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? Overhang Is Shrinking |
| An Industry's Temperature ?
March 28, 2005
Today SunGard, Tomorrow HP?
I had a pow-wow today with Terry Garnett of tech buyout shop Garnett & Helfrich Capital to mull over the $10.8 billion mega-buyout of SunGard Data Systems. The upshot: this is the first of many king-sized buyouts in techland. I'll get to the whys and wherefores in a minute. First, which company do you think is next? I said Computer Associates, to which Terry replied, "Would you rule out HP?"
No I would not. On the day HP announced it was ousting Carly Fiorina, I mentioned to a colleague that if I were a private equity investor, I would be pouncing on HP. But I was thinking of spinning out the PC business a la IBM or even bidding for the crown jewels: the printer business. Terry was talking about the whole enchilada. HP's current market cap is $57 billion. Assuming a buyout consortium paid the same whopping 40% premium that Silver Lake et al paid for SunGard (a generous assumption for any company), that would put HP's price tag at about $80 billion -- almost eight times the size of the SunGard deal.
Here's why that's not such an insane notion. First, consider the giant cash hordes that many private equity shops are sitting on. Then imagine those hordes growing even bigger. (This amp goes to 11!) This year, The Blackstone Group, Warburg Pincus, and Goldman Sachs Group are each expected to raise a fund in the neighborhood of $8 billion. The Carlyle Group just closed a $7.85 billion U.S. fund.
Now, consider that the debt-to-equity ratio of the SunGard deal was about 3:1. Banks like Citigroup and JP Morgan Chase like to take care of their best customers (i.e. KKR, Blackstone, et al). Plus, for the first time in history, the tech industry has reached a stage of maturity where companies like Sungard have predictable revenues that go cha-ching like clockwork every quarter. Banks like that. With 3:1 leverage, any cash the PE firms can put up from their funds gets quadrupled. If you get a dozen of these firms around a table, pretty soon HP doesn't look so big.
Garnett & Helfrich estimates there are 175 tech companies around the world with $5 billion or more in annual revenues. These are mostly SunGard-like companies--mature, stable, predictable. Just five years ago, many of them looked like growth companies. Now they look like buyout targets. "We? in uncharted water here," Garnett says. "This has been an area that's been taboo -- you don? do big tech acquisitions in private equity." Goodbye, taboo.
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