On Friday, we wrote about the effect of the current private equity/M&A boom on the supply of equities in the U.S. market--and suggested that the dealmaking was beginning to feel a little frothy.
Saturday morning, we found the following headline on the WSJ's breakingviews.com column by John Paul Rathbone and Edward Chancellor: "Mergers Take It Up a Notch: Lengthening Premiums Point to Value Destruction; The Risk of a Buyout Bubble." Rathbone and Chancellor note, as we did on Friday, that conditions are more favorable for constructive buyout activity today than they were in the late 1990s. But they're concerned about the premiums seen in the latest deals: 85% for aQuantive and 46% for Reuters, for example, relative to an average of 39% in 2000.
Here's the key passage from Rathbone and Chancellor:
"A breakingviews.com analysis of these deals suggests that they are value-destructive: the premiums paid can't be justified by the synergies promised by the acquirers. That means shareholders in target companies have more to celebrate than those of the buyers."
Then this morning we learn that Alltel will be taken private in the largest leveraged buyout ever in the telecommunications industry ($27.5 billion, $23 billion of which is debt). This morning's relatively modest jump in AT reflects only part of the underlying premium, as takeout rumors sent the stock sharply higher in late December.
Then we hear CNBC's David Faber suggest that the AT premium could have been higher still if another private equity consortium had prevailed. At least one such group had offered a higher bid, and apparently the deal includes no "go shop" provision that would accommodate additional bids. That's intriguing and, as Faber notes, not necessarily shareholder-friendly.
Let's be clear: We don't know nearly enough about this deal to draw any firm conclusions. But if it generates excess economic "rents" for management and their investment bankers at the direct expense of shareholders...we would interpret that as evidence that things are getting a little carried away and that we're in the late stages, if not the final stage, of the private equity/M&A boom. And somehow we don't think this is the kind of thing Clayton Christensen and Scott Anthony had in mind when they wrote this.
Finally: Is this funny or frightening (or both)? Here's Faber, discussing this morning's ~$4 spike in ValueClick on speculation that it must be next: "I'm channeling 1999 here!"
Sources
John Paul Rathbone and Edward Chancellor, "Mergers Take It Up a Notch: Lengthening Premiums Point to Value Destruction; The Risk of a Buyout Bubble," Wall Street Journal, May 19-20, 2007
Ritsuko Ando and Jessica Hall, "Alltel stock jumps on $25 billion buyout," Reuters, May 21, 2007
"Private equity sees Alltel as possible target: report," Reuters, December 29, 2006
Clayton M. Christensen and Scott D. Anthony, "Put Investors In Their Place: Why pander to people who now hold shares, on average, less than 10 months?" BusinessWeek, May 28, 2007
