M&A watchers can only sit back
and enjoy the takeover battle unfolding for specialty retailer,
Colorado. As noted
by Stephen
in the Smage, it is
almost unheard of for a management (or leveraged) buyout to be done in a hostile
manner. The usual course is for a private equity firm (like Affinity Equity
Partners) to conduct due diligence on a target, and often, bid for the company
in conjunction with management.

Of course, leveraged buyouts do
occasionally get hostile. The most famous example was the legendary Kohlberg
Kravis Roberts’s acquisition of
US giant food
and tobacco, RJR Nabisco. That takeover battle, which marked the peak of the
go-go eighties, was immortalised in possibly the finest business book ever
written, Barbarians at the
, by former WSJ writers, Bryan Burrough and John Helyar.

After a bitter and somewhat amusing
series of bids and counter-bids, KKR eventually acquired Nabisco for more than
US$30 billion in 1988, beating off a management consortium of Shearson Lehman
and Nabisco boss, Ross Johnson
(although by the end of
the battle, half of Wall Street was involved in some form). Every private equity
firm will no doubt be fully aware that despite ostensibly winning the battle for
Nabisco, KKR ended up paying so much that it pretty much only broke even on the
deal, eventually selling its remaining stake in the company seven years later.

Ultimately, the key rationale
underlying any business combination is the synergies which can be reaped by the
parties. However, private equity buyers generally are not able to access
synergies like a trading business can. Rather, private equity buyers need to rely
on superior management, cost cutting and tax-effective use of debt to earn a
superior return. Or, of course, private equity firms can buy a company which has
been significantly undervalued by the market, tidy it up a little, and then
float it for a far higher price (as was perfectly executed by CVC Asia Pacific
and Catalyst Investment Management with Pacific

Colorado’s case,
Affinity seems to have found quite a bargain.
Colorado shares
plummeted from $6.50 in late 2004 to around $3.20 before Affinity’s bid after
several profit downgrades. This much will no doubt be emphasised by
Colorado in its
Target’s Statement.

Regardless of whether Affinity is
ultimately successful in its unusually hostile bid, a lot of bankers and lawyers
will no doubt be sitting back and enjoying the show as
Colorado tries to
push the barbarians away from its gate.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey