May 12, 2020 - Economy & Business

Abandoned deals have become a new normal for private equity

Dan Primack, author of Pro Rata

Illustration: Sarah Grillo/Axios

Private equity investors have historically taken a dim view of peers that renege on signed merger agreements, believing that an honorable reputation can be the difference between winning and losing the next deal or next fund.

What's new: Not only have stigma worries dissipated, but some buyers now feel honoring their pre-pandemic word would diminish their reputation.

Driving the news: Broken buyouts are becoming nearly as prevalent as new ones. Just within the past 48 hours, we've learned that:

  • Carlyle bailed on its $900 million deal for a 20% stake in American Express Global Business Travel.
  • Kohlberg & Co. walked away from its $550 million deal for cake decorations company Decopac, owned by Snow Phipps.

"It's one thing to buy a company that eventually loses value," says a private equity investor whose firm is largely sitting on the sidelines.

  • "It's quite another to buy a company that you need to write down by 50% the minute you close. That's a tougher sell to limited partners."

Both Carlyle and Kohlberg will need to defend their cold feet in court, and are no locks to succeed.

  • So will many non-PE acquirers. Wex (NYSE: WEX), for example, was sued yesterday by Travelport for trying to abandon its $1.7 billion deal for a pair of travel payments businesses.

But no judge can rule on reputation. That will be up to the markets. And, for now, indications are that absconders will get mulligans. Or even rewarded.

  • "This is the first time I can remember that companies aren't being criticized too much for doing layoffs, because everyone understands the extreme circumstances," says a fund-of-funds manager. "I think it'll be the same for private equity. You're not being held to the regular standard."

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