india going global.indd - The IIPM Think Tank

RESEARCH
prise, the recent $20 billion and $40 billion LBO deals
grabbed most of the M&A headlines in the fi rst quarter
of 2007. But today’s capital markets offer abundant
transactional opportunities for companies of all sizes,
from private, middle-market fi rms to publicly traded
large caps.
And lower return requirements among an expanding
pool of private capital means few industries are left
out of the action any longer. Private equity fi rms and
hedge funds have raised billions in new equity capital
over the last few years, and they haven’t hesitated to
put that money to work.
Private Equity-The next biggest thing in the M&A mar-
ket, how
Private Equity M&A: The Force behind the Seller’s
Market.
There are several reasons for the recent boom in
private equity M&A activity. First, today’s market is
over-flowing with private equity capital looking for
investments. Many private equity funds took advantage
of the strong market in 2005 and cashed out their
investment portfolios, distributing loads of cash to
their investors, many of which were pension funds.
The pension funds used the profits realized in 2005
and reinvested them last year in private equity investments,
which are expected to continue generating rates
of return well above what is available in the public
markets.
Furthermore, extraordinarily low spreads in the debt
markets and the aggressive expansion of hedge funds
into debt fi nancing offer plenty of cheap fi nancing.
Also, the compliance costs and potential liabilities
associated with Sarbanes- Oxley have driven many investors
and managements from the public markets.
Finally, private equity fi rms with six or seven year
horizons that were created in the heyday of private
equity investment in 1999 and 2000 are about to expire,
leading their managers to dispose of numerous assets,
which are increasingly being purchased by other private
equity fi rms (in so called “secondary transactions”).
All of these factors have led to a dramatic increase
in the amount of capital in the private equity market
and a substantial increase in the percentage of total
M&A volume involving private equity buyers and sellers,
which has swung the pendulum in the seller’s favor
in today’s M&A market, where hungry buyers are on
a buying spree.
Private equity players are participating in larger and
larger transactions, where traditionally private equity
players had stayed mainly in the middle market. Seven
of the ten largest buyouts of all time took place last
year. In recent years, private equity players have been
pooling their money to pay for large targets in socalled
“club deals.” Furthermore, some fi nancial buyers
are beginning to amalgamate such large portfolios of
assets that they can take advantage of synergies that
were once only available to strategic highly-capitalized
buyers, in effect themselves becoming strategic buyers.
These trends have resulted in the entry of private equity
funds into larger transactions, which means that sellers
throughout the entire spectrum of transaction values
are increasing their leverage ovessssr buyers. With so
much excess cash on hand, private equity funds are
competing in a race to deploy their funds. There is
an oversupply of money chasing a limited number of
quality targets, causing private equity buyers who want
to compete to offer sellers top prices and very seller
friendly deal terms.
With so much excess cash on
hand, private equity funds are
competing in a race to deploy
their funds
No Financing Contingency:
Most leveraged buyouts in the United States traditionally
have provided that one of the conditions to
a buyer’s obligation to consummate the transaction is
that the buyer has obtained the requisite fi nancing,
as those transactions by defi nition involve significant
leverage and sponsors do not maintain significant cash
on hand from operations. However, recent private equity
M&A transactions have been consummated with
no fi nancing contingency, including the following
major transactions: the $21.3 billion leveraged buyout
of hospital operator HCA by a consortium of private
equity funds including Bain Capital Partners, Kohlberg
74 Need the Dough July-October - 2007