Buyout barons go big, then go home

Contact: Brenon Daly

After totaling about $100bn in both 2006 and 2007, the aggregate value of acquisitions by private equity (PE) firms dropped to $27bn last year. And the way 2009 is starting out, we’re certainly looking at another down year for leveraged buyouts (LBOs). So far this year, we’ve seen just half the number of financial deals that we saw during the same period in each of the past two years, and spending has plummeted. The largest LBO so far this year is a mere $60m.

Obviously, the dealmaking climate has changed dramatically over the past three years for the buyout barons, who were once able to draw enough cheap credit to pay top dollar for some technology properties. On occasion, PE firms were able to outbid strategic buyers for companies, even though corporate buyers should be able to wring out more cost savings not available to buyout shops, which (theoretically) should allow them to pay more.

To get a sense of just how far valuations have plunged, compare the price that Chicago-based PE shop Madison Dearborn Partners paid for CDW in May 2007 with the current valuations of VARs that are still publicly traded. (We were thinking about that last week because Insight Enterprises lost half of its value when it said it would have to restate earnings going back a decade.) In its $7.3bn buyout, CDW went private at 1x trailing 12-month (TTM) sales and about 15x TTM EBITDA. In contrast, both Insight and PC Mall currently trade at just one-tenth the price-to-TTM-sales multiple (0.08x sales for both companies) and about one-fifth the price-to-TTM-EBITDA multiple (2.3x for Insight and 3.2x for PC Mall.)

PE deal flow

Period Deal volume Deal value
January 1 – February 17, 2009 20 $149m
January 1 – February 17, 2008 36 $879m
January 1 – February 17, 2007 44 $9.8bn

Source: The 451 M&A KnowledgeBase