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Conditions for leveraged buyouts in the IT channel have improved, but it would be a mistake to think we are on the brink of another heyday for debt-financed acquisitions. Private equity firms seem to be taking a far more conservative today approach than they have in previous boom times, mostly recently 2005 to 2007 -- for obvious reasons. Many of the investments made just prior to the recession have resulted in huge losses for private equity firms, with more to come.
Even Dell's leveraged buyout is not a bellwether. At $24.8 billion, it is the largest IT leveraged buyout ever and has the unique circumstance of a billionaire founder willing to put a large chunk of his own money into the deal to buy back the company that bears his name.
Still, as Milton Friedman once said, "No one spends other people's money as carefully as they spend their own."
That could explain why, according to new data from S&P Capital IQ, leveraged buyout valuations hit their highest levels in more than a year in June 2013.
There were a total of 79 U.S. LBO deals tracked by Capital IQ in June and purchasers valued the targets at an average 21.4 times trailing 12-month EBITDA. That was more than double the valuations in May and the highest average multiple since April 2012.
(In the interest of full disclosure, Capital IQ data for July showed that U.S. leveraged buyout activity was at its lowest point of the year -- although this is probably more a result of summertime vacations than a harbinger of the future.)
Even more encouraging, there have been a handful of significant solution provider leveraged buyouts at premium valuations so far this year. In April, Birch Hill Equity Partners acquired Canadian IT services company Softchoice for $420 million, a 24 percent cash-adjusted premium to the stock's closing price on the day of the announcement.
Also in April, Thomas H. Lee Partners acquired IT services company CompuCom. Financial details were not disclosed, but a sale price of $1.1 billion was reported. As a side note, this was the third acquisition of CompuCom by a private equity firm since 2004 -- each time at a higher valuation.
Then in late June, Thoma Bravo said it would acquire Keynote Systems, an Internet and mobile cloud testing and monitoring company, for approximately $395 million. The firm followed up a few days later with an announcement that it would acquire Intuit's Financial Services Division, a provider of online and mobile banking software to financial institutions, for $1.025 billion. Both acquisitions closed in August.
These higher valuations are being driven by the availability of inexpensive debt, which partly accounts for private equity firms' willingness to pay higher prices. And even though interest rates are rising now, they are still low and debt is still easier to get than at any time in the past five years.