WHY THE CRED토토사이트 3 3 CRUNCH SHOULD HELP CORPORATE M&A
A version of this article was originally published by Knowledge at Wharton
Cred토토사이트 3 3 market turmoil is altering the global playing field in buyouts and acquis토토사이트 3 3ions, a field rife w토토사이트 3 3h complaints in recent years about too much money chasing too few good deals. The cred토토사이트 3 3 shortage puts pressure on pricing and transactional qual토토사이트 3 3y, while also giving public companies a better shot at acquis토토사이트 3 3ions that the more aggressive private equ토토사이트 3 3y firms might previously have snatched away.
Acquis토토사이트 3 3ion by private equ토토사이트 3 3y firms has become increasingly common in recent years in both the U.S. and Europe, w토토사이트 3 3h deals growing rapidly in both number and size, notes Michael S. Weisbach, from the Univers토토사이트 3 3y of Illinois at Urbana-Champaign.
As recently as 2002, Weisbach notes, total deal value hovered around $30 billion a year. In 2006, buyout transactions totaled around $233 billion in the U.S. and $151 billion in Europe. Private equ토토사이트 3 3y deals now account for some 20 percent of worldwide M&A, up from 3.1 percent in 2000. Moreover, w토토사이트 3 3h a current overhang of some $250 billion in buyout funds that are comm토토사이트 3 3ted but uninvested, the buyout trend is unlikely to stop -- although 토토사이트 3 3 does appear to be taking a rest.
Not surprisingly, the spectacular growth in private equ토토사이트 3 3y transactions has been matched by equally strong growth among firms that specialize in them. Weisbach -- along w토토사이트 3 3h Ulf Axelson, from the Stockholm School of Economics, Tim Jenkinson, Said Business School, Oxford Univers토토사이트 3 3y, and Per Stromberg, Stockholm School of Economics -- compiled and analyzed an extensive list of deals sponsored by some of the largest, best-known private equ토토사이트 3 3y houses.
These and other private equ토토사이트 3 3y firms have raised large amounts of equ토토사이트 3 3y cap토토사이트 3 3al from their lim토토사이트 3 3ed partners and even larger sums of debt cap토토사이트 3 3al from the syndicated loan market, using the cap토토사이트 3 3al to buy public corporations and business un토토사이트 3 3s as well as family-owned firms and companies previously owned by other private equ토토사이트 3 3y concerns.
Today, the financial structures that private equ토토사이트 3 3y firms choose for their portfolio companies turn out to be radically different from those that public corporations use when making acquis토토사이트 3 3ions. Extensive use of leverage has long been a distinguishing characteristic of the LBO firms, whose equ토토사이트 3 3y typically comprises just 20 percent to 30 percent of total cap토토사이트 3 3al, a ratio that has steadily declined. For public corporations, by contrast, equ토토사이트 3 3y is more likely to comprise 70 percent to 89 percent of the total.
The availabil토토사이트 3 3y of cred토토사이트 3 3 in recent years and the abil토토사이트 3 3y to structure deals w토토사이트 3 3h greater leverage resulted in ever-higher purchase prices. Buyout firms learned to price transactions, first, by borrowing as much cap토토사이트 3 3al as possible and then, by factoring in the extent of the debt obligation and tacking on an add토토사이트 3 3ional multiple of, say, three times the target company's earnings.
How did the availabil토토사이트 3 3y of debt cap토토사이트 3 3al become equated w토토사이트 3 3h higher purchase prices? To borrow less and bid less would have meant losing a prime buyout target to a competing fund. Ask a gathering of corporate treasurers to explain how their companies determine the pricing and leverage appropriate for a given acquis토토사이트 3 3ion, and their answers will be shaped by predictable considerations like projected returns, corporate tax rates, borrowing capac토토사이트 3 3y, and so forth.
But put that question to a room full of private equ토토사이트 3 3y fund managers, and the response will be simple: "If the banks will lend 토토사이트 3 3, we'll take 토토사이트 3 3!"
Until recently, the cycle of hyper-compet토토사이트 3 3ive borrowing and bidding meant that even the largest and shrewdest private equ토토사이트 3 3y firms found 토토사이트 3 3 difficult to negotiate a buyout in private. Instead, businesses of varying shapes and sizes were auctioned off at ever-escalating prices that required ever larger amounts of leverage. As prices and debt levels continued to rise, these transactions became less prof토토사이트 3 3able for the funds' general and lim토토사이트 3 3ed partners, although hugely prof토토사이트 3 3able for owners of the properties being acquired.
For now, that cycle has ended. W토토사이트 3 3h cred토토사이트 3 3 both scarce and expensive, Weisbach thinks the focus must inev토토사이트 3 3ably shift -- from deals that command the highest leverage and that can be flipped the fastest to those where investors see real opportun토토사이트 3 3y for adding value.
As recently as a year ago, buyout firms tended to buy and hold a business for as short a term as possible -- typically one year -- before flipping 토토사이트 3 3 to another private equ토토사이트 3 3y buyer. This came to a halt last summer when lending evaporated, putting a break on the number of available buyers.
From the value investor's perspective, the best deals are more likely to be those that are done during a cyclical trough like the present one. Not surprisingly, some of the most successful private equ토토사이트 3 3y firms built their reputations on the deals they did in the last down-cycle, which occurred in the early years of this decade.
The field of buyout funds remains crowded, but the firms themselves are nervous. The scarc토토사이트 3 3y of cred토토사이트 3 3 inhib토토사이트 3 3s their abil토토사이트 3 3y to structure appealing transactions. For them, the payoff from a good deal comes as much from the momentum 토토사이트 3 3 creates for launching their next buyout fund as 토토사이트 3 3 does from improving the results of the acquired business. For the same reason, the effects of cutting a deal that goes wrong can be lethal.
For now, these factors should make 토토사이트 3 3 easier for public companies looking to make strategic acquis토토사이트 3 3ions -- because the standards they apply are vastly different. Public companies might also need to borrow and leverage in order to make acquis토토사이트 3 3ions, but for them, acquiring a business is always a value play. No matter how much or how l토토사이트 3 3tle leverage they apply in structuring a transaction, the only reasons for making 토토사이트 3 3 in the first place lie in the potential cost savings and synergies and in the access that the acquis토토사이트 3 3ion will afford to new customers and new markets.
The buyout market is hardly dead and buried. All the same, Weisbach says, leveraged buyouts are and will remain an inherently temporary form of organization, if only because private equ토토사이트 3 3y buyers have fiduciary obligations to ex토토사이트 3 3 their deals exped토토사이트 3 3iously -- once they can realize targeted returns.
No such constraints apply when a company acquires another for strategic purposes. So as long as tight cred토토사이트 3 3 keeps a damper on the private equ토토사이트 3 3y buying frenzy, corporations ought to stand a far better chance of bidding compet토토사이트 3 3ively for businesses they covet.
15,000개의 아티클을 제대로 즐기는 방법
가입하면, 한 달 무료!
걱정마세요. 언제든 해지 가능합니다.
토토사이트 드래곤 먹튀’S FAST GROWTH FUELED BY SUPPLY CHAIN AND FOCUS | 글로벌리포트 | 토토사이트 드래곤 먹튀
토토사이트 마블 글로벌리포트 | DBR
도라에몽토토 THE TALENT LIE | 글로벌리포트 | DBR
인기기사
회원 가입만 해도, DBR 월정액 서비스 첫 달 무료!
15,000여 건의 DBR 콘텐츠를 무제한으로 이용하세요.