LBOs: A bad case of buyers’ remorse
The long-term legacy of the LBO mega-deals has yet to emerge. Judging by their performance so far, things don’t look good. Louise Bowman reports.
TO SAY THAT the LBO market experienced a boom in the mid-2000s is akin to saying that the sub-prime mortgage market triggered a slight wobble in the financial system thereafter. Roughly a half of all private equity that has ever been invested was put into the market in that 30-month period. That shocking figure describes a frenzy of LBO activity, the long-term consequences of which will not be known for many years to come. Those in the industry might argue that the wisdom or otherwise of these transactions should not be judged until the investment periods are up – a simple ebitda-in, ebitda-out analysis. But this line of reasoning is disingenuous. The jumbo deals of that period provide an extraordinary insight into a market mentality that merely three years later seems utterly baffling.
The writing was on the wall for many jumbo LBOs as soon as the credit market seized up in mid-2007. Business plans that had been written amid the optimism of previous years were never going to be able to hold up once the bubble burst and the reality of double-digit leverage multiples hit home. But the reasons for failure are more complex simply than size and leverage.