Legal Briefs

Buyout shops may not be able to buy large public companies for the time being, but that doesn’t mean they can’t be a source of deal flow.

Instead of taking control of companies, buyout firms might provide an equity infusion enabling a company to undertake its long-shelved expansion plan. Or a strategic buyer and financial buyer could form a club in pursuit of a shared target.

These kinds of deals are already happening. The Carlyle Group teamed up last year with Prudential to buy a stake in China Pacific Life, while a host of buyout firms joined up with Sony to take control of MGM. Law firm Debevoise & Plimpton, along with several market observers, predicts these kinds of deals will become more common, but there are often legal strings attached to the investment capital provided by strategic buyers.

In sponsor-only club deals, typically one firm takes the lead. Strategic buyers, on the other hand, are often less willing to relinquish the reins of control, according to a recent report from Debevoise & Plimpton, and they don’t often share the same stomach for risk-taking that most buyout firms naturally assume. A strategic partner, for example, might want to see more indemnification from the seller, for instance, potentially lowering the competitive value of a bid.

Teaming up with a strategic buyer also may bring regulatory issues into play. Antitrust rules, for example, normally compel the disclosure of sensitive information to a potential buyer. When dealing with buyout firms, a corporation isn’t usually reluctant to share that type of information, but a corporate seller might be skittish about revealing too much to a corporate buyer that’s also a competitor, according to Debevoise & Plimpton.

Also, these strategic partnerships are likely to occur in heavily regulated industries such as financial services, insurance and gaming. As Debevoise & Plimpton points out, corporations prize their relationships with regulators and will want to lead any negotiations. While that can be good, the need to maintain a friendly relationship could prompt a strategic buyer into being more cautious with regulators than a buyout firm would be on its own.

One more potential peril: Dealing in heavily regulated industries will likely require buyout firms to disclose more sensitive information—including, say, the details of the compensation packages of top professionals at a firm. That could be an unwanted level of scrutiny for an industry that likes the “private” part of private equity.