Winning by Losing?

Am I the only one whos beginning to think its in Blackstones 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 its 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 Blackstones 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 Ill 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.