$11.3-Billion Tech Deal Extends Buyout Boom
A group of investment firms banded together Monday to take a major software company private in an $11.3-billion deal -- the second-largest leveraged buyout in history, and a sign of how big-money investors increasingly are looking for ways to boost their returns as the stock market struggles.
SunGard Data Systems Inc. of Wayne, Pa., said it agreed to be bought by a consortium of seven investment firms, including some of the biggest names in the private equity business: Silver Lake Partners, Kohlberg Kravis Roberts & Co. and Blackstone Group.
In dollars, the deal ranks second only to the $29.4-billion leveraged buyout of RJR Nabisco in 1988. That transaction marked the pinnacle of the late-1980s takeover wave.
But a key difference between that buyout binge and the current one is that the dealmakers today generally aren’t seeking to quickly bust up the businesses and sell the pieces for more than the whole was worth.
Menlo Park, Calif.-based Silver Lake Partners, which initiated the SunGard deal, said it planned to continue investing in the company to fuel growth.
Now, as in the late 1980s, a driving force behind the buyout boom is that there is a hoard of investment capital looking for a place to go, said David Barnes, a managing director at Los Angeles-based investment banking firm Houlihan Lokey Howard & Zukin.
“There’s an incredible amount of financing available” for buyouts, he said.
Erik R. Hirsch, chief investment officer at Bala Cynwyd, Pa.-based Hamilton Lane Advisors, which manages a $40-billion private-equity portfolio, said the climate of relatively low interest rates and a lagging stock market would continue to stoke buyouts as elite investors such as pension funds look for ways to lift their returns.
Investors in some buyout funds have gotten used to annualized returns in double digits, sometimes exceeding 30%, industry experts say.
The total value of announced leveraged buyouts worldwide soared to $161 billion last year, the highest ever and up from $87 billion in 2003, according to data tracker Thomson Financial. The total number of deals last year was 1,123 compared with 980 the year before.
This year, 191 deals have been announced, worth $34.2 billion.
In a leveraged buyout, investors take a business private by purchasing all of the publicly held stock. The buyers typically put up cash for 30% to 50% of the purchase amount and borrow the rest.
The usual goal in an LBO: Improve the business, boost profit, and eventually sell the firm for substantially more than the purchase price -- either to another buyer or by taking the company public again.
Although the business is booming again, today’s LBOs bear little resemblance to the no-holds-barred buyout mania of 20 years ago, many experts say.
The buyers of the 1980s were putting as little as 5% cash into the deals, leaving the companies highly leveraged and more vulnerable to financial trouble if their business stumbled.
The SunGard buyers are putting up $3.5 billion in equity, or 31% of the $11.3-billion purchase amount. The rest of the money needed to buy out public shareholders will be financed by debt arranged by banks including J.P. Morgan Chase & Co., Citigroup Global Markets Inc. and Goldman Sachs & Co.
The buyers agreed to pay $36 a share in cash for SunGard, or about 44% more than the stock’s level on March 18, before the company said it put itself up for sale. The shares rose $2.81 to $34.36 on the New York Stock Exchange on Monday.
Another change in the buyout environment since the 1980s is that investment firms are banding together on big deals instead of going it alone -- a far cry from the LBO bidding war for RJR Nabisco that the book “Barbarians at the Gate” made famous.
“In the last few years private equity firms have learned how to work in consortiums,” said Greg Mondre, a principal at Silver Lake Partners.
By joining forces the investors spread the risk in case a privatization deal goes sour. By negotiating as a group, instead of bidding against each other, the investors also can snare target companies for lower prices, said David Brophy, a University of Michigan finance professor.
“These guys are still competitors,” he said of the partners in the SunGard deal, “but they all realize that a truce now and then is good for business.”
Besides Silver Lake, KKR and Blackstone, the other investment firms in the SunGard deal are Bain Capital, Goldman Sachs Capital Partners, Providence Equity Partners and Texas Pacific Group.
The downside to such consortiums is that the returns the buyout firms earn for their clients are likely to be comparable over time because they’re in the same deals. That can reduce the competitive edge any one firm might have in attracting capital.
For the management of individual public companies, one appeal of leveraged buyouts is that the deals tend to be friendly. The buyers often work with current managers and allow them to be investors in the transaction, which can mean a big payoff if the company prospers -- and a handsome return if the company is sold.
SunGard, which provides software and services to the financial services industry and had $3.6 billion in sales last year, sought to assure customers that the firm wouldn’t be ripped apart.
Cristobal Conde, SunGard’s chief executive, said in a statement that the investment group had “a long-term view towards growing the businesses in which they invest and an excellent track record of working in partnership with management to build great companies.”
The deal still requires shareholder approval.
More companies may be receptive to the idea of buyouts in part because the burdens of being public have mounted since the high-profile corporate scandals of a few years ago. The Sarbanes-Oxley corporate reform law of 2002 and other new regulations have increased the financial-reporting requirements for companies and raised the penalties if companies fail to comply.
Given the costs, “There are a lot of publicly traded companies today that shouldn’t be” public, said Houlihan’s Barnes.
Even if LBOs have become more appealing on their own merits, the deal wave since 2002 couldn’t have materialized if banks and other lenders hadn’t begun to provide financing again, Barnes and others said.
“This is a function of lenders beginning to lend again” for LBOs, Barnes said.
The use of leverage is what gives buyouts the potential for double-digit annualized returns on the equity the investors put up. But leverage cuts both ways: If a business performs poorly, the chance of failure rises when high debt weighs on a company.
With interest rates rising as the Federal Reserve continues to tighten credit, all buyout transactions take on greater risk. A deal that made sense with a bank loan rate of 5.75% might not look good if the rate was to rise to 8%.
For now, rate fears aren’t likely to discourage cash-laden private equity firms from pursuing more deals, experts said.
“We’re in completely loose money time,” said one investment banker who asked not to be named. As always in the buyout business, he noted, “The challenge for the investors is going to be when and how you get out.”
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Biggest leveraged buyouts
*--* Deal value Date Target Buyer (In billions) announced *--* *--* RJR Nabisco Kohlberg Kravis Roberts $29.4 10/24/88 *--* *--* SunGard Data Systems Silver Lake Partners, Bain Capital, Blackstone Group, Goldman Sachs Capital, Kohlberg Kravis Roberts, Providence Equity, Texas Pacific Group 11.3 3/28/05 *--* *--* Beatrice BCI Holdings 8.2 10/16/85 *--* *--* Elders IXL Harlin Holdings 6.3 7/5/89 *--* *--* Amadeus Global BC Partners, Air France, Travel Dist. Iberia, Lufthansa, Cinven 5.9 3/11/05 *--* *--* Hospital Corp. HCA Management 5.7 9/15/88 of America *--* *--* Safeway Stores SSI Holdings 5.6 7/25/86 *--* *--* Southland JT Acquisition 5.2 7/3/87 *--* *--* Legrand Wendel Investissement, Kohlberg Kravis Roberts, HSBC Private Equity, WestLB, GS Capital 5.1 7/29/02 *--* *--* Intelsat Apax Partners, Permira Advisers, Apollo Mangmnt., Madison Dearborn 5.0 8/16/04 *--* *--* Metro-Goldwyn-Mayer Sony (U.S.), Texas Pacific Group, Providence Equity, DLJ Merchant Banking, Comcast 4.8 9/13/04 *--*
Source: Thomson Financial
