The Reason Private Equity Is Losing Out to Cash Rich Corporations On the Big Deals

Corporate acquirers are called 'strategic buyers' because their reason for making an acquisition is ostensibly tied to long term future growth rather than short term financial gain.

But they are also noted for overpaying. Which raises questions about the validity of those strategies. JL

Javier Espinoza reports in the Financial Times:

Companies have become more willing to spend top dollar because they are sitting on cash and are seeking to use acquisitions to boost revenue growth. (They) are also becoming more confident.Strategic buyers are willing to pay higher prices in auctions when they can find cost-savings through synergies, while private equity groups often do not have that option unless they already own a similar company.
Private equity groups are losing out in fierce bidding wars for hot targets to cash-rich strategic buyers, driving down the share of deals involving buyout groups to the lowest level since 2009, according to analysis from Bain & Company, the consultancy.The research found that just 4.2 per cent of deals ended up with private equity buyers in 2016, down from 5.4 per cent in 2014. PE’s share of deals peaked in 2006 at 7.9 per cent.Recent examples of private equity groups being outbid by corporations include the purchase of Yahoo by Verizon after several buyout groups bid for the California internet search company.Likewise, the share of total mergers and acquisition activity by value involving buyout group purchasers has fallen from 9.1 per cent in 2014 to 8 per cent in 2016, Bain found in research released ahead of SuperReturn in Berlin, private equity’s main annual gathering.Buyout groups are continuing to be priced out in 2017. Consumer groups Weetabix and Continental Foods are each up for sale, and people briefed on both processes say they are largely being fought over by corporate buyers.Analysts said many companies have become more willing to spend top dollar because they are sitting on cash and are seeking to use acquisitions to boost revenue growth. Hugh MacArthur, head of global private equity for Bain, said companies are also becoming more confident as the distance from the financial crisis increases.Strategic buyers are also willing to pay higher prices in auctions when they can find cost-savings through synergies, while private equity groups often do not have that option unless they already own a similar company, industry observers said.Some private equity groups are taking up the ‘if you can’t beat them, join then’ approach by teaming up with corporations to bid on assets together.Recent examples include GI Partners joining Allscripts Healthcare Solutions to buy Netsmart Technologies, the healthcare software and services provider. Warburg Pincus and United Internet teamed up to bid on Host Europe Group, the web hosting firm, but lost out in the bidding process to strategic buyer GoDaddy.The Bain report also warned that fundraising may become tougher after a “torrid pace” in which demand among institutional investors has been strong. Some fundraisings closed up to four times oversubscribed. “A recession along with stagnant or falling stock markets could erode [investment], possibly causing investors to retrench,” the report said.