The Answer Is Private

What kind of buyers and sellers made the greatest strides in deal-making for 2004?

Kmart-Sears may be the big-name deal of the year, and JPMorgan Chase-Bank One may boast the biggest ticket price. But the big news in acquisitions was definitely private equity. That’s because last year’s strong M&A recovery — which by December totaled $664 billion, 19 percent higher than in all of 2003 — reflected a heavy concentration of deals involving major nonpublic sellers and buyers.

Leveraged buyouts alone reached a 15-year high, accounting for nearly one-tenth of 2004 deals in terms of value. Among the billion-dollar-plus LBOs: Cox Communications; Metro-Goldwyn-Mayer; the Loews, Cinemark, and AMC Entertainment theater chains; PanAmSat; and the Texas Genco Holdings unit of CenterPoint Energy. But small and midsize domestic private-equity (PE) transactions helped boost LBO volume to a record $64 billion. And that’s not counting PE sales or the initial-public-offering market, which PE sellers dominate.

Private buyers like Blackstone Group, The Carlyle Group, Apollo Management, and Kohlberg Kravis Roberts (KKR) expect their participation in overall dealmaking to increase sharply again this year, boosted by overflowing coffers and the recent move toward the formation of PE consortia.

And a push among private-equity firms to invest or cash out existing funds is driving up deal prices and making secondary buyouts — in which one fund buys from another — increasingly common. Last July, for example, Apollo purchased Borden Chemical from KKR for $1.2 billion. And through last August, Thomas H. Lee Partners LP had done six straight deals with other PE firms. “There’s so much private-equity money out there, we are creating our own little market unto ourselves,” says Kevin Landry, CEO of Boston-based TA Associates.

Dealing with consortia of buyers may take some getting used to, but publicly held sellers like CenterPoint don’t seem to mind. “I don’t know what went on behind the scenes,” says CFO Gary Whitlock of his Texas Genco negotiations with GC Power Acquisition LLC, a company formed by Blackstone, KKR, Texas Pacific Group, and Hellman & Friedman. “But in our discussions with them, it looked like we were dealing with one [buyer].”

“A Good Time to Sell”

Since the tech-market bubble burst four years ago, economic factors have kept many publicly traded firms out of the acquisition market, and left them looking to shed businesses instead. For a public company, “it’s a good time to be a seller,” says Josh Harris, founding partner of Apollo.

That is part of the recipe for the rising share of activity by PE firms. But another factor is the looming expiration date for many of the huge five-to-seven-year funds raised in 1999 and 2000. Thanks to the subsequent economic bust, PE companies are sitting on vast amounts of capital they have yet to invest. That overhang puts them in the mood to do deals on both sides of the table — acquisitions to employ their remaining funds, and asset sales to boost returns before the funds close.

Investors, moreover, are clamoring for a chance to participate in new funds. Even though the largest PE funds have lowered their expected internal rates of return to about 20 percent on average, PE funds still are seen as a far better bet than stocks and other asset classes. Says TA’s Landry: “Everyone in the private equity business knows that as soon as they invest the fund they have now, they can go out and raise a fund that is 50 to 100 percent larger.”


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