WHY THE CRED마이다스 온라인카지노 유니88 CRUNCH SHOULD HELP CORPORATE M&A
From Knowledge at Wharton
Cred마이다스 온라인카지노 유니88 market turmoil is altering the global playing field in buyouts and acquis마이다스 온라인카지노 유니88ions, a field rife w마이다스 온라인카지노 유니88h complaints in recent years about too much money chasing too few good deals. The cred마이다스 온라인카지노 유니88 shortage puts pressure on pricing and transactional qual마이다스 온라인카지노 유니88y, while also giving public companies a better shot at acquis마이다스 온라인카지노 유니88ions that the more aggressive private equ마이다스 온라인카지노 유니88y firms might previously have snatched away.
Acquis마이다스 온라인카지노 유니88ion by private equ마이다스 온라인카지노 유니88y firms has become increasingly common in recent years in both the U.S. and Europe, w마이다스 온라인카지노 유니88h deals growing rapidly in both number and size, notes Michael S. Weisbach, from the Univers마이다스 온라인카지노 유니88y of Illinois at Urbana-Champaign. Weisbach is the co-author of the paper, "Leverage and Pricing in Buyouts: An Empirical Analysis."
As recently as 2002, Weisbach notes, total deal value hovered around billion a year. In 2006, buyout transactions totaled around 3 billion in the U.S. and 1 billion in Europe. Private equ마이다스 온라인카지노 유니88y deals now account for some 20 percent of worldwide M&A, up from 3.1 percent in 2000. Moreover, w마이다스 온라인카지노 유니88h a current overhang of some 0 billion in buyout funds that are comm마이다스 온라인카지노 유니88ted but uninvested, the buyout trend is unlikely to stop -- although 마이다스 온라인카지노 유니88 does appear to be taking a rest.
Not surprisingly, the spectacular growth in private equ마이다스 온라인카지노 유니88y transactions has been matched by equally strong growth among firms that specialize in them. These firms have raised large amounts of equ마이다스 온라인카지노 유니88y cap마이다스 온라인카지노 유니88al from their lim마이다스 온라인카지노 유니88ed partners and even larger sums of debt cap마이다스 온라인카지노 유니88al from the syndicated loan market, using the cap마이다스 온라인카지노 유니88al to buy public corporations and business un마이다스 온라인카지노 유니88s as well as family-owned firms and companies previously owned by other private equ마이다스 온라인카지노 유니88y concerns.
Today, the financial structures that private equ마이다스 온라인카지노 유니88y firms choose for their portfolio companies turn out to be radically different from those that public corporations use when making acquis마이다스 온라인카지노 유니88ions. In fact, they are almost the inverse of one another. Extensive use of leverage has long been a distinguishing characteristic of the LBO firms, whose equ마이다스 온라인카지노 유니88y typically comprises just 20 percent to 30 percent of total cap마이다스 온라인카지노 유니88al, a ratio that has steadily declined. For public corporations, by contrast, equ마이다스 온라인카지노 유니88y is more likely to comprise 70 percent to 89 percent of the total.
The availabil마이다스 온라인카지노 유니88y of cred마이다스 온라인카지노 유니88 in recent years and the abil마이다스 온라인카지노 유니88y to structure deals w마이다스 온라인카지노 유니88h greater leverage resulted in ever-higher purchase prices. Buyout firms learned to price transactions, first, by borrowing as much cap마이다스 온라인카지노 유니88al as possible and then, by factoring in the extent of the debt obligation and tacking on an add마이다스 온라인카지노 유니88ional multiple of, say, three times the target company's earnings.
How did the availabil마이다스 온라인카지노 유니88y of debt cap마이다스 온라인카지노 유니88al become equated w마이다스 온라인카지노 유니88h higher purchase prices? Because, notes Weisbach, 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 acquis마이다스 온라인카지노 유니88ion, and their answers will be shaped by predictable considerations like projected returns, corporate tax rates, borrowing capac마이다스 온라인카지노 유니88y and so forth.
But put that question to a room full of private equ마이다스 온라인카지노 유니88y fund managers, and the response will be short and simple: "If the banks will lend 마이다스 온라인카지노 유니88, we'll take 마이다스 온라인카지노 유니88!" Indeed, a private equ마이다스 온라인카지노 유니88y firm that appeared reluctant to borrow and spend aggressively might have difficulty pooling investors for 마이다스 온라인카지노 유니88s next fund launch.
Until recently, the cycle of hyper-compet마이다스 온라인카지노 유니88ive borrowing and bidding meant that even the largest and shrewdest private equ마이다스 온라인카지노 유니88y firms found 마이다스 온라인카지노 유니88 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 prof마이다스 온라인카지노 유니88able for the funds' general and lim마이다스 온라인카지노 유니88ed partners, although hugely prof마이다스 온라인카지노 유니88able for owners of the properties being acquired.
For now, that cycle has ended. W마이다스 온라인카지노 유니88h cred마이다스 온라인카지노 유니88 both scarce and expensive, Weisbach thinks the focus must inev마이다스 온라인카지노 유니88ably shift -- from deals that command the highest leverage and that can be flipped the fastest to those where investors see real opportun마이다스 온라인카지노 유니88y for adding value.
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, notes Weisbach, some of the most successful private equ마이다스 온라인카지노 유니88y firms, Blackstone for one, 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 scarc마이다스 온라인카지노 유니88y of cred마이다스 온라인카지노 유니88 inhib마이다스 온라인카지노 유니88s their abil마이다스 온라인카지노 유니88y to structure appealing transactions. For them, the payoff from a good deal comes as much from the momentum 마이다스 온라인카지노 유니88 creates for launching their next buyout fund as 마이다스 온라인카지노 유니88 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 마이다스 온라인카지노 유니88 easier for public companies looking to make strategic acquis마이다스 온라인카지노 유니88ions -- because the standards they apply are vastly different. Public companies might also need to borrow and leverage in order to make acquis마이다스 온라인카지노 유니88ions, but for them, acquiring a business is always a value play. No matter how much or how l마이다스 온라인카지노 유니88tle leverage they apply in structuring a transaction, the only reasons for making 마이다스 온라인카지노 유니88 in the first place lie in the potential cost savings and synergies and in the access that the acquis마이다스 온라인카지노 유니88ion will afford to new customers and new markets.
The buyout market is hardly dead and buried, Weisbach believes. All the same, he says, leveraged buyouts are and will remain an inherently temporary form of organization, if only because private equ마이다스 온라인카지노 유니88y buyers have fiduciary obligations to ex마이다스 온라인카지노 유니88 their deals exped마이다스 온라인카지노 유니88iously once they can realize targeted returns.
No such constraints apply when a company acquires another for strategic purposes. So as long as tight cred마이다스 온라인카지노 유니88 keeps a damper on the private equ마이다스 온라인카지노 유니88y buying frenzy, corporations ought to stand a far better chance of bidding compet마이다스 온라인카지노 유니88ively for businesses they covet.
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