The Buyout Binge

"More shareholders are extracting their pounds of flesh, and multiples are increasing," says Raphael Newman, a managing director in the due-diligence practice at Duff & Phelps. "It's becoming a sellers' market, and more sellers are willing to walk away if they don't get their price."

Josh Lerner, a professor of investment banking at Harvard University, says that conditions bode well for private equity for the foreseeable future. But he doesn't think that it can escape its cyclical nature. "It will continue to remain cyclical, but it will likely operate from a higher base," he says, meaning a return to the dormant days of the early part of this decade is improbable.

Others foresee anything but a soft landing. EVA's Stewart says that a slow normalization into a downward cycle is unlikely. "Engines that get going that fast are hard to slow down. They put together lots of infrastructure to do deals and they keep doing deals until they do bad deals," he says. "It's going to be a quick unraveling. They always overshoot."

Joseph McCafferty is departments editor at CFO.

Imitating the Masters

The perception that buyout firms are gobbling up undervalued companies on the cheap may be prompting some companies to leverage themselves preemptively. For example, Health Management Associates announced last January that it would take on $2.4 billion in new debt to finance a one-time $10-per-share dividend. While the move will lower HMA's credit rating from investment grade to junk levels, CFO Robert Farnham noted in a conference call that it would drop the company's cost of capital from the low teens to 7.5 to 8 percent. The move makes a private-equity buyout nearly impossible. Anheuser-Busch signaled that it was pursuing a similar strategy when it announced in December that it was moving to an "aggressive leverage target."

But such instances are few. "It's really shocking how difficult it is for Corporate America to repeat what private-equity firms have done," says Josh Lerner, a professor of investment banking at Harvard University. He says that while observers have long predicted that public companies would adopt plays from the private-equity playbook, such as using more leverage, they have been slow to do so. "They just don't seem to get it," says Lerner. — J.McC.

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