What Is The Impact Of Private Equity On The Market?
The summer doldrums, compounded by the recent credit crunch, set the stage for a fair amount of speculation about the M&A market. Hard news was scarce in August, so many articles we read indulged themselves in wondering who might buy whom next and even whether the M&A market would continue or collapse. This latter question, it seems to us, stems largely from a belief that the seizing up of the credit markets will prevent private equity firms from pursuing leveraged buyouts and privatizations and, in so doing, effectively eliminate one of the major drivers of the M&A market. We believe this interpretation fails to accurately assess the role private equity, however glamorous it may appear, has played in health care M&A activity.
The table on page 3 of this month’s issue reveals that from 2002 to the present, private equity groups, as buyers, have never accounted for more than 5% of deal volume in the health care M&A market. It also shows that in only two of the past six years has private equity accounted for more than 10% of the annual dollar volume. In 2006 and 2007 (year to date), private equity accounts for 18.5% and 16.9%, respectively. A few high profile deals, such as HCA’s $33.0 billion privatization by a consortium of PEGs in 2006, are clearly responsible for the recent spike in private equity’s share of dollar volume. The remainder of the buyers, at least 80% in any given year, are strategic buyers, with a sprinkling of other financial buyers, such as REITs in the Long-Term Care sector.
The table on page 8 of the September issue shows which sectors private equity dollars have been flowing to in recent years. With the lone exception of 2004, health care services sectors captured the majority of PE dollars committed in any given year. The same holds true for deal volume, as well; the health care services segment accounts for the majority of transactions announced in each year except for 2002. One reason for the disparity between PE interest in services over technology may lie in the fact that certain sectors, such as Hospitals and Long-Term Care, have real estate assets that can be separated from the business operations of an acquired company and subsequently leveraged to finance the original deal (think HCA, think Manor Care). In both the technology and services segments, individual assets or discrete units can naturally be sold off to the same end.
The chart on page 9 of this month’s issue tabulates the kinds of companies PE buyers targeted in terms of their status as publicly traded or privately held. The clear trend to emerge from the chart is that, with the exception of 2003, the majority of private equity dollars were focused on recapitalizing and privatizing publicly traded corporations. So far, shareholders have been willing to oblige these buyers as long as they could get their 20% acquisition premium. The top portion of the chart divides private targets into those sold by other PE firms and those sold by strategic sellers. While the strategic sellers in this cohort have tended to account for the majority of deal volume in any given year, since 2004 it is PE “flippers” who have dominated in terms of dollar volume.
Private equity deals may have had a psychological impact on the M&A market because they tend to be large, splashy and well-covered in the media, often with attempts to conjure the robber barons of old. But such anecdotal accounts appear neither to jibe with the figures nor to recognize the strong fundamentals in private equity, as detailed in our July and August 2007 issues. As we see it, private equity will continue to access the merger and acquisition market as a means of discovering and unleashing untapped value in companies.
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