Looking Back

Most industry pros think we’re in for a deal rebound in 2010. Now that we’re one quarter of the way through the supposed year of recovery, it’s a fitting time to take a look back at a similar time in LBO history—the first quarter of 2003—for a little perspective.

After the recession associated with the bursting of the dot-com bubble in 2000, the Sept. 11, 2001 terrorist attacks and the corporate scandals of Enron and WorldCom in 2002, 2003 was looked at as a year for the market to regain its footing. And indeed, that’s just how it started off. The first three months of 2003 saw U.S. LBO shops close 107 control-stake transactions for a total disclosed value of about $19.3 billion. That was way ahead of the same quarter a year earlier, when U.S. LBO shops closed just 45 control-stake deals worth a combined total of $3.04 billion in disclosed values. Moreover, the number of closed deals in the first quarter of 2003 was greater than any other quarterly total in the five years preceding it, according to Buyouts.

Now, after the burst of the housing bubble and the tightening of the credit markets in 2007, the collapse of Lehman Brothers in 2008 and the dregs of the Great Recession in 2009, it does appear that 2010 is offering some relief, albeit to a lesser extent than 2003. The 147 closed LBOs of the first quarter of 2010 represents a 21 percent quarter-over-quarter increase when compared to the fourth quarter of 2009, and it’s 23 percent ahead of the first quarter of 2009. But unlike the first three months of 2003, Q1 2009 is far from breaking any five-year industry records. This could be because the credit markets bounced back more strongly after the former recession than than have after this most recent one, possibly because this recession was caused in part by a credit bubble.

Another difference can be seen in the types of deals being done. Corporate carve-outs led the way in the first quarter of 2003 as large global conglomerates moved en masse to try and improve their financial health by restructuring, cutting debt and refocusing their strategies. Of all the control-stake transactions that closed in that quarter, carve-outs of divisions or assets accounted for nearly a quarter (23 percent), while making up about 52 percent of the total disclosed purchase price.

In the first quarter of 2010, however, corporate carve-outs accounted for just 3 percent of completed deals and 2 percent of the total disclosed purchase price. Rather, add-ons were the star of the past three months, accounting for 47 percent of all closed deals as firms continue to strengthen their existing portfolios and prepare for exits.