Who's Afraid of Leverage? Not the Buyout Kings by Andrew Bary
Highlighted companies: Gap Inc. (GPS), Micron Technology (MU), Bed Bath and Beyond (BBBY), Nike (NKE), Liz Claiborne (LIZ) EMC (EMC), Costco Wholesale (COST), Apache (APA), Valero Energy (VLO), Hess (HES), Transocean (RIG), Avon Products (AVP), Kimberly-Clark (KMB), Estée Lauder (EL), KB Home (KBH), DR Horton (DHI), Lennar (LEN), Toll Brothers (TOL), MDC (MDC), Hovnanian Enterprises (HOV), Linear Technology (LLTC), Maxim Integrated (MXIM), Analog Devices (ADI), Altera (ALTR) and Xilinx (XLNX)
Summary: $227 billion of leveraged buyouts [LBOs] have been announced so far this year -- 34% of all merger activity, and nearly double last year's $119 billion (18%). Now pundits say a $50b LBO is possible, making all but the top 60 publicly-traded companies potential targets. Some large companies that could be taken private: Gap Inc. (GPS), Micron Technology (MU), Bed Bath and Beyond (BBBY), Nike (NKE), Liz Claiborne (LIZ), EMC (EMC) and Costco Wholesale (COST). Potential energy targets: Apache (APA), Valero Energy (VLO), Hess (HES) and Transocean (RIG) -- low price/earnings multiples healthy cash flow make them attractive. Consumer stocks: Avon Products (AVP) has been the subject recent rumors; a Merrill Lynch analyst placed Kimberly-Clark (KMB) and Estée Lauder (EL) at the top of a list of companies that would benefit from the greater financial leverage LBO's bring to the table. Homebuilders: Almost every one has been mentioned as a candidate, including KB Home (KBH), DR Horton (DHI), Lennar (LEN), Toll Brothers (TOL), MDC (MDC) and Hovnanian Enterprises (HOV). Technology: cash-rich analog semiconductor companies like Linear Technology (LLTC), Maxim Integrated (MXIM) and Analog Devices (ADI), as well as Altera (ALTR) and Xilinx (XLNX) are prime targets in an industry that has the healthiest balance sheets of any. But LBO firms are playing with OPM (other people's money) -- many LBO firms buy companies with 35% cash and 65% debt -- and the boom could get ugly if financing dries up.
Related: Takeover Chatter Around Marvell, SanDisk • Fitch: Convergys, CA and Dell Are Buyout Candidates • Five Semi Equipment Buyout Candidates • Investment Banks Have Too Much Money On Their Hands • Bond Bull Funding of LBOs -- No End in Sight