Private equity giants such as KKR, Cerberus and Blackstone fund takeovers through loans from credit investors, but escalating mortgage defaults in the US have forced the lenders to adopt a more cautious approach to would-be borrowers.
There was evidence of this shift in sentiment last week when investors at Chrysler and Alliance-Boots both rejected the terms on senior debt arising from the recent buyouts. And there are now signs that the flow of private equity moves in the technology and IT services space may be slowing down.
UK software and IT services vendor Civica announced it has terminated takeover talks with a private equity group, citing uncertainty in the debt markets. Civica was first approached by the unnamed investment group in June, but confirmed in a statement that it failed to reach an acceptable offer.
Press reports have suggested that the suitor is UK private equity group Alchemy Partners, which was Civica’s largest shareholder until last October when it sold its stake.
There are many examples of IT services companies turning down private equity approaches, such as Computer Sciences, Atos Origin and ACS. But the main sticking point in these cases has tended been the price put on the table, and Civica is the first company to explicitly cite concerns over the debt markets as a factor.
The technology sector has been a prime target for private equity in the last two years. Figures from Computer Business Review show that the value of private equity takeovers in the technology sector rocketed from $28.7bn in 2004 to $62.5bn last year. The IT services market has been a particular source of interest, with investors attracted by the reliable, long-term revenue streams.
Recent services buyouts include banking processing services specialist First Data (KKR is finalizing a $29bn buyout), Vertex Data Sciences, Computer Software Group and CompuCom, while software acquisitions have included Onyx and Kronos.
If private equity organizations are losing some of their muscle, it could lead to an increase in the number of trade sales. Technology and IT services companies have one advantage over private equity firms when bidding to acquire other companies in their peer group, as they can offer a mix of stock and cash.
It will be interesting to see if the balance of power has shifted away from private equity bids on forthcoming sales such as the auction of Virgin Media. The UK company has already received a reported $20bn approach from private equity giant Carlyle Group but is also generating interest from other cable companies including Liberty Global.
