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Are Big PE Deals Slowing?

January, 2006

A recent article in CFO Magazine suggests that the torrid pace of private equity mega-deals may slow in 2006. While we understand the reasons for why CFO believes this, we donít find them particularly compelling.

2005 was indeed a big deal. Total M&A deal value came in at about $845 billion versus 2004ís $692 billion, a leap driven in part by corporate Americaís new-found interest in divesting ďnon-coreĒ properties.

PE groups participated in 18 of the yearís largest 100 deals, those valued at more than $1 billion each. PE firms were more visible than ever before at these rarefied heights for several reasons:

ē Some of them, individually or working in concert, now control the huge quantities of capital necessary to play this big-boy game, more equity capital in some cases than even the largest operating companies in the targetís industry;
ē Then again, operating company bidders sat out many deals on the sidelines, hoarding their cash and perhaps getting vertigo at the high leverage used by PE groups to generate the ROE needed to make winning bids. Various widely-publicized accounting scandals and the regulatory overload of Sarbanes-Oxley also probably dampened operating company ďanimal spiritsĒ.
CFOís point is that 2006 may close down the cheap debt spigot and re-energized corporate buyers will shoulder aside PE competitors. But we think the Fed is slowing and may even suspend its clockwork interest rate ratchets, PE firms continue to attract massive amounts of new capital, and already in 2006 the announcements of more giant PE deals done or in the works keep on coming (see CSC , ACS and TIís Sensors unit).

In fact, our concern isnít a slowing in the number or size of big PE firm deals due to rising interest rates or corporate deal competition: itís the levels of debt PE firms saddle on their targets post deal. In our opinion, a spate of PE target bankruptcies like Bain Capital's KB Toys could be the real deal killer.

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