On February 7, medical instrument giant Danaher said it would buy smaller rival Beckman Coulter for $6.8 billion, reportedly fending off private equity groups TPG and Blackstone, who were said to have been interested in Beckman as well. It was just the latest example of the power that strategic buyers are exerting in their tug of war with buyout firms, who had the upper hand for several remarkable years prior to the credit crisis.
Corporate acquirers are known as strategic buyers because they tend to view M&As as more than just a financial investment and historically can pay a higher price and extract greater value from an acquisition. During the credit boom, private equity firms were able to outbid strategic buyers because of their access to debt and their ability to use very high levels of financial leverage.
Over the last year, rising equity values have given strategic buyers a currency for transactions. An increasingly viable economic recovery has given corporate CEOs and boards the confidence to pursue deals. They have been gaining momentum since the start of 2011. “Strategics are back and CEOs and boards are feeling more confident — that is the single biggest factor that is driving activity this quarter,” one M&A adviser said.
Just a few years ago, private equity firms such as TGP and Blackstone captured headlines with large deals and huge returns.
That isn’t the case right now. The deal that has captured the most attention since the beginning of the year — Deutsche Boerse’s proposed acquisition of NYSE Euronext — involves one corporate entity buying another. It isn’t clear that the deal will succeed. There has been speculation that it could be disrupted by a rival bid from another strategic buyer, Nasdaq OMX, although it is far more likely Nasdaq would try and team up with ICE or CME. Private equity just isn’t driving the story.
The revival of corporate M&A deals began last year, with transactions such as Sanofi-Aventis’ $24.47 billion acquisition of Genzyme last August. It continued this year, with Duke Energy’s announcement on January 11 that it would buy Progress Energy for $25.8 billion.
In another environment, a private equity company might have had a play in either situation. Goldman, KKR and TPG bought energy company TXU for $48 billion in 2007. But last fall Blackstone failed last fall to win shareholder approval for its acquisition of power generator Dynegy.
One reason that strategic buyers are walking away with deals now is that private equity firms let them. Big takeovers such as TXU never lived up to their potential, and Sam Zell’s acquisition of the Tribune Company has been an outright disaster. Private equity firms are avoiding bidding wars and showing more restraint this time around.
While the post-crisis market opened up first for strategic buyers, financial sponsors have been more active over the last six months or so as credit conditions have improved.
There are plenty of recent cases in which private equity firms have prevailed in a battle with a strategic buyer, says Michael O’Bryan, co-chair of law firm Morrison and Foerster’s M&A group. Conexant, a semiconducter company, agreed February 23 to sell itself to private equity firm Golden Gate Capital for $196 million, and terminate a deal with strategic buyer strategic buyer Standard Micro Systems.
While strategic buyers may be applying the most pressure for now, neither side is running the table. Both sides are growing. Global strategic buyouts for the 12 months ending in February was $2.43 trillion, up from $2.04 trillion in the 12 months ending in February 2010, according to Dealogic. Financial sponsored buyouts for the 12 months ending in February were $199.21 billion, nearly double the $104.86 for the comparable period ending in February 2010, Dealogic said.
“What you are seeing is healthy competition, and the winning side will vary from situation to situation,” O’Bryan says.
