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Yes90 - 14th Week
of 142005 /
108 What's A LBO?
Company Buyouts Are In SaysWall STREET LookRadio turnsdown a
Billion Tech Deal to Extend the Buyout Merger Boom
March 29, 2005 / 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 same group
wanted LookRadio, says Mark Soval, but they were not ready,
so the Group eyeballed the software firm SunGard. 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."
More Stories •
Converging
News 142005 / Buy Out and Merger Boom LookRadio
ByLines:
Editors Note
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Josie
Cory
Publisher/Editor
TVI Magazine
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Press Releases, They Said It and SmartSearch were used in
compiling and ascertaining this Yes90 news report.
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108 What's A
LBO? Company Buyouts Are In SaysWall STREET
LookRadio turnsdown a Billion Tech Deal to Extend
the Buyout Merger Boom
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