Deal Mania
Shades of the '80s: The leveraged buyout is back in vogue
One reason buyout firms are so flush is that the alternatives have become meager for large investors. The S&P 500 index of large stocks is down 2 percent this year; bonds and real estate funds were underwater in the first quarter. The outlook isn't much rosier. The consensus is that equities will return 5 percent to 7 percent this year and some bond funds could post negative returns because of rising interest rates.
And even though the Federal Reserve is raising interest rates, the cost of debt is still near historic lows. "There's a lot of capital out there but not a lot of returns," says Robert Teitelman, editor-in-chief of The Deal, a publication that tracks the global deal business.
In such a drab investing landscape, private equity stands out. Buyout funds are a long-term investment--10 years is the norm, with the bulk of the return coming in the second five years. Money invested in U.S. buyout funds in 1994 has returned 19.6 percent a year, on average, according to Private Equity Intelligence. "Barring the bad years, net returns of 15 percent to 25 percent are achievable," says Mark O'Hare, PEI's managing director. Carlyle's Akerson says that's doable: "We're shooting for returns of 20 percent to 25 percent," he says.
Best of all for buyout firms, there's an abundance of companies in need of restructuring. Two on the radar are retailers J. C. Penney and Saks Department Store Group. And the technology sector, once considered too asset and cash poor for successful buyouts, is now all the rage.
One player, Silver Lake Partners, a six-year-old firm that organized the SunGard consortium, actually specializes in technology. "We only shop for investments in our neighborhood," says Glenn Hutchins, cofounder of the Menlo Park, Calif.- and New York-based firm. It has raised two funds totaling $5.9 billion, half of which is already invested. The firm led the $1.97 billion buyout of disk drive maker Seagate in 2000, which it took public again a little over two years later, turning a $382 million investment into a stake worth $1.8 billion.
The original idea behind leveraged buyouts was to purchase a company with undervalued assets and sell them off. Now, the goal for at least some deals seems to be to "look for good companies and make them great," says Hutchins. That's apparently the case with SunGard, a fast-growing firm with good cash flow. Hutchins says the company's value can be greatly enhanced with additional investment and commitment to its long-term strategy, "something the public markets generally do not tolerate."
Yet such enormous deals with multiple new owners will present operating obstacles. Will egos get in the way of unified and decisive management strategies when things go wrong? Will the abundance of private equity capital and competition among buyout firms bid up deals beyond profitability? Already, a number of the biggest players are finding some deals too rich. Says Akerson of Carlyle, which balked at the SunGard deal because of its price, "now comes the hard part."
THE TOP LBO FUNDS
FUND SIZE (BILLIONS OF DOLLARS)
J. P. Morgan Partners Global 2001 7.90
Carlyle Partners IV 7.85
Permira Europe III 6.70
BC European Cap VIII 6.57
Blackstone Capital Partners IV 6.45
Source: Private Equity Intelligence Ltd.
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