In the late 1980s, the boom in leveraged buyouts (LBOs) ended with a monster deal: A $25 billion transaction for RJR Nabisco in 1989. There was a bidding war from various private equity firms, as well as an extreme amount of greed to get the deal done. In fact, the saga was turned into a best-selling book, Barbarians at the Gate, and an HBO movie.
Lately, we are seeing a return of megabuyout LBOs from private equity firms, as their coffers have bulged from recent successful exits from deals like The Blackstone Group's buyout of chemical company Celanese (NYSE:CE). More money means bigger deals.
The latest megadeal is the $11.3 billion purchase of SunGard Data Systems (NYSE:SDS). On the news, the stock price rose 8.9% to $34.36. SunGard shareholders are to receive $36 in cash for each share.
The buyers include a consortium of private equity firms: Silver Lake Partners, Bain Capital, The Blackstone Group, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts, Providence Equity Partners, and Texas Pacific Group. They will pony up $3.5 billion in equity capital. The remaining will come from debt financing from JPMorgan Chase, Citigroup, Deutsche Bank AG, Goldman Sachs Group, and Morgan Stanley.
A key reason for private equity firms to collaborate on transactions is to lessen the competition, which should translate into a lower buyout price.
And, yes, this is the biggest LBO since the RJR Nabisco transaction.
Since the early 1980s, SunGard has built a solid business -- with more than 200 acquisitions. The company provides technology solutions such as disaster recovery, backup, brokerage, and trading systems; risk management; and back office systems. Customers don't often change such critical things willy-nilly.
This has translated into sustainable cash flows for SunGard, which makes it an attractive target for an LBO. Last year, net income at SunGard increased 23% to $454 million on a 20% increase in revenues, to $3.56 billion.
Since the rumor about the SunGard buyout deal hit on March 21, the stock has risen 44%. So, is it possible that the company might be selling itself short in the transaction? Well, that's not the case, according to SunGard CEO and President Cristobal Conde. He said: "This transaction offers great value to our stockholders and represents an endorsement of our business model." Perhaps, as a private company, SunGard can make the long-term decisions that would not be possible as a public company subject to Wall Street's demand for consistent earnings growth every quarter.
Yet Conde will stay on board and get a significant stake in the private company. This seems counter to his statement that the deal provides "great value" to shareholders. By staying and holding that stake, he seems to be declaring that he feels there's still a lot of value left in the company -- value that shareholders aren't getting with the current buyout price.
There's a key conflict of interest when management takes over a company: The very group set in place to act on behalf of shareholders is faced with the obvious temptation to pay them as low a price as possible for the company. Once the company is private, the unfettered management can pare down debt and restructure more easily, hoping to eventually bring it back to the public markets at a higher valuation.
Bottom line? I'd argue that current shareholders of SunGard don't reap a whole lot of benefit from this deal.
Fool contributor Tom Taulli does not own shares mentioned in this article.
