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.
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.