(Download data here: RaisingBids.pdf)
I’ve been taking some reader heat for my latest thesis du jour: Private equity firm adulation/omnipresence is causing public shareholders and strategic buyers to feel that initial take-private offers are artificially low – thus resulting in a need to either raise or abandon bids. Recent examples include Equity Office, Harrah’s, Elkcorp, Countrywide, Cornell Cos. and Eddie Bauer (with Clear Channel and Four Seasons possibly to come).
The criticism has been twofold: (A) Where’s the evidence that this is happening with greater frequency today; and (B) If true, where’s the evidence that it is impacting LBO firm returns?
Let’s tackle B first, if only because it cannot be tackled. This phenomenon is too new to be reflected in performance data, although most LPs I speak with expect mega-market funds to under-perform large and middle-market funds on an IRR basis (obviously megas produce more cash-on-cash). So we’ll table B and return to A.
Ok, this is equally unsatisfying, since most of the argument thus far is based on anecdotal evidence (see above). But Thomson Financial is at least providing us with some historical data (download here: RaisingBids.pdf)) that can help us begin a more quantitative conversation. The information is not specific to PE-backed bids, but instead focuses on all M&A offers for public U.S. companies. What it finds is that the percentage of such deals with raised bids rose from 4.97% in 2005 to 5.27% in 2006, although it dropped from 11.11% to 10.45% for deals valued at $1 billion or more. In both cases, the percentage of bid increase fell between 2005 and 2006.
I know this signals trouble for my argument – both A and, consequently B – but there are two caveats that are convincing me to hang on for at least a little longer. First, as I said previously, this is a fairly new phenomenon. I’m going to get the quarterly breakdown of 2006, and also await Q1 2007 data. Second, the Thomson info is not PE-backed specific, nor does it include situations in which shareholders rejected bids. This latter category would include Countrywide, Cornell Cos. and Eddie Bauer. Again, good for context, but not the whole story…