The New Face of Capitalism
Private buyers are gobbling up some of the premier names in corporate America
Clubby. The funds are likely to keep getting bigger. In fact, Blackstone recently announced that it would bring its $15 billion fund up to $20 billion. Other large private-equity firms are building similar war chests. At the same time, they are often combining forces in "club deals." These accounted for $414 billion in buyouts over the past 12 months, according to Thomson Financial. This is roughly a 10-fold increase from the same period five years ago. Home-improvement behemoth Home Depot, whose shares are worth some $79 billion, and computer maker Dell, at around $56 billion, have both been bandied about as possible targets, if some of the biggest private-equity firms combined forces.
"If I represent a seller and I go to 40 buyers, half will be private-equity firms now," says Montague. "Ten years ago, there'd be maybe two."
But the amount of money chasing deals has bidden up prices and thereby crimped returns for some private-equity funds. There's an "illogical" element to parts of the market, complains Mark Jrolf of Heritage Partners, a Boston-based private-equity firm. He notes that some investor groups are paying well beyond what strategic, public-company buyers would in some takeovers, and "that doesn't make sense."
Attempting to avoid this competition, private-equity firms have increasingly looked both farther afield and farther up the food chain for their next deal. But in doing so, their activities have drawn the scrutiny of shareholders and regulators, and not just in the United States.
The Bank of England signaled its concern recently by calling the voracious appetite for leveraged takeovers one of the six greatest threats to the financial system, while the country's Financial Services Authority, Britain's version of the SEC, said this month that it is monitoring private-equity firms for insider trading and conflicts of interest. The FSA warned that the collapse of a large private-equity firm was likely, given the number of deals such firms were making and their high levels of debt.
Politicians have also weighed in. In Germany, a prominent lawmaker recently compared private-equity firms snapping up companies there to "locusts." And in South Korea, where the buyout firms are called the moktui, or "eat and run," trouble abounds. One lawmaker there has said that private-equity firms' interest in "short-term profits could lead to the drain of national wealth."
Private-equity players aren't always helping defuse the situation. The subject of the lawmaker's ire, Dallas-based Lone Star Funds, recently admitted that it broke South Korean tax laws when the firm's former head in the country embezzled $12 million. Now prosecutors are delving through Lone Star's Korea Exchange Bank deal looking for, among other things, evidence that the private-equity firm might have intentionally driven down the bank's share prices in 2003 before making its bid. Prosecutors are seeking the arrest and extradition of several members of the firm, including Lone Star Funds cofounder Ellis Short.
In the United States, the Justice Department's antitrust division sent out letters last month to several of the largest buyout firms requesting information on all their deals in the past five years. "There is no smoking gun that one can point to here," cautions Andrew Metrick, a finance professor at the University of Pennsylvania's Wharton School. "The values being paid are higher than that offered by the public market, and the directors don't have to sell."
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