Private Equity Acquisitions

What's up with these private equity firms? They seem to be on an acquisition spree lately..Acquiring startups is one thing, but acquiring companies whose market cap is in the 9 "0's" is just something else. I would have been surprised seeing one such deal every year, but this year is a totally different story...Qantas ($8.7 billion), Hertz ($15 billion), Clear Channel Communications, Sabre Holdings, Chrysler, Reuters, AllTel etc have all been targets of the same. DOW almost came under the radar and I think it is still under it :).

So, why do these private equity firms acquire these monoliths? Well, money is ofcourse the reason, but wouldn't it have been wise to buy them when the market cap of these companies was lower than current? Dow and NASDAQ are riding all time highs almost..couldn't they have satisfied their thirst with other start-up/midsize companies? Is there a lot of money floating in the market? Probably true, looking at how dollar is faring against other currencies...There are a couple of other reasons as cited by Professor Jacob H. Schiff (Investment Banking at Harvard Business School) here. Some excerpts below..

* An influx of money on the equity side from pension funds and overseas investors is helping create an explosion of LBOs.
* Hedge funds have joined banks as major providers of debt, creating a market with more favorable terms for investors.
* Although there have been deals that have gone sour, the private equity boom can be seen as mostly beneficial for both investors and the companies involved.


The modus operandi for Private equity firms acquiring large public organizations is something like this..
Public companies are acquired and then financial engineering is applied to restructure the companies. They are then sold to other private equity firms or they go public again. The profits on such deals can be huge and there are also massive fees that the private equity firms collect from the companies they acquire.

So, prime targets are basically companies that have a lot of potential, but are bogged down by their own culture and systems or probably just the way they do things..Private Equity firms inject new management too in the hope of steering the newly acquired elephant onto the right road. The risk is high (especially with the impression that re-engineered companies often carry an unreasonable price tag), but the returns are well worth it...

Well, just hope that these big games are beneficial to all involved, especially since I am in the midst of one :)