The megadeal is a rare bird these days. Chief executives and buyout barons alike have shied away from them since 2008. Corporate bosses keep getting rewarded for more modest acquisitions while the likes of Glencore and Hewlett-Packard serve up fresh reminders of the hazards of going big. Private equity firms, however, may need to be bolder in 2013.
Despite their stockpiles of cash, companies have been reticent to splash out. From 2005 to 2008, there were 127 corporate acquisitions of at least $10-billion (U.S.), according to Thomson Reuters data. In the four years since the crisis, the figure has tumbled to 74. The comparable decline for private equity – using $5 billion-plus deals instead to account for the relative scale – is even starker, with the four-year total falling from 62 to 11.
Bank deleveraging, investor skittishness, global unrest and political dysfunction all have played their parts. Fortune 500 CEOs and boards, in particular, also have found that curbing their enthusiasm for so-called transformational deals has its benefits. Shareholders have typically been more receptive to spinoffs than big efforts to bulk up. Perhaps with post-crisis caution in mind, they also have welcomed bread-and-butter-type M&As with simple strategic logic and obvious cost savings.
Those carrots are accompanied by countervailing sticks. Glencore got hammered by investors for months before it could close its $90-billion acquisition of Xstrata. AT&T squandered $4-billion in the form of a break fee when it failed to persuade trust busters to allow its $39-billion purchase of T-Mobile USA. HP's aggressive push into software led it to buy Autonomy for $11-billion, most of which it recently wrote down to metaphorical market jeers.
Private-equity bosses lost some swagger, too, after high-profile humiliations like the record $44-billion buyout of TXU in 2007. Yet their business model may impede continued discipline. The biggest funds are sitting on about $230-billion of investor commitments they haven't yet deployed, according to research firm Preqin. That's probably some $750-billion of purchasing power once leveraged, enough for many years of supercharged buyouts.
The life cycle of funds is such that firms may soon lose capital and the associated fees if they don't use it. And interest rates on debt can only go up, something that could start happening by the end of 2013. Those should be the catalysts to make private equity's animal spirits stir.