The Deal Economy's Great Power Shift

This doesn't happen very often: TPG Capital, the leveraged buyout firm started by David Bonderman, chased two acquisitions only to see them bought by cash-rich companies. TPG bid about £490 million ($806 million) for London-based shoe designer Jimmy Choo, according to two people with knowledge of the matter. Labelux Group, the owner of Bally footwear, won the auction on May 22 by paying about 12 percent more and offering a stake to Tamara Mellon, Jimmy Choo's co-founder, and other senior managers, say the people, who declined to be identified because the talks were private. Three days earlier, Tokyo-based Toshiba acquired Landis+Gyr, a Swiss electronic-metering company TPG was also vying to buy, for $2.3 billion, two people with knowledge of the transaction say.

After rebuilding cash reserves, companies are resuming acquisitions and competing against private equity firms for the same assets. Worldwide, companies with market values of at least $2 billion had cash and cash equivalents of $8.6 trillion in their latest reported full year, 21 percent more than the year before, according to data compiled by Bloomberg. "Corporations are now competing more aggressively with buyout firms," says Matthew Grinnell, head of a team at Barclays Capital (BCS) that advises LBO firms. "A lot of the cash on corporate balance sheets is finding its way into acquisitions."

Shareholders aren't pushing companies to return cash via dividends or stock buybacks because they would rather see it invested for growth, says Larry Slaughter, head of corporate coverage at JPMorgan Chase (JPM) in London. That's helped fuel the $1 trillion of acquisitions announced by companies worldwide this year, a 22 percent increase from the same period in 2010, Bloomberg data show.

The increased competition comes at a time when buyout firms have about $400 billion in so-called dry powder, or investors' money left to spend before their funds expire, according to London research firm Preqin. While that's down from a record of almost $500 billion in 2009, it's still more than the amount available in 2006, when buyout firms announced $538 billion of transactions. That's also about five times the value of deals announced in the last 12 months, according to Bloomberg data.

Private equity firms are struggling to beat prices paid by corporate buyers partly because the amount of bank debt they can raise to fund takeovers is limited, says Celine Mechain, a Paris-based Goldman Sachs (GS) managing director advising buyout firms. Thermo Fisher Scientific (TMO), a U.S. instruments manufacturer, acquired Swedish laboratories operator Phadia in March for €2.5 billion ($3.6 billion), about 16 times earnings before interest, taxes, depreciation, and amortization, according to people familiar with the deal. Buyout firms would be able to raise only about six to seven times Ebitda in debt, Mechain says. Goldman Sachs advised Phadia on the sale.

Another way corporate buyers are prevailing is "by making unexpected, preemptive bids to avoid auctions and by offering competitive incentive packages to the managers of the companies they target to win their hearts," says Mechain. That's what Labelux did in pursuit of Jimmy Choo. Spokesmen for Fort Worth-based TPG and Vienna-based Labelux declined to comment.

The shopping spree has an upside for buyout firms: It's making it easier to exit deals by selling investments. Corporate buyers purchased the four largest private equity-owned companies sold this year, acquiring $84.5 billion of assets from buyout firms in North America and Europe, triple the amount in the same period last year, according to Preqin. That corporate appetite is reducing the number of "pass-the-parcel" deals, when a company is sold by one private equity fund to another. "If a buyout firm can combine the best price with selling the asset to a strategic trade buyer, their investors are likely to consider that move very favorably," says Mark Pacitti, a partner at Deloitte corporate finance in London.

The bottom line: With $8.6 trillion of cash, corporations are spending freely to capture companies, often outbidding leveraged buyout firms.

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