Private cash fuels boom in takeovers
Elite private investors are buying up major companies at a record pace, in a wave of deals that is raining riches on Wall Street but also may be raising the risk of a financial bust.
Investors led by Blackstone Group announced late Sunday the biggest takeover ever by a so-called private equity fund, a $36-billion deal to buy Equity Office Properties Trust, the largest U.S. owner of office buildings.
The proposed purchase follows announcements in recent months of buyouts that would put firms including radio giant Clear Channel Communications Inc., casino titan Harrah’s Entertainment Inc. and food-service company Aramark Corp. in private hands, taking their shares off the stock market.
Takeovers are nothing new in American business, but historically the largest deals have involved companies whose shares are publicly traded buying other companies.
This year, the buyers behind the biggest deals are private equity funds -- run by generally secretive investment firms that raise money from pension funds, wealthy individuals and other investors who are hungry for double-digit returns on their capital.
“It’s obviously a boom,” said C. Kevin Landry, a managing director at TA Associates, a Boston-based private equity firm. “You can raise as much money as you want” to do deals.
A private equity fund typically buys a company using mostly borrowed money, then seeks to improve the firm’s bottom line through measures that may include refocusing the business or forcing cost cuts. The goal is to eventually sell the firm to another company, or take it public again, at a fat profit.
The buyout wave is enriching company shareholders because private equity investors usually pay more than a stock’s current price to clinch a deal. That is helping to drive share prices higher overall, analysts say; the Dow Jones industrial average has been hitting record highs.
Yet the surge in buyouts this year is making some on Wall Street wonder whether they’re witnessing a replay of other episodes when too many investors threw too much money in the same direction -- the dot-com boom of the late 1990s, for example, or a late-1980s company buyout wave led by corporate raiders. Both of those booms gave way to painful busts.
“It’s sort of feeding on itself now,” said Edward Yardeni, investment strategist at money management firm Oak Associates in Akron, Ohio. “You could make a pretty good case that a bubble is building in private equity, and that it will burst.”
Private equity buyers have announced about 1,000 U.S. takeovers this year worth a record $356 billion, according to data tracker Thomson Financial. That dwarfs the $138 billion in such deals announced last year.
Private-fund deals still account for a minority of U.S. takeover activity. In all, the value of announced corporate takeovers this year exceeds $1.2 trillion; most of those are company-to-company deals. But the rising clout of private equity buyers shows in the sizes of the deals they’re behind, experts say.
“Five of the six top deals this year are private equity. That’s never happened before,” said Richard Peterson, an analyst at Thomson Financial in New York.
Most private equity firms aren’t household names, but more may be on their way to that status as their corporate assets balloon. Big players include Blackstone, Bain Capital, Carlyle Group, Silver Lake Partners and Texas Pacific Group. One -- Kohlberg Kravis Roberts & Co. -- became famous for its massive deals in the 1980s.
More than any other factor, the ascendance of private equity buyers over the last few years reflects the willingness of well-heeled investors to pony up mountains of cash in search of better returns than they can earn in stocks or bonds.
“There is tremendous liquidity in the market,” said Brad Freeman, a 23-year buyout fund veteran whose Los Angeles-based firm, Freeman Spogli & Co., has a $1-billion private equity fund it’s putting to work. “Deals are being done because they can be.”
Private equity firms have raised an unprecedented $178 billion in new capital from investors this year, about 10 times what they raised in 1995, according to data firm Dealogic.
The cash comes from investors such as the California Public Employees’ Retirement System, or CalPERS, the nation’s largest public pension fund.
CalPERS has about $6.3 billion invested in buyout funds, said Joncarlo Mark, a senior portfolio manager. The pension plan expects to earn an annual percentage return in the upper teens on that money, he said. By contrast, U.S. blue-chip stocks have generated a return of 11.4% a year over the last three years.
“There are a lot of investors out there looking for yield,” said Josh Lerner, a finance professor at Harvard University.
But the success of buyout deals depends in large part on the purchased companies’ ability to handle the debt loads they take on with their new owners.
With many private equity funds wielding huge war chests, competition to acquire companies has become fierce, said Stephen Presser, a partner at private equity firm Monomoy Capital Partners in New York.
“At the moment, private equity firms are paying almost historically high prices for businesses, and are depending on those businesses to continue to grow in order to pay down their debt,” Presser said. “If the economy softens -- and someday it will -- those companies are going to have a tough time” managing their debt loads.
Some analysts also question whether companies that are targets of private equity buyers today can be substantially improved by their new owners.
“Companies already are under so much pressure to be lean and mean,” Yardeni said. “It’s not clear what they’re [private equity owners] going to bring to the table to make these companies more profitable.”
Still, corporate managers often are happy to attract private equity buyers. One reason is that top managers often participate as investors in buyouts, with the potential to reap hefty financial rewards if the company is eventually sold at a profit.
The costs and regulatory hassles of being a public company also are spurring corporate boards down the go-private road, said Scott Honour, a managing director at Gores Group, a private equity firm in Los Angeles.
“Companies are bogged down by Sarbanes-Oxley requirements,” he said, referring to the law Congress passed in 2002 tightening regulation of public companies after the financial scandals at Enron Corp. and other firms.
“Boards are saying, ‘Geez, we’re better off being private,’ ” Honour said.
That worries the Bush administration. In a speech Monday, Treasury Secretary Henry M. Paulson Jr. questioned whether the going-private trend might signal that U.S. regulation of shareholder-owned companies had become too severe, and was driving them out of the public market.
The deal wave also has attracted the attention of another branch of the government: The Justice Department reportedly is looking into the power wielded by private equity funds and whether the biggest players may be illegally colluding to increase their clout.
Times staff writer Walter Hamilton contributed to this report.
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The year’s top 10 private buyouts
Here are the U.S. companies that have brought the highest purchase prices from private equity funds this year:
Equity Office Properties: $36
Kinder Morgan: $27.4
Clear Channel Communications: $26.7
Harrah’s Entertainment: $25.4
Freescale Semiconductor: $16.2
Univision Communications: $12.6
Merrill Lynch Investment Mngmt.: $8.5
Sources: Bloomberg News, Thomson Financial, companies listed
Note: Deal values include assumption of debt.