Hi,
I've been studying some old transactions and was wondering if anyone can educate me on this - in what scenarios can PE firms win targets that are carve-outs versus strategics?
It seems like carveouts always need to have some added costs to support them as a stand-alone unit - this cost will be an actual cost for PE funds whereas for strategics, the cost is likely smaller due to their existing infrastructure (sales, marketing, overhead etc).
Yet, PE funds continue to bid for these assets. Are carve-outs inherently lower likelihood for PEs?
Thanks!
Most obivous reasons would be around assets that require a lot of organisational attention. Can be anything between disentanglement issues, low profitability, buy-and-build. If you can improve profitability a lot and you also have likely buyers, you have a solid PE case. Next to that the PE could run its models assuming a higher exit multiple (upside case, not standadr practice) because of synergies that can be achieved when the asset is acquired by a strategic eventually.
Why did people give MS to this?
It could be for a few reasons. Perhaps the PE firm has actually better if not equally comparable / reputable experience (in terms of IRR / prior exits achieved) in running similar targets vs. the strategic. Perhaps the management team prefers the transaction structure offered by PE (more cash now vs. stock offered by strategic, or may be the ability to retain future ownership of the business if they desire and make more money than they can if they were aligned with the strategic)...perhaps the PE firm has a longer term investment horizon which can matter if the industry is about to go through a storm that most strategics may not be able to weather...if all the strategics are publicly listed, perhaps the target doesn't want to be subjected to the onerous reporting required in the public markets...
Integration with another business is much tougher in practice - have seen a few deals where building these capabilities from scratch made more sense than trying to adapt them from the strategic buyers slightly different functionality / processes. In the deals th strategics didn't really have an advantage
If you look at Tyssenkrupp or however it’s spelled - there may be anti-trust issues and why would a firm want to sell one of their asset to their competitors?
Because the board is incentivized to maximize shareholder value and strategics often offer higher price.
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