Private-Equity Firms Unlikely To Lead M&A Activities
August 30 2010 - 3:47PM
Dow Jones News
Private-equity firms may be sitting on an estimated $500 billion
of uninvested cash at the moment, but they are not ready to go on a
shopping spree just yet.
August has been a busy month for mergers and acquisitions, but
the bulk of the global volume has come from companies making
strategic buys, rather than private equity looking for financial
plays. Companies engage in "strategic" acquisitions when they see a
good fit with their current operations.
Also, "banks aren't as excited to loan to private-equity firms
as they would to corporates as they are still working their ways
through deals they financed private-equity firms (before the
crisis). Many of them are still under water," said Steven Gerbel,
founder and president of merger arbitrage hedge fund Chicago
Capital Management.
Data provider Dealogic said buyout firms led just $114 billion,
or 6%, of the global M&A volume so far this year, a decline
from the 17% they accounted for during the height of the
leveraged-buyout boom in 2006 and 2007. For those two years, there
were a total of $13 trillion worth of deals led by private-equity
firms.
"Private-equity funds don't have the stomach for another deal
that may fail," said a hedge fund manager, who declined to be
named. "The market is cheap now, but they are just going for the
absolute no-brainers where there are stable cash flows and no
element whatsoever of cyclicality."
The deals buyout firms have announced so far this year fit that
description.
Canadian private-equity Onex Corp. (OCX.T)-led acquisition of
British maker of car parts, industrial hoses and bath tubs Tomkins
PLC (TKS, TOMK.LN) for $4.7 billion, announced last month, is the
largest buyout so far this year, followed the $3.9 billion
acquisition of hotel chain Extended Stay Inc. by a consortium
formed by Blackstone Group LP (BX), Centerbridge Partners LP and
Paul & Co. Another private-equity giant, Carlyle Group Inc.,
announced last month it agreed to buy NBTY Inc. (NTY), a maker of
vitamins and nutritional supplements, for $3.8 billion.
The technology and pharmaceutical industries have been
especially active on the M&A front recently.
French pharmaceutical company Sanofi-Aventis SA (SNY, SAN.FR) on
Sunday went public with its $18.5 billion all-cash bid for Genzyme
Corp. (GENZ), ratcheting up the pressure on the biotechnology
company, while technology giants Hewlett-Packard Co. (HPQ) and Dell
Inc. (DELL) are still battling it out for data-storage company 3PAR
Inc. (PAR).
Chicago Capital's Gerbel said while private-equity firms can
provide the capital smaller tech companies the extra push their
businesses need, they may lose out to strategic acquirers.
"The problem is larger tech companies also have a lot of cash on
hand. Corporates, in this case, have an upper hand," he said.
There are industries, however, that corporates are shunning,
such as aerospace.
The auction for McKechnie Aerospace, which makes aerospace parts
for both commercial and military customers, earlier this month has
seven private-equity firms, including Blackstone Group and Carlyle
Group.
Logical industry buyers such as Orbital Sciences Corp. (ORB) and
Lockheed Martin Corp. (LMT) have shown limited interest, people
familiar with the matter told the Wall Street Journal earlier.
Orbital doesn't have the funds on hand for the deal, these people
said, and Lockheed is headed in a different strategic
direction.
Another industry private-equity firms may flex their muscles in
is the fragmented health-care service sector.
Royal Bank of Scotland Group PLC's (RBS, RBS.LN) sale of
health-care provider the Priory Group has drawn interests from
seven private-equity firms, including Blackstone Group, Apax
Partners and Kohlberg Kravis Roberts & Co., people familiar
with the situation said earlier. Bids are due mid-September, they
said.
-By Amy Or, Dow Jones Newswires; 212-416-3142;
amy.or@dowjones.com
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