Will CFOs and their executive management teams forge sensible deals if buyout firms begin to swamp them with offers?
An outbreak of heated bidding isn’t far-fetched. It’s been well documented that private-equity firms hold heaps of capital (“dry powder”) to invest — more than $500 billion in March, according to London-based research firm Preqin. They began to deploy it in the second quarter. Globally, the volume of private-equity-backed buyout deals tripled year-over-year, to $43.3 billion, according to Preqin. Almost half the deals were leveraged. Exits by PE firms numbered 140 and were up 57% in total dollar size, providing much-needed liquidity.
“Private-equity firms are dying for acquisition candidates,” says Ed Hackert, a partner in the transaction services group at Marcum LLP, a large accounting firm. “I’ve met with 25 to 30 PE firms over the last six months that we’ve never done business with,” he says. “They want to leverage our client base to identify potential deals.”
“Debt is more available, although it is still not a walk in the park,” points out Steven Kaplan, professor of entrepreneurship and finance at the University of Chicago’s Booth School of Business. “PE money is burning up fees — they need to put it to work.”
At the same time, the supply of quality assets remains somewhat scarce, say experts. The bar for a quality asset is higher today than three years ago: acquirers want sustainable revenue streams, proper internal and operational controls, cost-containment strategies, strong earnings patterns, and solid management. “When a good-quality asset comes to market, it’s a real feeding frenzy,” says Stephen McGee, a practice leader in M&A at Grant Thornton. Adds Justin Wender, former president of Castle Harlan, a private-equity firm: “Pristine companies are very salable.”
Growth Versus Synergy
From the seller’s point of view, it’s up to the CFO to discern whether it’s the right time to sell, and if a suitable buyer is out there. American Renal Holdings, which owns and operates dialysis clinics, found the right buyer last May. The seller, Pamlico Capital (formerly Wachovia Capital Partners), had grown the company from 25 clinics in 2004 to 83 clinics currently, quintupling its revenue. Private-equity firm Centerbridge Partners approached Pamlico about acquiring American Renal, says Neal Morrison, a Pamlico partner. “It had significant upside, and was hard to let go,” he says of American Renal.
Yet a private-equity sale made sense, especially with IPOs closed to the middle market and considering the market dynamics in dialysis clinics, says Morrison. Two companies controlled 65% of the market for dialysis clinics, but they were using a different business model in which they employ their physicians. American Renal’s disruptive model is to set up joint ventures with physicians, so selling to one of the large operators was out, since the company’s growth was coming at their expense. “They could pay us for synergies, but they would have struggled to pay us for growth,” Morrison says. “And management wanted to continue to build the business.”