CORRECT(8/30):Private-Equity Firms Unlikely To Lead M&A Activities

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 $1.3 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

N B T Y (NYSE:NTY)
Historical Stock Chart
From Apr 2024 to May 2024