Buyout Firms Haven't Forgotten How to Go Hostile
Private equity's approach to hostile deals has come full circle, and investors needn't be spooked.
On Monday, KKR & Co. and CVC Capital Partners joined Silver Lake in agreeing to provide a combined $6 billion in convertible-note financing for Broadcom Ltd.'s proposed acquisition of rival chipmaker Qualcomm Inc. It's part of as much as $106 billion in total debt financing that Broadcom has lined up to back the megadeal.
The involvement of the trio in an unsolicited transaction isn't exactly a return to the "Barbarians at the Gate" days of deals like the raid on RJR Nabisco in the 1980s. Still, it does mark a departure from today's status quo.
These days, most private equity firms follow Warren Buffett's approach to unsolicited offers: Abstinence. It's a decision mainly driven by a desire to keep management teams on their side. That's an important consideration for serial dealmakers like Mr. Buffett and private equity firms fearful of tarnishing their reputations or being hindered from striking future proprietary and inevitably friendly deals. On top of that, some pension funds -- among the earliest private equity investors -- have been wary of any association with hostile deals and only handed over cash on the condition that firms would be precluded from the practice.
But such concerns appear to be waning, and for good reason. Data shows that buyout firms are migrating toward patterns of the past and have been willing participants in hostile or unsolicited deals, especially outside the U.S. The shift is somewhat necessary considering that firms continue to amass record amounts of capital, known as dry powder, which must be spent over a certain time frame. Concerted efforts in nations such as Australia -- home of four of the 10 targets listed below -- suggest potential desperation from some firms in their pursuit of geographic diversity:
Globally, dealmaking remains intensely competitive. Investors are under pressure to find situations that enable them to write checks that are meaningful enough in size, so it's understandable that they're seizing these opportunities. Plus, occasionally, these decisions can be made palatable to any stakeholders with objections. For instance, both Silver Lake and KKR can defend their participation in Broadcom's financing lineup because they previously profited from the 2005 buyout of Avago Technologies, the predecessor of Broadcom for which they recruited Hock Tan as CEO. 1
Regardless, even when there isn't the ability to team up with a strategic buyer or if they can't claim a long history or track record with a key executive, expect private equity firms to exercise less restraint when it comes to hostile deals. Sure, some may stick to the more reactive role of white knight and step in only as a result of activist shareholders agitating for change, which often forces companies to consider a sale or alternative transaction. 2 But with the largest buyout firms now able to dictate terms, in part because of seemingly insatiable demand from pension funds and other investors, there's scope for change.
Even if hostile deals remain sporadic, don't be surprised to see some firms push for flexibility by wiggling out of time-honored agreements that constrain them from partaking in such transactions. After all, it's in their DNA.
Silver Lake later rekindled its support of Mr. Tan when Avago bought LSI Corp. in 2014.
They could also do the agitating themselves through toehold stakes, although this strategy is relatively untested.
To contact the editor responsible for this story:
Beth Williams at email@example.com