By: Staff writer

August 24, 2006, Reuters

NEW YORK (Reuters) - Management-led buyouts are running more than eight times ahead of this time last year, buoyed by blockbuster deals at HCA Inc. and Kinder Morgan Inc. , and more announcements are expected.

Private equity firms have raised tens of billions of dollars from investors, debt markets are still strong, and many managers see going private as an answer to an undervalued company stock.

"The money that the private equity funds have raised, have available and want to put to work -- that's a very strong driver of LBO (leveraged buyout) activity," said Morton Pierce, a partner at law firm Dewey Ballantine, adding that the ease of borrowing money has helped.

So far this year, $74.7 billion has been announced in U.S. management buyouts compared with $9.2 billion last year, accounting for more than 9 percent of U.S. merger and acquisition deals, up from 1.2 percent in the year earlier period. That growth also outpaces the growth in U.S. private equity and M&A overall, up 151 percent and 25 percent respectively this year.

Among this year's biggest deals are plans for the $21 billion purchase of health care company HCA by its founders as well as private equity funds Bain Capital, Kohlberg Kravis Roberts & Co and Merrill Lynch Global Private Equity.

In addition, the founder of pipeline operator Kinder Morgan, Richard Kinder as well as co-founder Bill Morgan and board members Fayez Sarofim and Mike Morgan, joined with GS Capital Partners, AIG Global Asset Management Holdings, and the Carlyle Group and Riverstone Holdings.

And food service company Aramark Corp. said it to would go private in a $6.3 billion management buyout led by its Chairman and Chief Executive Officer Joseph Neubauer as well as GS Capital Partners, CCMP Capital Advisors and J.P. Morgan Partners, Thomas H. Lee Partners and Warburg Pincus LLC.

Pierce said managers typically have a number of incentives to take part in buyouts, including a possible change of control payment.

"Management teams get roughly 10 percent of the ongoing entity so they have the ability to participate in the upside" after the company is private, Pierce said.

That can be easier to do if the company's stock has been underperforming the broader market.

But some critics say these management buyouts can tie the hands of shareholders and board as they face a "my way or the highway" situation; the CEO or the founder might leave if the deal does not go through and there is no guarantee the company will find another buyer.

"It's kind of a difficult position for shareholders to be in," said Chris Young, head of mergers and acquisitions research at ISS. "They are dealing with a counter party that has more negotiating leverage than the typical acquirer."

But, he said, courts look closely at the deals and the companies themselves work hard to treat their shareholders fairly by creating a special committee of the board that hires investment bankers and lawyers to examine the deal.

In addition, the boards typically use a "go-shop" period of one to several months during which they look for potential other buyers.

In HCA's case they have 50 days to shop the company around. Aramark spent more than three months reviewing its management's buyout offer. Kinder Morgan's special committee, which named Morgan Stanley and Blackstone as its advisors in June, has not provided any information about its review process.

WHITHER THE LBO

It would take several changes to reduce the flow of money to management buyouts. The debt markets, which have weathered rising rates, would have to tighten up first, which would make borrowing more difficult and costly.

In addition, if the stock market took off over an extended period of time or if some of the current large deals ended up as disasters, that could slow down deals.

"If, in fact, returns begin to tank because of problems with the acquisitions and so forth, the available additional money could be more limited, that could have an impact at some stage," said Wally Scott, professor of management at the Kellogg School of Management at Northwestern University.

But so far, indications are few that private equity deals - and by extension management buyouts - are headed for a decline.

While deal makers have been watching the credit markets closely to see if there are signs of a retreat that would hurt the ability to finance large deals, that has not happened yet.

"I'm still hearing that it's a really robust fund-raising market," said David Breach, an M&A lawyer who focuses on private equity, based in the San Francisco office of Kirkland & Ellis LLP.

"I think as long as the finance markets hold up, we are likely to see other large transactions. The number of funds that are capable of doing these large deals has, if anything, expanded," Breach said.

Copyright 2006 Reuters