The Private Equity Effect

As buyout firms hunt for underperforming public companies, many are trying to boost their stocks with asset sales, spin-offs, and restructurings

by Steve Rosenbush

Private equity firms are on the hunt like never before. With increasing amounts of cash at their disposal, firms like Blackstone Group, Texas Pacific Group, and Thomas H. Lee Partners are chasing more deals and hunting ever-larger prey. So far this year, the value of companies acquired through buyouts has more than doubled to $487.2 billion.

Almost no company is beyond their reach. In February, Texas Pacific, Kohlberg Kravis Roberts, and Goldman Sachs (GS) cut a deal to acquire the Texas utility TXU (TXU) for $45 billion, in the largest buyout ever (see BusinessWeek.com, 2/26/07, "How Green Green-Lighted the TXU Deal").

Now, a growing number of public companies are taking action to stay beyond the grasp of the private equity firms. They're spinning off assets, rethinking their portfolios, and overhauling their balance sheets to keep the buyout barons at bay.

There was a spate of such deals on June 4. Dominion (D) said it would sell its onshore oil-and-gas businesses to Loews (LTR) and XTO Energy (XTO) in two separate deals worth a total of $6.5 billion. General Electric's (GE) real estate arm said it would buy the Canadian operations of Dundee Real Estate Investment Trust. And Reuters (RTRSY) reported that American Express (AXP) had decided to sell its private banking unit.

Private Pressure

The value of spin-offs has increased 14% so far this year, to $56.8 billion, according to the market research firm Dealogic. It's clear evidence that private equity, coupled with powerful shareholder activists, are changing the way all companies do business. "Private equity guys are putting pressure on public companies to become more efficient and boost their share price," says John Altorelli, a partner and mergers-and-acquisitions specialist at law firm Dewey Ballantine. "If those companies don't do it, somebody will do it for them."

The private equity effect looks like it will only grow in the months ahead. With buyout firms raising larger war chests and pressing into new industries, more public companies will feel the heat. "It sure looks like it will pick up this summer," says Robert Profusek, head of the M&A practice at law firm Jones Day. "The trend toward deconsolidation appears to be accelerating."

Not so long ago, investors valued big companies with diverse asset portfolios. Such companies, epitomized by überconglomerate GE, were supposed to ride out the ups and downs of the economy. While one set of businesses was out of favor, another set of businesses would be in favor, ensuring a ready, reliable pace of growth. Now, even GE is selling off major chunks of its business, including its plastics operation in May for nearly $12 billion (see BusinessWeek.com, 5/21/07, "Saudi Firm Buys GE Plastics for $11.6B").