The one thing that equity markets have taught us over hundreds of years is that investors have very short memories. From Tulipmania to the South Sea Bubble, Roaring Twenties to the Nifty Fifty in the late 1960s, and most recently the dot.com boom, investors have been prone to forgetfulness as they were driven by uninhibited greed.
Which brings us to today. While the markets are not in the midst of a bubble, with the possible exception of mining and media stocks, there’s one hell of a private equity boom going on.
This is not surprising. For the past ten years private equity has been a veritable gold mine for the operators — Pacific Brands, Repco, Just Jeans and JB Hi-Fi are some recent local success stories. Of course, those who get in on the ground floor of any boom invariably do well (you could have made a lot of money in tech stocks in 1999).
But the private equity players seem to have forgotten the last LBO boom — which as Alan Kohler noted, is just another name for private equity buyouts — in the late 1980s. Back then, things went awry when every investment bank and his dog got in the act, pushing up prices and reducing returns. Skyrocketing interest rates didn’t help either.
While we’re not about to see Barbarians at the Gate II: Return to Wall Street just yet, the boom seems to be gathering steam at an alarming rate. On Sunday, The New York Times reported that the granddaddy of LBO operators, Kohlberg, Kravis, Roberts and Co, is considering a US$50 billion takeover bid for Vivendi. Back home, it was reported yesterday that Archer Capital have agreed to acquire Rebel Sport for $4.60 a share.
The Rebel acquisition isn’t your typical LBO. First, it seems to have hit a stumbling block with minority shareholders, who are dissatisfied with the price offered by Archer. Second, only last year Rebel’s share price was trading at around $2.00, Archer is certainly not picking up a bargain. It is also worth remembering the last time Gerry Harvey sold a significant business — back in 1982 when he sold his Norman Ross chain. The purchaser that time was a bloke called Alan Bond. (In fairness, Archer’s investment record is a darn site better than Bondy’s).
Of course, private equity defenders have plenty of reasons why they can pay more for assets than regular punters. For example, private equity firms have a lower cost of capital (through their huge use of debt) and they can take a longer-term outlook, rather than needing to report on a quarterly basis to institutional investors. Not to mention the fact that it can avoid all those pesky costs associated with being a public company.
Perhaps it’s worth turning back 18 years and considering these Warren Buffett comments in his 1988 Annual Report:
We have no idea how long the excesses will last, nor do we know what will change the attitudes of government, lender and buyer that fuel them. But we do know that the less the prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs. We have no desire to arbitrage transactions that reflect the unbridled – and, in our view, often unwarranted – optimism of both buyers and lenders. In our activities, we will heed the wisdom of Herb Stein: “If something can’t go on forever, it will end.”