More Mergers of Buyout Firms on the Horizon? The desire to chase bigger or different kinds of deals could prompt more of these uncommon matches

Mergers of private equity firms are uncommon sights. Differences in culture, investment focus, and managerial style tend to stymie such hookups. So when the U.S. arm of Apax Partners Inc. and Saunders Karp & Megrue announced a deal to merge on the heels of AEA Investors and Aetos Capital’s merger announcement, industry experts started speculating. Those two deals followed the move a year earlier by Ripplewood Holdings LLC to link up with MidOcean Partners LLP. While some experts think this could be the bud of a trend, several who talked to Mergers & Acquisitions are skeptical that there will be a flow of private equity firm mergers. “I would not be surprised if we see a few more of these, but I don’t think it will be a big trend,” says Heather Stone, a Partner at Edwards & Angell who focuses on private equity and venture capital, technology, and financial services. “For one, private equity firms are very personality driven,” she adds. Personality and a cultural fit are top priorities for private equity firms. The firms are very tight-knit, and the most common reason a person doesn’t work out in a company is not because of his or her business qualifications but because of a bad fit. Successfully meshing cultures in corporate mergers can challenge even the most experienced integration team. Bringing together two different teams of deeply bonded people would probably work only in a limited number of private equity firm mergers. David Sands, a Partner in the Corporate Practice Group at Sheppard Mullin, warns that the ego factor also can’t be overlooked. “Even among firms with similar cultures, outlook, and approach to investing, at the end of the day, everyone thinks they do it better than anyone else.” Apax said that its merger provides greater ability to do cross-border deals and enhances its capabilities in sourcing “unique” deals. Those could be important elements in any future private equity firm mergers. Deals like Blackstone Group LP ‘s current pursuit of Italian mobile telecommunications operator Wind Telecomunicazioni SpA are out of the reach of many financial buyers, although PE mergers that combine domestic and overseas capabilities could make such deals a reality for more firms. “The ability to do deals worldwide is an important trend that could drive activity,” Sands says. Europe, for example, has become a hot investment spot – much more attractive than the saturated U.S. market. Reports show that last year, private equity funds invested nearly $160 billion in European companies, up more than 65% over 2000. The twist in the AEA Investors/Aetos Capital deal is that it melds a buyout firm with a real estate investor and manager of hedge funds-of-funds. This type of deal is part of a growing trend, as many hedge fund companies have muscled into buyout firms’ turf, and added to the competition for deals. One way for buyout firms to counter the additional competition is to launch a hedge fund, as Carlyle Group is doing. Other firms might decide to follow in AEA’s footsteps. “Deals that match a hedge fund with a private equity firm offer PE firms the ability to be more flexible and creative in their investment approach,” Sands says. But Stone notes, “The hedge fund industry has gotten more regulated, and PE firms generally try to avoid a lot of that regulation. However, I do see my hedge fund clients increasingly acting more like PE firms, with more focus on private deals and being longer-term investors. Still, I think their objectives and the way they deal with their investors are so different that those types of deals would present even more of a culture shock than a merger of two PE firms.” Copyright 2005 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com