. [WSJ]

Related: Stock markets are tumbling; the world’s credit markets are in their worst state since the credit crunch began and a takeover battle has broken out for perhaps the sickest U.S. bank. What gives? [WSJ]

Maybe not a takeover battle, but still possibly a battle: ImClone agreed to a $6.5 billion takeover by Eli Lilly, prompting Bristol-Myers Squibb to abandon a rival bid for the biotech company but setting the stage for a possible legal battle over ImClone’s future cancer-drug revenue. [WSJ]

Today in capital infusions: Hartford Financial will receive a $2.5 billion capital investment from German insurer Allianz, while also warning of a big third-quarter loss and announcing a 40% cut to its quarterly dividend. [WSJ]

The “having a stadium named after your company” curse hits again: Reliant Energy is considering strategic alternatives including a possible sale of its retail unit, a sign of the difficulties that some power companies face. [WSJ]

BankWest: Commonwealth Bank of Australia has begun exclusive negotiations with HBOS to buy BankWest. [Sydney Morning Herald]

Financial Institutions

Bank of America: BofA slashed its dividend and announced plans to raise $10 billion in new capital. Profits fell 68%. [WSJ]
Related: BofA picked Merrill to help lead the capital-raising. Surprise. [eFinancialNews.com]

Mr. Fuld goes to Washington: And he’s probably in no rush to come back. [WSJ]
Related: Highlights of Fuld’s Congressional testimony. [Deal Journal]
Related: A Lehman employee punched Fuld in Lehman Brothers’ gym after the firm declared bankruptcy. This is not, however, what Fuld meant when he said he “feel this pain for the rest of his life.” [Gawker.com]

Up next in Washington, AIG executives: The complexity and international spread of AIG’s operations impeded regulatory oversight of the derivatives unit. [FT.com]

HSBC: It is the only British bank left in the list of top 30 global financial institutions. [eFinancialNews.com]

At least someone can get a loan: MGM Mirage said it received a $1.8 billion credit facility from a group of banks for its massive CityCenter project of hotels, condos, retail stores and restaurants in Las Vegas. [WSJ]

The investors who give private-equity firms the money to do deals still are plowing cash into the asset class, but increasingly it is being funneled away from buyout funds to more specialized investors.

Three-quarters of the way through the year, fund-raising by North American private-equity firms–a category that includes buyout, venture capital, mezzanine, distressed and several other types of firms–is ahead of last year’s pace. Through the end of September, 264 funds had raked in $222.6 billion, well ahead of the $200.4 billion raised by 298 funds at this time last year, according to data from LPSource.

That may seem a little nutty, given that the freeze-up in credit markets and the slower-growing economy stand to have a big impact on the private-equity asset class. But after the last downturn, in 2001 and 2002, many investors, known as limited partners, stopped investing in private equity, which turned out to be a bad move, as funds raised at that time eventually proved to be big winners. LPs say they have learned that lesson and will keep investing this time around.

That isn’t to say they aren’t hedging their bets. Buyout firms, which have been hardest hit by the credit crunch, raised $103.3 billion across 77 funds, down 12% from 98 funds that raised $118 billion last year. And venture capital fund-raising was flat, with 107 funds raising $19.7 billion compared with 103 funds raising $19 billion a year earlier.

Other types of firms–those perceived as most likely to benefit in the current environment–gained ground. Mezzanine funds, which invest in debt that also carries characteristics of equity, continue to have a strong year, gathering in $36.9 billion across 13 funds, compared with the $3 billion across nine funds through the third quarter of last year. Distressed firms also have well exceeded last year’s total through the third quarter. Eighteen funds have raised $37.9 billion, up 28% from $29.5 billion raised by 16 funds at this time last year.

“Instead of halting or materially decreasing investing in private equity–as was done in 2000 to 2002–this time around investors are looking to be more tactical investing capital in areas which may benefit in the current economic and business cycle,” said Brett Nelson, head of private equity at consulting firm Ennis Knupp + Associates.

–Keenan Skelly is a reporter for Private Equity Analyst, a Dow Jones publication and a contributor to Deal Journal.

It is amazing what a trust fund can do.

Two weeks ago, Wachovia couldn’t get arrested. It was scorned by analysts, a pain to investors and low on potential acquirers because of its bad loans. Twice in the past week it came close to failure in what would have been the largest U.S. bank failure in history, stealing the crown from Washington Mutual.

Now, Wachovia is torn between suitors Citigroup and Wells Fargo. Citigroup offered $2.16 billion for most of Wachovia in a government-brokered deal. Then, Wells Fargo offered $15.1 billion, without government help, and now Citigroup is suing to win the bank.

What happened? Well, think of Wachovia as the ugly duckling who suddenly became a lot more attractive to marriage-hunters because of an inheritance. In this case, the inheritance is the Troubled Asset Relief Program, or TARP. The $700 billion bailout bill is likely to cleanse Wachovia of the bulk of its troubled mortgage assets and unleash its inner Miss Popularity.

Friday’s passage of TARP may be what made the Wells Fargo bid possible. Wells Fargo bid for Wachovia the weekend before last, in competition with Citigroup, but found that the deal was possible without government assistance. Still, Citigroup got government assistance: its bid was backed by the Federal Deposit Insurance Corp., which agreed to backstop any Wachovia losses over $42 billion.

WSJ colleague Damian Paletta reports that the FDIC may have been the one to steal Wachovia from Citigroup. According to an affidavit from Wachovia CEO Robert Steel, the FDIC pushed Wachovia into the arms of Wells Fargo–a deal that would save the FDIC the trouble–and risk–of providing an immediate backstop to Citigroup at a time when the agency is underfunded for the bank crisis. But it also belied FDIC Chairman Sheila Bair’s statement on Friday that the FDIC stood behind Citigroup’s deal.

If the FDIC was involved in pushing the Wells Fargo deal, it would make sense of a strange little amendment in TARP: an amendment that allowed deal-jumpers protection from litigation if they interrupt a government-brokered deal. That gives the FDIC some breathing room by allowing it to force sales without necessarily providing a backstop; since any bidder can come in with a better offer, potential buyers of bank assets can’t hold the FDIC at gunpoint and demand government money upfront in return for doing a deal.

Another reason TARP made the Wells deal possible: Wells Fargo, which predicts it will take losses of $74 billion on Wachovia’s assets, didn’t need the FDIC’s approval because TARP will give Wells Fargo a break on those toxic assets.

The Federal Reserve now is pushing for a compromise, although the regulator isn’t taking a stance on what kind of solution it wants. Citigroup and Wells Fargo’s discussions involve the Solomonic decision to split Wachovia in two. As a short-term answer to the dispute, it may work. But it may not bring long-term happiness to two banks that wanted all of Wachovia’s deposits without any of Wachovia’s troubles.