I appeared on CNBC’s SquawkBox program this morning, in order to discuss The Financial Times’ inane suggestion that Microsoft could be next on the private equity shopping list. As I told the equally-skeptical anchors, Snakes on a Plane will win a best picture Oscar before Microsoft gets acquired by LBO firms. For those of you (understandably) not awake at 6:45am, here is my three-part rationale:
LBO firms simply don’t have enough money
Commit that line to memory, because there are very few contexts in which it isn’t laughable.
S&P reports that the average $1 billion+ buyout includes around 30% equity, while the largest deal of late (HCA) came in at just under 17 percent. But Microsoft has a market cap of around $260 billion. Even if buyers were real aggressive and lowered the equity commitment down to just 10%, they’d still need to come up with around $26 billion. This simply isn’t doable, so long as: (A) The largest funds are around $15 billion and (B) Most firms are loathe to commit more than 20% of fund capital to a single portfolio company. Even if KKR, Blackstone, Apollo, Permira and TPG all committed that full 20%, you’d still be short by around $11 billion. And that doesn’t even take a bid premium into account, nor does it contend with mega-fund promises of fewer club deal going forward.
Bankers won’t bite
The FT acknowledges that this might be a deal without a viable exit strategy, and then says that it doesn’t matter. In other words, buyers could pay themselves back and generate some profit via financial engineering alone. If they can sell it back on the public markets, great. If not, they’ll just leave bankers holding the bag. Or maybe the bankers will kick the can down to the credit derivatives market. Either way, it’s not the LBO sponsors’ problem. Nifty theory, but only if the LBO firms never want to do another deal.
Fundraising will suffer
The biggest private equity market shift of the past 20 years is that the larger funds are now reliant on public pensions. The State of Washington, for example, committed $1.5 billion to KKR’s last fund.
So imagine if KKR suddenly helped buy Microsoft and — as the FT suggests – lays off lots of workers, sells off/shuts down a few divisions and ignores the rest because it’s already gotten paid via dividend recaps? No elected official in Washington would ever again be able to justify an investment in KKR, nor any other firm that helped strip jobs from one of the state’s largest private employers. Might be a tough sell in other West Coast states as well (think Oregon and California).
*** Look, I like speculation as much as the next pundit, but let’s keep it in the range of reasonability. The $80 billion ceiling holds for now, and all that will come out of the Microsoft pipedream is my television appearance.