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October 23, 2006

Bigger Means Cheaper in Private Equity Buyouts

posted by MR WAVETHEORY at 10/23/2006 11:40:00 AM
The NY Times is writing that the Justice Department is continuing its probe into private equity bidding practices. One of the biggest in the business is Texas Pacific Group which is run by David Bonderman. The Texas Pacific Group (commonly referred as "TPG") is a private equity investment firm founded by David Bonderman, James Coulter and William Price in 1992. The firm is currently investing its fourth fund, TPG Partners IV, L.P., which closed in March 2003 with $5.3 billion in capital commitments, and the firm is raising its fifth fund, seeking as much as $14 billion, according to reports. Recent notable transactions include the leveraged buyout of Burger King in July 2002 with Bain Capital and Goldman Sachs Capital Partners (NYSE GS), the acquisition of MGM in 2005 with Sony Corporation ADR (NYSE SNE) and other private equity firms, and the acquisition of high-end retailer Neiman Marcus. TPG also owns Bally Shoe and has stakes in Petco Animal Supplies Inc. (Nasdaq PETC) and J. Crew Group Inc. (NYSE JCG).

I can see why David Bonderman actually wrote "There's less competition for the biggest deals" in his Powerpoint presentation if he were actually pitching a bunch of potential investors, but a bunch of merger lawyers? After all, you want your investors to feel that they are part of something unique and exclusive. While raising a new fund, that makes perfect sense. Nonetheless, it is an election year and that single Powerpoint slide is probably the shot that set off the fireworks.

"THERE’S less competition for the biggest deals,” David Bonderman, the founder of the Texas Pacific Group, told a room of merger lawyers during a luncheon in New Orleans that I attended last March. Because there are only a few firms big enough to be acquirers in large deals — and many strategic buyers are sitting on the sidelines — they are getting better buys. According to a survey of deals over the last two years by Dealogic, buyouts of companies worth $100 million to $1 billion (typically deals that did not involve clubs) had an average premium of 27.4 percent; deals over $1 billion (which usually involved clubs) had a premium of only 16.5 percent. I was trying to point out that the possibility of collusion is a real issue for the bankers and lawyers managing an auction process. At the time, I did not consider it a legal one. That’s because in buyouts, the seller — not the buyer — always has the upper hand. The seller decides whether a bid is high enough, and if it isn’t, there is no sale. The seller can typically also manage an auction process however it wants. In some cases, sellers have selected which private equity firms will be teamed up with one another, to avoid any one team from becoming too strong. If a private equity suitor objects to the process, it is invited to leave.

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