Private Equity Slugfest
Maybe the deal didn't seem up to Four Seasons standards. On Feb. 12, the luxury Four Seasons hotel group said it had agreed to a $3.37 billion buyout of the company, led by Chief Executive Isadore Sharp. The other backers of the deal include Microsoft (MSFT) Chairman Bill Gates and Saudi Prince Alwaleed Bin Talal. Investors had clearly been betting on a higher price than the $82 a share Sharp had proposed last year (see BusinessWeek.com, 11/7/06, "Barring the Door at the Four Seasons"). The stock had closed at $83.88 on Feb. 9 and slipped on news of the company's acceptance. "[W]e believe some investors may be disappointed," wrote analyst William Truelove of UBS (UBS) in a research note, "however, we believe this offer is good value."
As the mergers-and-acquisitions boom hits all-time records, investors and federal regulators have been concerned that there isn't enough competition for corporate buyouts. The Justice Dept. is investigating "club deals," in which several private equity firms work as partners to make a big acquisition (see BusinessWeek.com, 10/10/06, "Justice Probes Private Equity Firms"). If one group of firms includes several others in a single bid, it could decrease the chances that a competing offer would materialize and drive up the price of a deal. The concern in deals with one bidder, as was the case for the Four Seasons, is that the acquirer may be paying an artificially low price and selling shareholders may be getting less than they otherwise could.
Funds Fuel Buyout Battles
But new data show that the private equity market has actually become much more competitive in the past two years. According to market researcher Dealogic, there were multiple bids for 29% of the private equity buyouts last year, up from just 4% in 2005. Although 2007 is only six weeks old, the figure has risen sharply so far this year, with 70% of announced private equity buyouts having multiple bids. "There are many more competitive bids right now, and that is because so much more money is going around," says Robert Profusek, co-head of the M&A practice at the global law firm Jones Day in New York.
Pension funds, university endowments, and others have been pouring money into the category of late. Global private equity funds raised a record $406 billion in 2006, according to Private Equity Intelligence, a market researcher in London. Institutional investors have been lured in by the strong returns, with some top funds generating returns of 30% or more. The average return for the Standard & Poor's 500-stock index is 8.65% (see BusinessWeek.com, 2/6/07, "How Texas Pacific Cleaned Up at J. Crew").
The highest-profile deal in recent months ended in a battle: Last fall, Blackstone made a record bid for Equity Office Properties Trust (EOP), and then Vornado Realty Trust (VNO) countered with a competing offer. Blackstone ultimately won the battle, but was forced to raise its offer to $38.9 billion.
Unsatisfying Bid? Go Shop
Target companies are figuring out ways to elicit more competition. One technique is the so-called "go shop" provision. In this situation, a target company invites several potential bidders to review its books. The buyout firms understand that they need to make an offer at the upper end of their limit, essentially paying a premium to avoid the competition of a full-blown auction, Profusek says. Once a company signs a deal, it may entertain additional offers for a month or so. If it decides to go with another offer, it pays the original bidder a breakup fee.
A go-shop provision was included in the $2.3 billion buyout that auto-parts maker Lear Corp. (LEA) announced on Feb. 8 with financier Carl Icahn's American Real Estate Partners (ACP). Lear has 45 days to find another suitor, a move that would certainly make investors happy. Some investors have said the price is too low.
Even some of the massive club deals have managed to spark rival bids. Freescale Semiconductor last year agreed to be acquired for $17.6 billion by a group of private equity firms including the Blackstone Group, Texas Pacific, the Carlyle Group, and Permira Funds (see BusinessWeek.com, 11/27/06, "A Dicey Win for Blackstone"). They beat out a rival bid from Kohlberg Kravis Roberts and others. The Freescale deal had a go-shop provision, according to Profusek. Another buyout agreement with a go-shop provision was Ripplewood's acquisition of Maytag. Rival appliance maker Whirlpool (WHR) stepped in, but Maytag stuck with the lower all-cash offer from Ripplewood, according to Profusek.
Competition for All?
Go-shop provisions don't always lead to a rival offer. Realogy Corp. (H), the real estate franchisor that owns Coldwell Banker and other groups, included a go-shop provision in last year's $9 billion buyout agreement with private equity firm Apollo Management, Profusek said. But no one took the bait.
As for the Justice Dept.'s efforts, the fact that the number of competitive private equity bids is on the rise doesn't mean that any investigation is off base. It's possible that the market may be increasingly competitive overall, while there are specific cases where investors act or have acted in ways to inhibit competition. The Justice Dept. hasn't disclosed the details of its investigation.