The last thing private equity firms would seem to need these days is some coaxing from Wall Street investment banks to pull off another super-sized leveraged buyout.
Buyout firms are having
no trouble raising money from institutional investors and tapping the bond market to finance their acquisitions. If anything, the biggest problem for private equity firms is finding an enticing company to buy, not putting together the cash and debt to pay for a deal.
Yet that's not stopping investment bankers from pushing companies into so-called stapled financing deals -- prepackaged debt offerings that are often used to stoke the interest of reluctant buyout firms. Not surprisingly, the investment bankers recommending this strategy to their merger clients are often the same ones putting these stapled financing deals together and then peddling them to the buyout crowd.
Stapled financing is something bankers dreamed up four years ago when the merger market was moribund and buyout firms had a hard time lining up financing for a transaction. The bankers argue that these ready-made packages of bonds and loans are a good way of showing buyout firms just how easy it is to get financing for a deal.
But stapled financing presents an obvious conflict of interest for Wall Street bankers. It's never a good policy for an investment bank that's advising a company on a takeover to get too chummy with any of the potential buyers. Still, stapled financing was seen as a necessary evil given the difficult environment for LBOs at the beginning of the decade.
Many predicted, however, that stapled financing would disappear as the credit markets loosened up and the buyout crowd got friskier. But that hasn't happened despite all the easy money flowing. Stapled financing has played a role in a number of buyouts in 2006, including the massive
$18.7 billion takeover of radio station chain
and the more modest $870 million purchase of orthopedic-device maker Encore Medical.
Some can't see a point to stapled financing other than to generate more fees for the bankers.
"There's a lot of liquidity, so it doesn't seem necessary,'' says Charles Elson, the chair of the University of Delaware's corporate governance program. "It presents a conflict of interest that outweighs the benefit it is creating.''
If nothing else, stapled financing raises the possibility that a banker's judgment might get punctured by greed and the prospect of grabbing some of the lucrative fees that can come from underwriting a big debt offering.
In 2006, Wall Street banks arranged $35.8 billion in stapled financing, which was used to pay for a portion of the transaction costs in 36 buyouts of U.S. companies, according to data service Dealogic, which only recently began keeping track of prepackaged debt offerings. Outside the U.S., bankers sold $46.7 billion in stapled financing to fund another 14 deals.
One of the bigger deals of 2006 was a $2.67 billion debt offering arranged by
for Infor Global Systems, a private equity-backed firm that acquired SSA Global Technologies in May for about $1.4 billion.
JPMorgan Chase served as the adviser to SSA Global, a software services firm, in the negotiations. In the proxy statement for the deal, SSA's board said any "actual or potential conflicts of interest that might be associated with JPMorgan's role as a source of Parent's and Infor's financing for the merger had been adequately addressed.''
served as both adviser and arranger of a stapled financing package that's funding a big piece of the $785 million purchase of software company
The acquisition of Open Solutions by Carlyle Group and Providence Equity Partners for $38 a share is still pending. Open Solutions, in a regulatory filing, says it agreed to let Wachovia put together a stapled financing package because it would "increase the certainty of closing and possibly achieve a higher price for stockholders.''
Still, critics aren't impressed.
"It puts the adviser in a conflict, even if the board is aware of it,'' says Elson. "Frankly, that's why you have to hire an independent adviser.''
Stapled financing continues even after a Delaware state just criticized the practice in June 2005 ruling stemming from a lawsuit over the $7.5 billion buyout of Toys 'R Us. Delaware Chancery Court Judge Leo Strine said he found an "appearance of impropriety'' in the fact that Credit Suisse collected $10 million in fees for arranging the financing for the deal, even as it was advising Toys 'R Us in the buyout. The toy store chain was bought by buyout firm Kohlberg Kravis Roberts in a deal that closed in July 2005.
Most of the stapled financing deals that got put to work in 2006 ended up funding midsized buyouts and nothing as big as the Toys 'R Us takeover. However, for a time, it looked like a stapled financing deal would help pay for one of the biggest LBOs on record: the pending acquisition of Clear Channel.
put together a financing package for the $18.7 billion buy of the Texas-based radio operator. Initially, Clear Channel's board rejected the idea, fearing it would pose a conflict of interest given Goldman Sachs' role as the company's merger adviser.
As the deadline for selecting a buyer grew closer, Clear Channel's board changed its mind in late October and gave Goldman Sachs the green light to approach the buyers, providing it "offered the same package of debt financing to each consortium.''
In the end, Goldman Sachs wasn't included in the bank syndicate that's setting up the billions in debt that will finance most of the deal. The decision by buyout giants Thomas H. Lee Partners and Bain Capital to seek financing from
cost Goldman Sachs some big underwriting fees.
Even so, don't fret too much for Goldman Sachs. It's still set to rake in $40 million for serving as Clear Channel's adviser in the buyout.