When private-equity firms go "clubbing," it's not to the latest hot spot. This past March, seven blue-chip private-equity groups announced that, as a syndicate, they would put up close to $11.3 billion to purchase data-processing and business-continuity specialist SunGard Data Systems Inc. in what is known as a "club" deal.
Although a seven-way deal is a rarity, the group approach is not unusual. In fact, the mergers-and-acquisitions world has been something of a club scene all year. Just days before the SunGard deal, a consortium comprising Kohlberg Kravis Roberts & Co. (KKR), Bain Capital, and Vornado Realty Trust picked up troubled Toys 'R' Us for $6.6 billion. Then, in May, a set of four private-equity groups bid $2.1 billion for appliance-maker Maytag Corp., which received a competing bid from a second consortium in June. And in recent months, two separate heavyweight syndicates were preparing bids for Spanish telecommunications company Grupo Auna SA, valued at more than $14 billion.
The obvious question is, why are so many investor groups banding together when some of the firms have enough capital to do the deals on their own? Industry-watchers point to a safety-in-numbers mentality that has been spreading since the stock market tanked in 2000. That free fall left investors with few good exit options — and gutted investment returns in the process. Others suggest that the best deals out there of late have been the megadeals — which could simply overcommit a single firm and elevate its risk.
"Clubbing affords firms the chance to do exceptionally large buyouts, such as the SunGard deal," says Daniel A. D'Aniello, managing director of The Carlyle Group. "No single firm would put $3.5 billion in equity into one deal." Carlyle just closed on a $7.85 billion U.S. buyout fund, and participated with KKR and Providence Equity Partners Inc. in buying satellite operator PanAmSat Holding Corp. last August for $3.35 billion. Thomas H. Lee, CEO of Thomas H. Lee Partners, which is about to raise a multibillion-dollar fund, recently told a Boston business group that while his firm can write a check for up to 30 percent of its fund for any single deal, on average, they put in 5 to 10 percent.
Clubbing among large private-equity firms also allows deal participants to reduce the competition for acquisition targets. "There are a number of multibillion-dollar funds, and they all compete for the same deals," explains John Rutherford, managing partner of middle-market buyout firm Parthenon Capital, which has $1.1 billion of capital under management. On the other hand, he says, if the firms "all match up into a couple of groups, rather than having six or eight bidders, it may help to get better pricing."
For CFOs of companies that are on the block, the club deal adds an extra level of complexity when talking with prospective buyers. For starters, private-equity investors are known for conducting painstaking examinations of a target's financial records. The requests for information are multiplied when a syndicate is involved.
"When they do due diligence, they ask a thousand questions, and that doesn't stop when they become board members," says Doug Barnett, CFO of UGS, a software and services firm based in Plano, Texas, which was bought by Bain Capital, Silver Lake Partners, and Warburg Pincus in May 2004. "You can't take it personally," he adds, noting that it's important for a CFO to develop a thick skin.
While the finance chief at any acquired company must provide plenty of data, Barnett says, answering to private-equity firms is different. "You'll have much more communication with them than with typical outside board members," he says, suggesting that "you should look at the sponsors who own you as if they were partners." His approach: "I try to touch base with our sponsor group at least once every week or two."
Private-equity firms themselves make no bones about the potential challenges facing the fortunate CFOs who manage to keep their jobs after a buyout involving multiple firms. One question that frequently looms, according to Carlyle's D'Aniello, is who makes the final decision should things get ugly in a multiple-owner scenario. "So far, there hasn't been a real blowup in a deal done by a consortium, when a tough decision had to be made," he says. "However, a blowup will happen someday, and then we'll get a better idea about how adept several firms are at making difficult joint decisions." Indeed, Rutherford points out that Parthenon Capital eschews club participation to avoid such conflicts among partners, noting that the firm's "preference is to be a control investor so that you know who can make a decision."
UGS has yet to face disagreement among its three buyers. "We're lucky that we have three investors who work very well together," says Barnett. "But if an issue arises, you do need three people to say yes."
Mike Wilhelms, CFO of automotive lender Triad Financial Corp., says his company's three equity sponsors — GTCR Golder Rauner; Goldman Sachs; and Gerald J. Ford, president of Hunter's Glen/Ford Ltd. — designated a managing partner to be his day-to-day contact after they purchased Triad in April. That partner is also chairman of the board. If a dispute arises, Wilhelms says having one point of contact should make for efficient communication and decision-making.
Potential disagreements aside, ownership by committee does have its advantages. In the case of Triad's buyout, "the transaction would never have taken place with just one investor," according to Wilhelms, who cites "the size of the deal and the complexity of the business" as reasons the deal required a group of investors. When he and his fellow management-team members began talking with GTCR about Triad, which had been a subsidiary of Ford Motor Credit, the private-equity firm indicated that it would like to bring in other partners, particularly ones with expertise in the financial-services sector. Hunter's Glen and Goldman Sachs shared that background, while the more-generalist GTCR brought additional capital and management expertise to the table.
"It's very valuable to have three groups with three different perspectives," agrees Barnett. And if the company needs to raise more capital, "it's better to have more pockets around the table," says Peter Falvey, a managing director of Revolution Partners LLC, a technology boutique investment bank. "If for some reason an investor leaves or you get in a fight, you have access to other resources."
Puddles, Rocks, and Parachutes
While the prospects are slim that an existing CFO will be kept on after a consortium buyout, experts says there are steps a finance chief can take to improve the odds. Yankee Group founder Howard Anderson notes that the CFO is "the one who can tell the investors what's behind the numbers." Hence, the finance chief can provide valuable insight to prospective buyers during due diligence. "The CFO is the one who knows where the rocks are under the mud puddle," argues Anderson.
Of course, pointing out the deficiencies of a business may not reflect well on those running that business — including its finance chief. "The best you can do is be honest and tell them everything," insists UGS's Barnett. "If you say, 'Here's an issue, maybe you can help us address it,' it's much better than if they find that issue during due diligence." And, he adds, "they will find it."
Full disclosure may be unpleasant, but CFOs who act with integrity when dealing with potential acquirers could benefit down the road. "If the private-equity guys say, 'This person is good, we can trust him,'" says Anderson, "he may be able to parachute into their next company."
Kate O'Sullivan is staff writer at CFO.
|Now In Syndication|
Some recent deals involving multiple buyers
|SunGard Data Systems||Silver Lake Partners, Kohlberg Kravis Roberts (KKR), Bain Capital, Texas Pacific Group, Blackstone Group, Providence Equity, Goldman Sachs Capital Partners||$11.3 billion||3/05|
|Toys 'R' Us||KKR, Bain Capital, Vornado Realty Trust||$6.6 billion||3/05|
|Maytag**||Ripplewood Holdings, RHJ International, Goldman Sachs Capital Partners, J. Rothschild Group||$2.1 billion||5/05|
|Universal Underwriters||Hellman & Friedman, Farallon Capital Management, GIC Special Investments, management||$1.1 billion||4/05|
|Brookstone||OSIM International, J.W. Childs Associates, Temasek, management||$445 million***||4/05|
|*Date of announcement|
**A second consortium comprising Haier American Trading, Bain Capital, and Blackstone Group is also bidding for Maytag.