LBO/M&A Black Matter

Black Matter makes up more than 80% of all matter in the universe - except you can't see it. Like this mysterious substance, the failed leveraged buyouts and mergers and acquisitions which made up the overwhelming majority of extreme leverage and debt in the past 10 years have gone unnoticed. The finger of blame has been squarely pointed at sub-prime homeowners instead of singling out the mega financial casino transactions that have created the black hole of debt.

Let's take the GMAC transaction as an example - valued at nearly $17 billion. This is roughly equal to 85,000 single family homes at $200,000 - two or three of these bunk deals is a metropolis of 1,000,000 people foreclosed on.

Following up on a post earlier this week, please find below a more detailed description of the real elephant in the bailout room - leveraged buyouts and the mega bubble they created. The content was taken from Wikipedia.

The third private equity boom and the Golden Age of Private Equity (2003–2007)

As 2002 ended and 2003 began, the private equity sector, had spent the previous three two and a half years reeling from major losses in telecommunications and technology companies and had been severely constrained by tight credit markets. As 2003 got underway, private equity began a five year resurgence that would ultimately result in the completion of 13 of the 15 largest leveraged buyout transactions in history, unprecedented levels of investment activity and investor commitments and a major expansion and maturation of the leading private equity firms.

The combination of decreasing interest rates, loosening lending standards and regulatory changes for publicly traded companies would set the stage for the largest boom private equity had seen. The Sarbanes Oxley legislation, officially the Public Company Accounting Reform and Investor Protection Act, passed in 2002, in the wake of corporate scandals at Enron, WorldCom, Tyco, Adelphia, Peregrine Systems and Global Crossing among others, would create a new regime of rules and regulations for publicly traded corporations. In addition to the existing focus on short term earnings rather than long term value creation, many public company executives lamented the extra cost and bureaucracy associated with Sarbanes-Oxley compliance. For the first time, many large corporations saw private equity ownership as potentially more attractive than remaining public. Sarbanes-Oxley would have the opposite effect on the venture capital industry. The increased compliance costs would make it nearly impossible for venture capitalists to bring young companies to the public markets and dramatically reduced the opportunities for exits via IPO. Instead, venture capitalists have been forced increasingly to rely on sales to strategic buyers for an exit of their investment.

Interest rates, which began a major series of decreases in 2002 would reduce the cost of borrowing and increase the ability of private equity firms to finance large acquisitions. Lower interest rates would encourage investors to return to relatively dormant high-yield debt and leveraged loan markets, making debt more readily available to finance buyouts. Additionally, alternative investments also became increasingly important as investors sough yield despite increases in risk. This search for higher yielding investments would fuel larger funds and in turn larger deals, never thought possible, became reality.

Certain buyouts were completed in 2001 and early 2002, particularly in Europe where financing was more readily available. In 2001, for example, BT Group agreed to sell its international yellow pages directories business (Yell Group) to Apax Partners and Hicks, Muse, Tate & Furst for £2.14 billion (approximately $3.5 billion at the time),[19] making it then the largest non-corporate LBO in European history. Yell later bought US directories publisher McLeodUSA for about $600 million, and floated on London's FTSE in 2003.

Resurgence of the large buyout

Marked by the two-stage buyout of Dex Media at the end of 2002 and 2003, large multi-billion dollar U.S. buyouts could once again obtain significant high yield debt financing and larger transactions could be completed. The Carlyle Group, Welsh, Carson, Anderson & Stowe, along with other private investors, led a $7.5 billion buyout of QwestDex. The buyout was the third largest corporate buyout since 1989. QwestDex's purchase occurred in two stages: a $2.75 billion acquisition of assets known as Dex Media East in November 2002 and a $4.30 billion acquisition of assets known as Dex Media West in 2003. R. H. Donnelley Corporation acquired Dex Media in 2006. Shortly after Dex Media, other larger buyouts would be completed signaling the resurgence in private equity was underway. The acquisitions included Burger King (by Bain Capital), Jefferson Smurfit (by Madison Dearborn), Houghton Mifflin[20][21] (by Bain Capital, the Blackstone Group and Thomas H. Lee Partners) and TRW Automotive by the Blackstone Group.

LBOs are back, only they've rebranded themselves private equity and vow a happier ending. The firms say this time it's completely different. Instead of buying companies and dismantling them, as was their rap in the '80s, private equity firms… squeeze more profit out of underperforming companies.

But whether today's private equity firms are simply a regurgitation of their counterparts in the 1980s… or a kinder, gentler version, one thing remains clear: private equity is now enjoying a "Golden Age." And with returns that triple the S&P 500, it's no wonder they are challenging the public markets for supremacy.

By 2004 and 2005, major buyouts were once again becoming common and market observers were stunned by the leverage levels and financing terms obtained by financial sponsors in their buyouts. Some of the notable buyouts of this period include:

* Dollarama, 2004

The U.S. chain of "dollar stores" was sold for $850 million to Bain Capital.[23]

* Toys "R" Us, 2004

A consortium of Bain Capital, Kohlberg Kravis Roberts and real estate development company Vornado Realty Trust announced the $6.6 billion acquisition of the toy retailer. A month earlier, Cerberus Capital Management, made a $5.5 billion offer for both the toy and baby supplies businesses.[24]

* The Hertz Corporation, 2005

Carlyle Group, Clayton Dubilier & Rice and Merrill Lynch completed the $15.0 billion leveraged buyout of the largest car rental agency from Ford.[25][26]

* Metro-Goldwyn-Mayer, 2005

A consortium led by Sony and TPG Capital completed the $4.81 billion buyout of the film studio. The consortium also included media-focused firms Providence Equity Partners and Quadrangle Group as well as DLJ Merchant Banking Partners.[27]

* SunGard, 2005

SunGard was acquired by a consortium of seven private equity investment firms in a transaction valued at $11.3 billion. The partners in the acquisition were Silver Lake Partners, which led the deal as well as Bain Capital, the Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, Providence Equity Partners, and Texas Pacific Group. This represented the largest leveraged buyout completed since the takeover of RJR Nabisco at the end of the 1980s leveraged buyout boom. Also, at the time of its announcement, SunGard would be the largest buyout of a technology company in history, a distinction it would cede to the buyout of Freescale Semiconductor. The SunGard transaction is also notable in the number of firms involved in the transaction. The involvement of seven firms in the consortium was criticized by investors in private equity who considered cross-holdings among firms to be generally

As 2005 ended and 2006 began, new "largest buyout" records were set and surpassed several times with nine of the top ten buyouts at the end of 2007 having been announced in an 18-month window from the beginning of 2006 through the middle of 2007. Additionally, the buyout boom was not limited to the United States as industrialized countries in Europe and the Asia-Pacific region also saw new records set. In 2006, private equity firms bought 654 U.S. companies for $375 billion, representing 18 times the level of transactions closed in 2003.[30] Additionally, U.S. based private equity firms raised $215.4 billion in investor commitments to 322 funds, surpassing the previous record set in 2000 by 22% and 33% higher than the 2005 fundraising total.[31] However, venture capital funds, which were responsible for much of the fundraising volume in 2000 (the height of the dot-com bubble), raised only $25.1 billion in 2006, a 2% percent decline from 2005 and a significant decline from its peak.[32] The following year, despite the onset of turmoil in the credit markets in the summer, saw yet another record year of fundraising with $302 billion of investor commitments to 415 funds.[33]

* Georgia-Pacific Corp, 2005

In December 2005, Koch Industries, a privately-owned company controlled by Charles G. Koch and David H. Koch, acquired pulp and paper producer Georgia-Pacific for $21 billion.[34] The acquisition marked the first buyout in excess of $20 billion and largest buyout overall since RJR Nabisco and pushed Koch Industries ahead of Cargill as the largest privately-held company in the US, based on revenue.[35]

* Albertson's, 2006

Albertson's accepted a $15.9 billion takeover offer ($9.8 billion in cash and stock and the assumption of $6.1 billion in debt) from SuperValu to buy most Albertson's grocery operations. The drugstore chain CVS acquired 700 stand-alone Sav-On and Osco pharmacies and a distribution center, and a group including Cerberus Capital Management and the Kimco Realty Corporation acquired some 655 underperforming grocery stores and a number of distribution centers.[36]

* Equity Office Properties, 2006 – Blackstone Group completes the $37.7 billion[37] acquisition of one of the largest owners of commercial office properties in the US. At the time of its announcement, the Equity Office buyout became the largest in history, surpassing the buyout of HCA. It would later be surpassed by the buyouts of TXU and BCE (announced but as of the end of the first quarter of 2008 not yet completed).

* Freescale Semiconductor, 2006

A consortium led by the Blackstone Group and including the Carlyle Group, Permira and the TPG Capital completed the $17.6 billion takeover of the semiconductor company. At the time of its announcement, Freescale would be the largest leveraged buyout of a technology company ever, surpassing the 2005 buyout of SunGard.[38]

* GMAC, 2006

General Motors sold a 51% majority stake in its financing arm, GMAC Financial Services to a consortium led by Cerberus Capital Management, valuing the company at $16.8 billion.[39] Separately, General Motors sold a 78% stake in GMAC Commercial Holding Corporation, renamed Capmark Financial Group, its real estate venture, to a group of investors headed by Kohlberg Kravis Roberts and Goldman Sachs Capital Partners in a $1.5 billion deal. In June 2008, GMAC completed a $60 billion refinancing aimed at improving the liquidity of its struggling mortgage subsidiary, Residential Capital (ResCap) including $1.4 billion of additional equity contributions from the parent and Cerberus.[40][41]

* HCA, 2006

Kohlberg Kravis Roberts and Bain Capital, together with Merrill Lynch and the Frist family (which had founded the company) completed a $31.6 billion acquisition of the hospital company, 17 years after it was taken private for the first time in a management buyout. At the time of its announcement, the HCA buyout would be the first of several to set new records for the largest buyout, eclipsing the 1989 buyout of RJR Nabisco. It would later be surpassed by the buyouts of Equity Office Properties, TXU and BCE (announced but as of the end of the first quarter of 2008 not yet completed).[42]

* Kinder Morgan, 2006

A consortium of private equity firms including Goldman Sachs Capital Partners , Carlyle Group and Riverstone Holdings completed a $27.5 billion (including assumed debt) acquisition of one of the largest pipeline operators in the US. The buyout was backed by Richard Kinder, the company's co-founder and a former president of Enron who was ousted after a dispute with Enron’s founder, Kenneth L. Lay.[43]

* Harrah's Entertainment, 2006

Apollo Management and TPG Capital completed the $27.39 billion[37] (including purchase of the outstanding equity for $16.7 billion and assumption of $10.7 billion of outstanding debt) acquisition of the gaming company.[44]

* TDC A/S, 2006

The Danish phone company was acquired by Kohlberg Kravis Roberts, Apax Partners, Providence Equity Partners and Permira for €12.2 billion ($15.3 billion), which at the time made it the second largest European buyout in history.[45][46]

* Sabre Holdings, 2006

TPG Capital and Silver Lake Partners announced a deal to buy Sabre Holdings, which operates Travelocity, Sabre Travel Network and Sabre Airline Solutions, for approximately $4.3 billion in cash, plus the assumption of $550 million in debt.[47] Earlier in the year, Blackstone acquired Sabre's chief competitor Travelport.

* Travelport, 2006

Travelport, which owns Worldspan and Galileo as well as approximately 48% of Orbitz Worldwide was acquired from Cendant by The Blackstone Group, One Equity Partners and Technology Crossover Ventures in a deal valued at $4.3 billion. The sale of Travelport followed the spin-offs of Cendant's real estate and hospitality businesses, Realogy Corporation and Wyndham Worldwide Corporation, respectively, in July 2006.[48][49] Later in the year, TPG and Silver Lake would acquire

Travelport's chief competitor Sabre Holdings.

* Alliance Boots, 2007

Kohlberg Kravis Roberts and Stefano Pessina, the company’s deputy chairman and largest shareholder, acquired the UK drug store retailer for £12.4 billion ($24.8 billion) including assumed debt, after increasing their bid more than 40% amidst intense competition from Terra Firma Capital Partners and Wellcome Trust. The buyout came only a year after the merger of Boots Group plc (Boots the Chemist), and Alliance UniChem plc.[50]

* Biomet, 2007

The Blackstone Group, Kohlberg Kravis Roberts, TPG Capital and Goldman Sachs Capital Partners acquired the medical devices company for $11.6 billion.[51]

* Chrysler, 2007

Cerberus Capital Management completed the $7.5 billion acquisition of 80.1% of the U.S. car manufacturer. Only $1.45 billion of proceeds were expected to be paid to Daimler and does not include nearly $600 million of cash Daimler agreed to invest in Chrysler.[52] With the company struggling, Cerberus brought in former Home Depot CEO, Robert Nardelli as the new chief executive of Chrysler to execute a turnaround of the company.[53]

* First Data, 2007

Kohlberg Kravis Roberts and TPG Capital completed the $29 billion buyout of the credit and debit card payment processor and former parent of Western Union[54] Michael Capellas, previously the CEO of MCI Communications and Compaq was named CEO of the privately held company.

* TXU, 2007

An investor group led by KKR and TPG Capital and together with Goldman Sachs Capital Partners completed the $44.37 billion[37] buyout of the regulated utility and power producer. The investor group had to work closely with ERCOT regulators to gain approval of the transaction but had significant experience with the regulators from their earlier buyout of Texas Genco.[55]

* BCE

On July 4, 2008, BCE announced that a final agreement had been reached on the terms of the purchase, with all financing in place, and Michael Sabia left BCE, with George Cope assuming the position of CEO on July 11. The deal's final closing date is scheduled for December 11, 2008. With a value of $51.7 billion (Canadian), this is now the largest buyout in Canadian and worldwide history.