Equity firms as buffers
We often cover mergers and acquisitions in this site, but we generally look at the deals where one company takes over another as it builds an oligopoly. But a major proportion of such deals are the acquisitions by private equity and buyout groups of division of companies as well as whole companies. Now equity firms often lubricate deals by financing direct acquisitions by same-industry companies, but they are increasingly often involved in buying companies themselves
The typical scenario for private equity companies is to snap up what is on the market (usually a company in decline or an unwanted, ill-fitting division); bring in a new financial regime which cuts losses, fires people, outsources activities, and perhaps joins it with other similar enterprises; and then either float the company in a stock offering or sell it to a company already in the industry in question.
With loads of private capital out there looking for a way to go beyond the weak returns of the stock and bond markets, there have sprung up a growing number of such firms. Some are older leveraged buy-out companies like Kohlberg Kravis Roberts (KKR) and Forstmann Little, survivors from the "Masters of the Universe" era of the 1980s. Others are well established companies that combine corporate expansion capitalization, consulting services and buyouts, the Carlyle Group, Apex Partners, Ripplewood Holdings, CVC Capital Partners and plenty more every day. These are generally American or British firms, and all have growing international operations. In fact, the strongest activity in recent years has been in Europe, where the progress of the EU has opened up lots of localized industries to foreign ownership and consolidation.
While such companies bring some management expertise to the table and often specialized in distinct industries like telecommunications, defense, or retailing, they are not building permanent corporations for the most part. The aim is turn the property around and resell it, not to be involved in long term business building. Then the profits are taken out and reinvested in new acquisitions.
As far as the world of oligopolies is concerned, I see these companies as buffers. Like buffers, they soak up "free radicals" in the solution, the unwanted companies and divisions. But they are also catalysts, after they alter those entities, they spin them off to join with companies that passed them by when first available.
Think of companies potentially up for sale or unwanted divisions on the auction block. In many cases, no appropriate buyer in the industry is available. That's for several reasons.
- First, no potential buyers might, at the time, have the cash or easily availability credit that would allow for the transaction.
- Second, potential buyers may not feel they have the management capacity to knock the unit into financial shape. That's especially true if the potential buyers are digesting other acquisitions.
- Third, the timing might not be right due to economic issues, industry changes, or other pressures. Companies in the midst of a quarter-to-quarter battle in an impatient stock market often can't afford to have the longer view that a small core of well-informed investors can.
Here a few examples of recent deals buffered and catalyzed by equity firms. Note also that many transactions (not listed here) are between equity firms, as they pass off properties form one to another.
- In 2000, Apax Partners acquired Symphonie On-Line, France's leading provider of clinical IT systems. In 2004, it sold it to Agfa Gaevert, the Belgian imaging company with a major concentration in medical imaging.
- In 1997, CVC Capital Partners backed a takeover of Dutch Trench Electric Holdings BV, a manufacturer of high-voltage electrical equipment including transformers. In 2004, it sold the company to Germany's Siemens AG, Europe's largest electronics and electrical engineering firm.
- In 2002, the Carlyle Group acquired a major take in BERU AG, a German maker of diesel engine specialist. In 2004, it sold its stake to Borg Warner, a US-based leader in automotive engine manufacturing.
- In 1999, the Carlyle Group bought EG&G'd Technical Services division, a US-based military project management company. In 2002, it sold it to URS, the leading project design and management contractor for the US government.
- In 2000, the Carlyle Group acquired Sippican Holdings, a US-based maker of naval electronic systems. In 2004, it was sold to Lockheed-Martin, the #1 US defense contractor.
- In 2003, Ripplewood bought out Japan Telecom. In 2004 Japan's Softbank bought the company.
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