Private Equity Steps Back From Acquisitions

This isn’t the time to be down on private equity. They aren’t the bad guys and they brought a lot of value to companies in recent years. But the growth economics have changed. Private equity buyers have wrung out much of the financial value from these companies. When it comes to business acquisitions, it’s time to start building strategically. Now we’re going to see combinations that really make strategic sense, not just financial sense. And that’s going to make companies stronger.

Private equity is here to stay. They have got lots of cash, and in time they will come back in and make deals. Right now, there’s no doubt they are sitting on the sidelines. Their models are changing because they cannot access the amount of debt that they used to. So they will have to pay less for companies or take lower returns — that’s the choice they face. Naturally, they will prefer to pay less and get the same returns. A good result is that prices will normalize. For sellers, of course, that doesn’t look so positive, but the overall change is for the good.

Weaker, smaller companies, whether in the financial, manufacturing or service industries are experiencing some healthy fear right now. They recognize the potential value of being aligned with other companies, but just being the small independent standalone isn’t enough to make an acquisition attractive. Unless they have something unique to offer a buyer, they realize they will have to act to enhance their business model. That’s the positive effect.

So there are going to be some motivated sellers — not fire sales, but motivated sellers who see value in being part of a strategic partnership, just as Merrill Lynch realized that becoming part of Bank of America would produce a worthwhile combination. We’ll see players in many different industries that will be more receptive to a corporate acquisition of this kind. What we won’t see for some time is the highly leveraged market. Instead, we can anticipate much more equity in M&A transactions. It’s back to cash is king and the Golden Rule!

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    It’s also worth keeping in mind that in the near term there will be a lot of investment banking talent looking for work and that one area they will probably focus on is private equity. So, while at the moment, PE firms may hunker down a bit until they can safely raise some debt to use alongside the large amounts of firepower in their funds, they will at least be able to sift through the talent coming their way to pick out the best and the brightest.

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