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LBOs Are Back, But Not For Everyone

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If you're trying to sell a company there are two basic but opposite approaches. In one, you approach the best buyer, negotiate exclusively, and generally do what you can to get them to put their best foot forward in exchange for not having the headache of a multi-round, winner's-cursed, might-get-topped-by-a-penny auction. In the other, you just run the auction and hope for the winner to get cursed, at the risk that the best bidders won't play, or won't bid aggressively, because they've been here before and understand the dynamic. There's no approach that is just a priori right; you have long heart-to-hearts with your banker and look at unilluminating comp sets and feel out your best-bet bidders and then sort of take a guess about what's the right thing to do.

There is an asymmetry here, though: if you do the exclusive approach, you get lots and lots of sued, because think of all the people you could have asked to bid but didn't (and scared away with breakup fees or whatever). If you do the auction approach, you're less likely to get sued, because it's harder to think of all the people who you did ask to bid but who refused because they didn't want to be winner's-cursed. The fact that negotiated deals still happen is a testament either to boards' and bankers' commitment to shareholder value, or to the fact that those negotiated deals really are as conflicted as plaintiffs' lawyers say they are and the boards and bankers are pursuing their own selfish agendas.

Anyway LBOs are back:

Total U.S. LBO volumes reached $28.87 billion in the third quarter through September 18, up 96 percent from the same period last year and outperforming a 32 percent growth in global leveraged buyouts, Thomson Reuters data shows. ... "There is enough liquidity and capacity in the high-yield market to empower financial sponsors to be aggressive in auction processes and, as a result, we're seeing robust competitive tension in recent sale processes," said [Barclays sponsors head John] Miller.

Which is nice!1 But mega-LBOs are not:

"Every once in a while you might see a large mega-deal, but I tend to think that very large deals will be more of the exception rather than the rule moving forward," said Kewsong Lee, managing director at private equity firm Warburg Pincus LLC.

"The liquidity is there to pull together the debt, but general partners (GPs) just don't want to write $1.5 to $2 billion commitments and fund them anymore because fund sizes are smaller and a lot of GPs have figured out that partnering in large consortia has been more difficult than not," Lee said.

Limited partners also are not sure they love the dynamics of these types of mega deals anymore, he added.

This quote is full of meaning. LPs don't love the dynamics for various reasons, one of them being perhaps that they invest with Warburg Pincus, or whoever, so that Warburg Pincus can use its smarts to find deals, not just to co-invest with every other PE firm that the LPs invest with. Private equity: the last bastion of non-index investing. Similarly, partnering in large consortia has been difficult for lots of reasons, including that, I mean, would you want to work with a bunch of private equity guys? If you're looking to ruthlessly manage a business and drive efficiencies, you don't want to do it via a committee with half a dozen similarly motivated competitors.

But it's fun to think that one reason may be the fact that the last time there were lots of private-equity consortium deals, everyone got investigated and sued for antitrust violations. That's got to make everyone a bit more careful about partnering up, at least without explicit permission from the target and a careful paper trail reflecting that permission. At the margin, you'd expect that to lead to fewer club deals, and in particular to fewer firms looking at the sorts of big deals where clubbing might be necessary. You don't want to get far along on a $20 billion buyout and then realize that you can't split the equity check.

Which is great, I suppose, will say the people suing the private equity firms over their 2007-era clubbing. Why should the private equity firms join up to buy a company? They should bid independently, and the company should be free to figure out how to get the most value out of them, whether by allowing clubbing or forcing a harshly competitive auction. That's the best way to maximize shareholder value.

And, maybe. The evidence that we have is that big companies aren't getting bought out at anticompetitive, too-low premiums. They're not getting bought out at all, at any premiums. You could imagine that collusively low premiums might still be better than no premiums, in which case you might wonder whether this result is good for shareholders.

Cheap financing fuels U.S. leveraged buyout boom [Reuters]

1.And an important corrective to the thing I wrote yesterday about how the piling up of corporate debt isn't that scary. The piling up of LBO debt maybe is.