Private equity driving merger deals to a record year


Wed, Dec 20, 2006 - Page 10

Merger Monday is back, and if the weekly announcements of multibillion dollar deals remind you of 2000, it is no coincidence: Private equity has not been this important since right before the stock bubble burst.

A flurry of deals announced on Monday at auto parts maker Delphi Corp, gaming company Harrah's Entertainment Inc and medical devices maker Biomet Inc hammered home private equity's starring role for the year.

"This is an unprecedented time," said William Kirsch, global chairman of private equity group at law firm Paul Hastings Janofsky & Walker LLP. "We're seeing a significant privatization of the American capital system."

Private equity mania has hit the point where giant companies can get a bounce if they are even rumored to be targets, as happened earlier this month to both Home Depot Inc and Deere & Co.

Mergers are on track to have a record year, and that would have been impossible without private equity, which was behind some of the largest US acquisitions announced this year.

At the top of the private equity tower was Hospital chain HCA Inc's US$21.3 billion deal to go private. Next in line are the US$19 billion deal by private equity firm the Blackstone Group for Equity Office Properties Trust, the country's largest publicly traded office building owner and manager; radio company Clear Channel Communications Inc's US$18.7 billion deal; and the US$15 billion deal for natural gas pipeline company Kinder Morgan Inc.

(If it feels like most of the deals come out on Monday, they do, after investment bankers and deal lawyers work through the weekend.)

Private equity was also involved in 34 percent of initial public offerings this year, according to Greg Peterson, a partner in Price-waterhouseCoopers' transaction services practice.

"That's off the charts," Peterson said.

Private equity firms are on track to raise US$146 billion by the end of the year, according to Merrill Lynch & Co. The last peak was in 2000, when private equity firms raised US$182 billion.

The deals keep coming because when private equity firms raise money, they promise they will buy companies, run them leaner and smarter than before and earn outsize returns. Private equity funds aren't built to sit on the money they raise, and they don't.

"They have to put the money to work to earn a return on it," said Steven Bernard, director of mergers and acquisitions market analysis at investment bank Robert W. Baird. "There's a lot of pressure to get the money invested quickly."

High valuations for companies are also luring sellers, especially those who missed the window in the last M&A run up during the tech boom, Bernard said.

Banks are also making heftier loans, which also boosts private equity. Interest rates are also low, by historical standards. And private investors are teaming up in "club" or "syndicate" deals, pooling their money to tackle ever larger targets.

The deals could screech to a halt if valuations get too high, Bernard said.

But one aspect of the deals may signal a permanent change. Back in the last round of privatization, the leveraged buyouts of the 1980s, private investors were called raiders; now they are called shareholder activists.

"Carl Icahn wears a white hat now, not a black hat," said Howard Horowitz, director of research at the Arbitrage Fund, a merger arbitrage mutual fund.