Kohlberg Kravis Roberts’ purchase of the Indian software subsidiary of Flextronics highlights the importance of senior industry operators in helping to buy a business beating rival private equity firms’ bids.
The importance of industry executives advising on a bid has always been there but when all parties are able to access the high-yield debt markets on favourable terms it can become more important.
KKR’s trump card was hiring Singapore-based Flextronics’ former chief executive and current non-executive chairman, Michael E Marks, as one of 23 members of the firm in January. Marks is overseeing KKR’s technology investments and his first deal has been the US$900m leveraged buyout of Flextronics Software Systems.
And other buyout firms have also been following the same path. Nordic private equity firm EQT paid about €1.6bn (US$1.9bn) for German vehicle maker DaimlerChrysler’s engine manufacturing subsidiary MTU Friedrichshafen. Rüdiger Grube, a member of the DaimlerChrysler board of management, said why EQT won. “As the prices under discussion with the three bidders were very similar, we decided in favour of the bidder with the most convincing concept,” he said.
And EQT had drawn up its “concept” after hiring as adviser Eckhard Cordes, the former boss of DaimlerChrysler’s Mercedes Car Group for 30 years, and Rolf Eckrodt, another former DaimlerChrysler man.
Often, these special advisers help the buyout firm get comfortable with industry trends and how to add in debt covenant flexibility in case of external shocks to turnover and earnings. The alternative is to club with a trade rival or investor already in the related area, such as EQT joining with toll road and airport operator Macquarie to bid for travel concessions retailer SSP.
But local knowledge and a “golden notebook” of senior contacts in small and highly interconnected markets, such as Italy, means these advisers can also sometimes provide access to proprietary deal flow before it reaches an auction when the prices might be bid higher.
As a result, the use of advisers is only likely to increase.