Flush with billions of dollars to spend on acquisitions, the private equity market could change the face of corporate America for many years to come. That was one of the scenarios posed by a panel of experts speaking at a forum on the outlook for mergers and acquisitions and private equity transactions in 2007. The forum, presented by Gold Coast Business Forum and held in Westlake Village late last month, featured Geoffrey C. Bland, managing director of Wedbush Capital Partners, a lower middle market private equity firm; Allan P. Merrill, executive vice president of strategy and corporate development for Move Inc.; Gary Rabishaw, managing director of Barrington Associates, an investment banking firm; and W. Graeme Roustan, CEO of private equity firm Roustan Capital. Brent Reinke, corporate partner with Musick, Peeler & Garrett in Westlake Village, moderated. The panel agreed that the sheer cash power of private equity firms operating today has accelerated M & A; activity and, in many cases, driven up the prices offered for acquisition targets. “Seven is the new six,” said Rabishaw referring to today’s typical transaction, which typically amounts to seven times EBITDA and for larger deals, as much as 10 or 12 times EBITDA. The price escalation is due mainly to competition there is far more money chasing deals than there are deals to be had, the panelists said. A staggering $150 billion was raised last year by private equity funds, and there are 50 private equity firms, each with over $6 billion in capital to invest, according to Bland, who noted he has seen first hand a number of auctions that pitted as many as four private equity firms against one another in the final rounds. The proliferation of private equity funds has opened up a number of new options for company owners who want to liquidate. “A couple of years ago, options for companies wanting to liquidate were either selling to another firm, going public or issuing an ESOP (an employee stock ownership plan), Rabishaw said. “Now there are dozens and dozens of options. That changes the dynamics of the market.” Private equity investments allow some partners to cash out while others retain an ownership position or they can provide cash for expansion while allowing the current owners to retain management and some ownership of the company, options that were not possible under the traditional liquidation scenarios. In fact, most private equity firms prefer, even demand, that management of the company remain at the helm, making the decision to take on a private equity partner far more attractive for company owners. At the same time, the availability of private equity funds is likely to attract public companies, some of the panelists noted. Back in the 1990s, the only way to raise enough cash to grow a large company was to take the company public. But the deep pockets of many private equity firms today can give corporations the same cash flow opportunities without the headaches of public ownership. “I do see that a lot of public companies are going to end up in private hands,” Roustan told the group of over 100 business executives who turned out for the meeting. Roustan told of a conversation he had with an executive who bought his company back with private equity funding. “He said, a lot of companies are having trouble paying their executives without getting hammered in the press. There are all of these compliance issues and running a company quarter to quarter isn’t the best way to run a company. When you can plan longer you can plan better.” While the availability of private equity funding has opened significant opportunities for companies that want to sell, it has also created a number of challenges for buyers, the panelists noted. Chief among them, the competition between buyers has required that private equity firms add resources in time and personnel, not only to win the attention of their targets but also because, with so much money at stake, they must make certain they can reap acceptable returns for the investors. “For a private equity firm like ours, when we’re looking to buy companies now we’re trying to be very discriminating,” said Bland, whose company focuses on businesses in the $1 million to $10 million in revenue range. “Now we’re going in with a full army and trying to convince management we have a good structure.” Some of the panelists noted that many equity firms are under so much pressure to deploy the capital they have raised that they are, what Roustan called, “trading paper” and not necessarily bringing resources to the company they acquire. “Companies are asking, other than money, what do you bring to the table,” said Roustan. “A lot of people don’t have an answer. They’re so busy placing money they don’t step up and help the company.” Move Inc. (formerly Homestore.com) went out to seek additional funding after a turnaround effort that left the company considerably downsized and eventually struck a deal with Elevation Partners, which acquired a $100 million interest in the firm. “We picked a partner and the money part came second,” said Merrill. Fresh from a series of near-debilitating events including shareholder lawsuits and an SEC investigation, Move Inc. needed to rebrand the company and fortify it against what it saw was an increasingly fierce competitive environment. “We told them things that would have made paint peel, “Merrill said of the discussions it held with Elevation Partners. “But the benefit to this company is the ability to pick our partners.” The need to bring expertise to the companies they acquire has created a cottage industry in recruiting seasoned CEOs and other professionals who can not only help to run the company acquired, but who can quickly determine for the private equity firm whether the deal will provide the kind of return they seek. Even so, the panelists said, expectations with regard to returns have been lowered as a result of the prices acquisitions are commanding. Where private equity firms could once expect a 25 percent internal rate of return, they are now settling for something in the neighborhood of the high teens within a three-to five-year window. Despite the challenges, the panelists agreed that, at least for the foreseeable future, the outlook for M & A; activity and continued private equity is strong. What worries them, however, is a somewhat longer horizon and the potential for a high profile, big money deal that turns sour, a scenario that seems all the more likely because many of these transactions are being financed with debt. “When we have that one hiccup, that will change the industry,” said Bland. “One over-leveraged situation, one economic event. Barring that, I’m bullish, but I would be cautious using too much leverage today.”
