LBO firms deal with a changing market
There’s a saying that goes something like this, “The only thing you can count on is that things change.” This is proving to be the case with the leveraged buyout (LBO). The LBO firms that made such big moves in the ’80s are still around, and they have a good chunk of cash to use for deals (see charts below). (Charts omitted) Steven Galante of The Private Equity Analyst predicted LBO firms will raise $11 billion, a record sum. Yet, the kind of deals they are making are very different from those of the ’80s.
The market has changed. In the ’80s, stock prices were lower, companies were much more affordable, the multiples were better and there was more to choose from. The pickings in the ’90s market are much less abundant.
A lot of cash has poured into the market, driving prices up and making deals harder to find. The past successes have created a climate of feeding-frenzy. Also, there are a lot of people looking to do deals. This competition has made deal-makers more creative.
Some LBO firms are operating like venture-capital or equity funds, putting money into startup companies, taking minority stakes and buying bank debt. Others are becoming niche market players, seeking clients among ethnic, minority and demographic groups.
With the market glutted with cash, prices have gone up. One firm, expected to fetch $120 million recently, got over 20 bids and went for $155 million.
An optimist would see this and think the market was maturing. The change is just a phase of growth. One such optimist is Professor Michael Jensen of Harvard. Mr. Jensen warns of the risks of becoming leveraged on long-shot upstarts. Still he thinks the best firms will rise to the top and make the change. Others in the field echo that sentiment. This is where the market has gone, and the best people will make it work. There is nothing like past successes to make optimists. That and a little aggressiveness can do it.
There are other views. A pessimist might think the market is becoming super-heated. When it drops the crash will be disastrous. Pessimists might point to the Depression, to Japan’s recent market falls or to any other market adjustment, fact or instinct that supports the theory that what goes up must come down.
The truth may lie somewhere in between, or it may be at the extremes. Who knows? You do your homework, come up with your ideas, place your bets and wait and see.
Speaking of gambling, check out the charts on page 7491. Now there’s a hot market!
Copyright Quality Services Company Oct 10, 1994
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