By-Lined Article
Setting the Stage
By Duane Morris Private Equity Connections
Summer 2012
Duane Morris Private Equity Connections
Private equity sponsors now find themselves more frequently competing against the bigger M&A players of the corporate world. Corporations in the United States are sitting on $2 trillion in cash,1 a substantial portion of which could be devoted to acquisitions. With $400 billion2 in dry powder of their own, private equity firms are ready and able to compete for deals. Credit is flowing back into the markets and so is confidence. Consequently, the competition for deals has intensified.
In short, both sides are positioned for engagement. Ronald Chang, Global Head of Mergers & Acquisitions at United Parcel Service of America, Inc., reports that his company was one of the many "strategics that began to stockpile cash." During the recession back in 2008–2009, UPS, like other corporates, reduced capital expenditures, eventually swelling the company's balance sheet to more than $5.5 billion, says Chang. "In 2010, we decided to start looking at strategic opportunities for growth."
Private equity firms are also locked and loaded. "There is a lot of fundraising activity right now," says Joseph Ibrahim, a New York-based principal for healthcare origination at global private equity firm The Riverside Company. Many funds are reaching the end of their investment periods, adding further urgency to deploy capital and make investments now. Leverage capabilities are creeping back to historic levels as well, says Ibrahim, giving financial sponsors more firepower to compete for deals.
It is not all competition, of course. When it's time to exit, private equity funds love a line-up that includes strategic buyers and financial sponsors. Strategic investors are still divesting assets, often into the portfolios of private equity funds, so plenty of cooperation coincides with competition for deals. This is likely to lead to a dynamic standoff for some deals, marked by intense bidding battles as strategics and sponsors begin to deploy their abundant capital reserves. Yet it also means many of these same rivals will be working on other deals that boost the prospects of both corporate investors and financial sponsors.
One thing is apparent: The seller determines the kind of process that the banker conducts. The seller sets the agenda from the beginning by controlling who participates in the bidding, how the process works and, most importantly, whether or not owners and senior management wish to stay involved. In general, where owners are looking for a complete exit, strategic investors have the advantage. If owners want to hold onto some of their equity and continue to play an active role in the business, financial sponsors have the advantage.
We thought it would be instructive to compare and contrast how financial sponsors and corporate acquirers put together deals, particularly in the middle market. This past April we invited two strategic investors, two private equity investors and one investment banker to evaluate the issues at the Duane Morris Private Equity Connections Forum held in Atlanta.3
Notes
- For Fortune 1000 companies as of November 2011, Press Release "Ernst & Young Says Fundamentals Will Finally Prevail over Uncertainty to Get Deals Rolling in 2012," December 7, 2011.
- PitchBook PE Trends, 2012 Q1 Expanded Presentation Deck, slide 28.
- Duane Morris' Private Equity Connections Forum was held in Atlanta, Georgia, on April 10, 2012. Follow-on interviews took place during May and June 2012.
