Mergers, Acquisitions, and Corporate Restructurings, 7th Edition

CHAPTER NINEThe Private Equity Market

THIS CHAPTER CONTINUES THE discussion of going-private transactions by first focusing on the role of private equity firms. Private equity firms have played a major role in the takeover market during the past quarter of a century. These firms have been able to attract large amounts of capital and very aggressively pursued takeovers.

HISTORY OF THE PRIVATE EQUITY AND LBO BUSINESS

The modern private equity business is not that old. We have had highly leveraged transactions for some time, so using large amounts of debt to buy businesses is not a novel concept. As we discussed in Chapter 8, Henry Ford did a highly leveraged transaction to regain control of his company in 1919. This was long before the words leveraged buyout and private equity even came into the vernacular of finance.

The first leveraged buyout took place in 1955, when McLean Industries, run by Malcolm McLean, acquired the Pan-American Steamship Company and the Waterman Steamship Company. He financed these acquisitions with the proceeds of the sale of his trucking company, McLean Trucking (regulations at the time prohibited a trucking company from owning a steamship company), and through bank debt and the issuance of preferred stock. However, he was able to use the cash and assets of the target companies to help pay down the buyout debt.

In the 1960s and 1970s, other dealmakers learned from McLean and formed their own investment firms to do similar types of buyouts. In the ...