Follow Up to 'Private Equity Buyouts: The Five Cs'

In a prior post we discussed five reasons behind the private equity buyout boom. In conclusion we noted how the fears over the death of public equity is overblown. However, it is naive to think that public companies, whether bought out or not, are going to remain unaffected.

Investors should keep their eye out for companies who in their fear of a takeout offer look to leverage up their own balance sheets. They could borrow (cheaply) from the high yield debt markets to: buy another company, pay a significant special dividend, or buy back a slug of their own stock. All of these are tried-and-true methods to help scare off potential acquirors. This not to say that these types of moves will necessary be in the best interest of all shareholders, but they will certainly serve the purposes of management.

The buyout boom has generated a flood of media mentions including ways in which buyouts will affect existing companies and their shareholders. For instance, Gregory Zuckerman in the Wall Street Journal discusses the rampant talk about which company will next be taken over. However the game seems to be changing. As Zuckerman writes:

But investors shouldn’t get carried away betting on possible takeovers. Not only are they tough to predict, these deals also are somewhat less lucrative than they once were. The average premium paid over market prices for shares of companies subject to an acquisition bid this year is 17%, down from 25% in 2000, according to Thomson Financial.

Randall W. Forsyth at Barrons.com notes the potential impact of the change in control of Congress on the stepped-up pace in dealmaking and asks the question why it takes private equity firms to fully realize the value in existing public companies. For Forsyth the blame lies with:

…corporate boards have to stop being lapdogs and shareholders have to start acting like business owners.

DealBook notes the holiday-induced break in deal-making and notes the growing fear in the media on the eventual impact of all this deal-making.

Over at FT Alphaville they have a series of posts on the role of private equity including a nod to our initial post on the subject. They also note the positive impact debt covenants can have in light of this wave of buyouts. They continue with an anecdotal item that seems to point towards a peak in private equity investing. In conclusion they explain why European companies remain relatively immune to the siren song of private equity-led buyouts.

As you can well see this is a big story that touches on all manner of capital markets from equities to bonds to credit derivatives. For the moment all the pieces are in place as private equity cash coffers remain filled and the debt markets remain ready to make leverage loans on these deals they will continue. How long these pieces remain in place remains to be seen.

Comments

[Amit Chokshi_:]

The massive coverage of the LBO wave is a few years overdue. 2004 and 2005 has massive dividend recaps, some satellite deals like Intelsat were recapped within one week after being purchased by their sponsors. The peak will come after the money's been invested and a few busts have occured. It's part of the typical cycle. The 1998 vintage PE funds were huge in terms of capital raised for the time and the majority have severely underperformed due to investments in the TMT sector.

As long as rates remain low PE funds will have all they need to do deals. They aren't buying bad businesses, they are buying stable businesses and juicing their returns. When Bain bought Burlington Coat Factory and now Outback, they're not changing much around. Those companies aren't going anywhere and a little leverage will juice their returns.

As for the PE/movie deal, that's been going on for a while. Tom Cruise getting into a PE deal is not a big deal, other entities like Relativity Media have been PE backed/financed.

2006 Nov 24 09:51 PM