Buyout boom

Buyout firms' $200 billion in deals shatters last year's record of $129 billion

September 03, 2006|By Laura Smitherman | Laura Smitherman,Sun reporter

Buyout firms flush with a record amount of cash are on the prowl.

HCA Inc., the nation's biggest hospital chain, was bought out this summer by a group of private investors in a $33 billion history-making deal. There's even speculation that insiders at Ford Motor Co. would consider a deal to go private to address its financial problems.

But the private-equity deal makers haven't been after only the top end of corporate America. They also are angling for America's small businesses in greater numbers.

"The net is being cast wide," said David Lazar, managing director at investment bank Ryan Beck & Co. "They are somehow getting in front of an owner in Iowa who makes bumpers for tractors and convincing him to sell his company. They are buying them small and building them up."

In the 1990s, every capitalist with a startup, namely any dot-com or tech business, was itching to take his or her company public. Nowadays, all kinds of capitalists are finding that the big money is to be made from buyout firms - and not necessarily from public shareholders.

So far this year $200 billion in buyouts have been undertaken in the United States, shattering last year's record of $129 billion for the entire year, Thomson Financial data show. More than 850 deals were done last year for companies worth less than $500 million, which is about one-third the size of the smallest company in the Standard & Poor's 500 stock index.

The volume of the smallest deals has jumped 75 percent in two years to $93 billion in 2005, according to American Capital Strategies Ltd., a Bethesda-based buyout firm.

In a buyout, deal makers buy companies and try to grow them by improving management or merging them with competitors. Then they take the companies public or sell them for a premium to the next bidder, sometimes another private-equity fund.

The deals can mean the departure of a company's CEO; even those who stay on after a buyout often leave within a few years. In some cases, buyouts can load a company with debt or fees to be paid to the private-equity buyers.

A company's owners often score big payouts, though figures are rarely disclosed. As buyouts are increasingly targeted at smaller companies, many entrepreneurs who might have been overlooked by firms in the past have been able to reap millions of dollars by selling. Baby boomers, in particular, have been able to amass instant nest eggs by unloading the family business that the next generation might not want.

The buyout boom also is reshaping industries on the local level, from biotechnology to retail, as private-equity funds combine businesses across the country under one corporate roof.

A number of Maryland companies have been snatched up in buyouts in recent months, including Barton-Cotton Inc., which designs direct-marketing campaigns for nonprofit groups; biotechnology companies PGC Scientifics Corp. and Kemp Biotechnologies Inc.; Soil Safe Holdings Inc, which treats contaminated soil for real estate developers; and swimsuit retailer Water Water Everywhere.

The buyout has become a more attractive exit for business owners as public companies have been put under more rigorous regulation after Enron and other corporate scandals.

Less hassle

"A large number of private companies are just saying, `I don't need the headache or liability of going public, and I would rather sell out completely to somebody even if it's a lower price than I could get in the public market," said Frank Adams, founder and managing partner of Grotech Capital Group in Baltimore.

Buyouts were first widely used in the 1980s, to great success and dismal failure. The highly leveraged purchase of RJR Nabisco by Kohlberg Kravis Roberts & Co. inspired the book Barbarians at the Gate and came to symbolize the Wall Street hubris of that era.

But much has changed since then. For one thing, today's leveraged buyouts, or takeovers using borrowed money, are often structured with less debt than in the past, industry experts said. Also, banks are more willing to lend money for a deal based on the acquired company's cash flow, as opposed to its hard assets, which has made it easier to obtain financing for smaller deals.

"Back then buyouts seemed to be associated with buying companies, taking on too much debt and then selling the pieces to pay off the debt," said Mark Opel, senior vice president of business development at American Capital. "That's not what private equity is about now."

Steady economic growth in recent years, historically low interest rates and good corporate profitability have contributed to the rise in buyouts, as investors see opportunity there. The trend has snowballed as institutional investors such as pension funds have plowed money into buyout funds, hoping to get higher returns than what stock markets have delivered.

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