The Pay-Offs for LBO Sponsors Are in “Making Deals Happen”

Private equity consultant Scott Birnbaum is forecasting a new upsurge in corporate divestitures and believes that they offer leveraged buyout firms premium opportunities to generate value-creating deals. But the trick to producing exceptional value, he says, is for the LBO sponsors to beat bidding competitors to the punch rather than wait for the excess operations to hit the m&a market. That means short-cutting the deal process by identifying likely sell-off candidates, approaching the corporate owners with an acceptable offer, and getting a pre-designed value plan to work quickly at the new property. “There are tons of orphan businesses and technologies that strategic companies now are sifting through that represent a tremendous universe of high-potential buyout deals,” says Birnbaum, a vice president and head of the private equity practice at Mercer Management Consulting. “I think that the traditional strategic buyer short-term is going to be a strategic divestor. It’s a good place for financial buyers to be proactive.” Picking off the best divestments is just one of several tactics that Birnbaum recommends for financial buyers to seize the initiative and “make deals happen” in a marketplace beleaguered by tight financing and the static economy. In general, he proposes that LBO firms lay in a plethora of strategic and operational skills to augment their traditional financial engineering expertise and support a get-there-first deal search for the best companies. “At the heart of it is that with shopped deals, you are not going to find exceptional value, especially in this kind of market environment,” he notes. “The deals in which you have an investment thesis and then look for the ideal companies are more likely to create value because you are going into it with a value-creation idea.” Birnbaum further warns that if the sponsors don’t shift their modus operandi, they may face the wrath of big-ticket equity investors who are becoming restive over compressed returns and sub-par performance at many portfolio companies across the industry. The sponsors who almost effortlessly have raised billions from a range of pension and investment sources, known in the industry as limited partners (LPs), could find them less receptive in the future, Birnbaum suggests. “The restiveness is beginning to emerge,” he adds. “As soon as the valuations and ultimately returns start to get nailed, it’s only a matter of time before they react. I think that the LPs are going to increasingly demand more clarity about what’s in their scope and what’s not.” Other proposals for a more proactive approach include: Pick Your Spots – Specialization and focus can help, whether in specific industries, concepts, or talents. Regardless of the case, Birnbaum advises the specialist to stick to its knitting. “As soon as they go out of those boundaries, they get their necks handed to them,” he says. Check Out Non-Traditional Areas – Birnbaum says that the financial services sector has drawn a limited amount of buyout activity but may prove to be a fruitful area. “It has some really interesting cut-across themes because it serves other industries,” he notes. “I also see some significant opportunities in basic manufacturing and transportation.” He is not warm to telecommunications and technology because “it’s hard to catch a falling knife.” Operating and Organizational Skills – The best value-creation projects in the future may come from redesigning a business, and Birnbaum believes that sponsors themselves will have to call the shots on it. But he finds that sponsors usually lack the design architects who can handle the job within their three-to-five-year holding horizons. “You can’t any longer just provide lip service to working with management,” he says. “You have to beef up your capability to create value with a lot of these (portfolio) companies.”