Private equity financing is booming and
reshaping corporate America, even at
its highest levels. Prior to the current boom, 2000 was considered to be private
equity’s high watermark, with private equity being behind an estimated 4 percent of
all public company acquisitions. Last year,
an estimated 18 percent to 20 percent of
such acquisitions were funded by private
equity. Indeed, eight of the 10 largest private equity deals of all time closed in 2006.
Smart Business spoke with Donald K.
Densborn, shareholder/director at Indianapolis law firm Sommer Barnard PC who
works extensively in corporate financings, buyouts and investments, to learn
more about what’s driving the private
equity boom and how it might impact
businesses.
What’s driving the growth in private equity
transactions?
In my estimation, it is a confluence of
events that has brought the M&A marketplace to a tipping point. We have had a very
strong economy for a long period of time.
The federal tax environment has never been
more favorable, but there is a rush of concern that the new Congress may close the
window. The cuts in the capital gains tax,
first under Clinton and then under Bush, lit
a fire that refuses to burn out, even as we
have confronted terror and war. At the same
time, interest rates have been low, providing
a ready supply of debt capital to finance
these transactions.
In the public markets we have seen enormous wealth creation in the last decade,
but as returns have leveled, institutional
investors have taken interest in the potential for higher returns from alternative
investments, including private equity.
Corporate profits, for the most part, have
been fabulous. Public companies have
been making special dividends and engaging in stock buy-back transactions that
have fueled the system. All that money
needs to go somewhere.
One of the trends now is for private equity firms to buy public companies and take
them private. Recent Securities and
Exchange Commission rule-making has paved the way for a return of tender offer
activity. This all has played right into the
hands of the private equity specialists.
There is so much private equity money
available for deals, that private equity firms
now are often willing to pay more than
strategic buyers. Traditionally, it was the
strategic buyers who were willing to pay
more. In addition, it is now common for
private equity groups to move faster and to
keep target managers intact whereas
strategic buyers tend to be more cautious
and immediately want to consolidate.
Are there legal advantages to a public company going private?
The regulatory response to the Enron
fiasco, particularly Sarbanes-Oxley, has
made it even more burdensome for companies and dangerous for corporate executives to operate in public-company mode.
Mix in the growing criminalization of
business for example the Justice
Department’s ‘Thompson Memo’ that
essentially says they’ll throw the book at
companies that don’t have a strong corporate governance system, the SEC rule-making and listing requirements aimed at curbing corporate fraud and abuse, the
Supreme Court’s Caremark decision, activist state attorneys general, and all of
private securities litigation going on — and
you see that, beyond financial considerations, the regulatory environment is a factor in some ‘going private’ transactions.
Will these trends involving Wall Street firms
impact the private company marketplace?
If you are asking whether the KKR’s of
the world will start to train their sights on
smaller companies, I expect so. Today
there are many large private equity firms
chasing a finite universe of publicly-held
companies. I am sure they will continue to
look to public companies for opportunities, but I predict they will seek smaller
deals, especially if you consider add-ons to
platform companies, as time goes on.
If a private company is interested in exploring a buyout, what should it look for in a
financial adviser?
An investment banker or financial adviser is essential. If a capable adviser can be
found locally, then all the better as personal relationships count, close interaction is
required and the focus tends to be more
intense. Some advisers specialize by industry. Special industry expertise may be indicated, even if the adviser is remote, but I
tend to worry a bit about loyalty, confidentiality and priority with the distant specialist.
Does all the private equity activity dim the
outlook for strategic acquisitions?
Strategic buyers have not gone away and
don’t count them out. Corporate boards
and CEOs want growth. Record profits
have generated cash that needs to be
deployed. If their prospects for internal
growth decelerate, strategic buyers, especially in regulated industries, will continue
to seek growth by acquistion. These are
heady times.
DONALD K. DENSBORN is a shareholder/director with
Sommer Barnard in Indianapolis. Reach him at (317) 713-4402
or [email protected].