Merger pace slows to allow big business into the ring
Julie MacIntosh | Sunday, 25 May 2008
CORPORATE acquirers are making rich offers for big-name assets in spite of a lack of competition from private equity bidders.
This indicates that corporate dealmaking is picking up not just because buy-out investors have stopped inflating asset values, but because the once-frenzied merged-market has slowed to a pace large companies can handle.
Hewlett-Packard's latest $13.9bn deal to buy Electronic Data Systems (EDS) illustrates that corporate buyers have not turned frugal in recent months, even with buy-out bidders' hands tied by the credit crisis.
EDS was tagged frequently as a potential private equity target during the merger market's heady days. But with financing no longer available for a buy-out of that size, Hewlett-Packard had the time it needed to get comfortable with EDS' business to offer a 32.5 per cent premium.
Average deal premiums rose from less than 24 per cent in the first quarter of last year to 36.3 per cent in the first quarter of 2007 for companies worth more than $100m, according to Dealogic, even as buy-out bidders grew, relegated to the middle markets.
That suggests to some dealmakers that the willingness of private equity buyers to move through auctions and accept risks more quickly, and not merely the high prices they offered, may have helped them beat corporate competitors to the punch during the boom.
"The financial sponsors are machines at analysing companies, getting to an answer quickly and pulling financing together," said one person who advised on a range of boomtime deals.
"They are clearly able to move faster and in some cases that certainly gave them an edge."
The decision-making structures of buy-out firms tend to be more nimble than those at publicly traded companies. Their internal investment committees can often grant approval for a bid, or bless an increased bid during an auction process, more quickly than a public company's board of directors can react.
To even consider making an acquisition in the fist place, many large companies undertake time-intensive evaluation processes that can leave them choking on buy-out firms' exhaust fumes. In particularly sticky cases, such as when a target has unaudited financial statements or outstanding legal issues, corporate bidders might have to shift into a holding pattern while buy-out firms press forward.
Michael Boublik, Morgan Stanley's co-head of mergers and acquisitions for the Americas, said: "Private equity players have a different risk profile that, in some cases, allows them to assume exposures that corporate buyers might not be able to accept."
Armed with cheap debt, buy-out investors simply outbid competitors from corporate America in many cases. In some, such as with the sales of TXU and BCE, there were no clear corporate bidders against which to compete.
But even in situations in which corporate buyers were ready to pay up to win, they could find themselves overwhelmed by the pace at which buy-out bidder-heavy auctions were conducted. One person who has advised on many such deals called it an advantage of "process, not just price".
During the boom, capital rich investors blanketed potential targets with phone calls in a ritual that came to be known as "dialling for dollars". As those calls triggered auction processes, some companies suddenly heard that they had just weeks to submit a bid for an asset they had eyed for years.
Now that corporate suitors have more time to vet their targets, many dealmakers believe it could actually lead to more hostile deals, as boards of directors who have already approved a take-over bid grow determined to buy specific assets.
"Corporate buyers, when they have the luxury of targeting entities they feel are highly strategic, are not as worried about paying a fuller value," Mr Boublik said.
"They can justify paying a higher price by virtue of knowing they have fulfilled their due diligence and understand the synergies and the risks."
Under syndication
arrangement with FE
This indicates that corporate dealmaking is picking up not just because buy-out investors have stopped inflating asset values, but because the once-frenzied merged-market has slowed to a pace large companies can handle.
Hewlett-Packard's latest $13.9bn deal to buy Electronic Data Systems (EDS) illustrates that corporate buyers have not turned frugal in recent months, even with buy-out bidders' hands tied by the credit crisis.
EDS was tagged frequently as a potential private equity target during the merger market's heady days. But with financing no longer available for a buy-out of that size, Hewlett-Packard had the time it needed to get comfortable with EDS' business to offer a 32.5 per cent premium.
Average deal premiums rose from less than 24 per cent in the first quarter of last year to 36.3 per cent in the first quarter of 2007 for companies worth more than $100m, according to Dealogic, even as buy-out bidders grew, relegated to the middle markets.
That suggests to some dealmakers that the willingness of private equity buyers to move through auctions and accept risks more quickly, and not merely the high prices they offered, may have helped them beat corporate competitors to the punch during the boom.
"The financial sponsors are machines at analysing companies, getting to an answer quickly and pulling financing together," said one person who advised on a range of boomtime deals.
"They are clearly able to move faster and in some cases that certainly gave them an edge."
The decision-making structures of buy-out firms tend to be more nimble than those at publicly traded companies. Their internal investment committees can often grant approval for a bid, or bless an increased bid during an auction process, more quickly than a public company's board of directors can react.
To even consider making an acquisition in the fist place, many large companies undertake time-intensive evaluation processes that can leave them choking on buy-out firms' exhaust fumes. In particularly sticky cases, such as when a target has unaudited financial statements or outstanding legal issues, corporate bidders might have to shift into a holding pattern while buy-out firms press forward.
Michael Boublik, Morgan Stanley's co-head of mergers and acquisitions for the Americas, said: "Private equity players have a different risk profile that, in some cases, allows them to assume exposures that corporate buyers might not be able to accept."
Armed with cheap debt, buy-out investors simply outbid competitors from corporate America in many cases. In some, such as with the sales of TXU and BCE, there were no clear corporate bidders against which to compete.
But even in situations in which corporate buyers were ready to pay up to win, they could find themselves overwhelmed by the pace at which buy-out bidder-heavy auctions were conducted. One person who has advised on many such deals called it an advantage of "process, not just price".
During the boom, capital rich investors blanketed potential targets with phone calls in a ritual that came to be known as "dialling for dollars". As those calls triggered auction processes, some companies suddenly heard that they had just weeks to submit a bid for an asset they had eyed for years.
Now that corporate suitors have more time to vet their targets, many dealmakers believe it could actually lead to more hostile deals, as boards of directors who have already approved a take-over bid grow determined to buy specific assets.
"Corporate buyers, when they have the luxury of targeting entities they feel are highly strategic, are not as worried about paying a fuller value," Mr Boublik said.
"They can justify paying a higher price by virtue of knowing they have fulfilled their due diligence and understand the synergies and the risks."
Under syndication
arrangement with FE