Silver Lake's agreement to buy a majority stake in EBay's Skype unit for $2 billion shows how much private-equity firms have been forced to scale back their ambitions.
The transaction offers a telling contrast to the firm's $11.3 billion leveraged buyout (LBO) of SunGard Data Systems Inc in 2005, an early model for the debt-laden purchases that dominated LBOs until the surge ended two years later.
Private-equity investors are doing business more like they did before the market exploded, said Paul Schaye, managing director of New York-based Chestnut Hill Partners. They're targeting divisions of larger corporations, in deals known as carve-outs, and smaller companies they may have passed over at the peak of the buyout frenzy. They're paying a higher percentage of cash to sellers eager to unload businesses that are unprofitable or no longer suit their needs.
"You're seeing private equity go back to its roots with carve-outs," said Schaye, whose company helps buyout firms find deals. "There are things that have pain and need to be fixed."
Recent carve-outs include New York-based KKR & Co's purchase in June of the South Korean unit of Anheuser-Busch InBev NV for $1.8 billion. Bain Capital LLC, based in Boston, and Blackstone Group LP of New York joined with NBC Universal Inc to buy the Weather Channel for about $3.5 billion from Landmark Media Enterprises LLC last year.
The purchase of Skype, an Internet video and phone service, is the biggest private-equity deal this year, according to data compiled by Bloomberg. Banks pulled out of LBO financing as credit markets collapsed in mid-2007, leaving firms unable to make deals such as the record purchase of Texas power producer TXU Corp by KKR and TPG in 2007 for $43.2 billion, including debt.
The LBO industry came of age in the 1970s and 1980s with carve-outs and purchases of distressed businesses. The so-called mega-deals such as TXU, in which large public companies were taken private, were an anomaly made possible by a flood of cheap financing, said Steven Kaplan, a professor at the University of Chicago.
Nine of the 10 biggest LBOs were announced in 2006 and 2007, the lone exception being KKR's 1989 takeover of RJR Nabisco Inc.
Private-equity firms have an estimated $400 billion of commitments from their investors for future transactions. Financing remains elusive. Some deals are been done using no debt, including the pending $571 million takeover of Bankrate Inc, a North Palm Beach, Florida-based provider of personal-finance information.
Financial firms worldwide have posted losses of $1.6 trillion since the credit markets seized up, with some tied to leveraged loans used to fund takeovers the banks couldn't sell to investors. That's made them skittish about taking on more commitments.
EBay failed to use Skype to expand its main auction business, even as the unit's users rose 8 percent to 480.5 million in the second quarter. The San Jose, California-based company, which bought Skype in 2005 for $2.6 billion, wrote down the value of the unit to $1.2 billion a year later.
The firms didn't say how much debt they'd raise for the Skype purchase, which will be funded mostly with equity. JPMorgan Chase & Co is leading a financing group that also includes Barclays Plc and Royal Bank of Canada, according to a statement.
In the Skype deal, the buyers will pay $1.9 billion in cash and will give EBay a $125 million note, the company said. EBay, which had planned an initial public offering for Skype, will retain 35 percent of the business. The deal values Skype at $2.75 billion.