Dow may be next private-equity target

Alisa Roth Apr 9, 2007

Dow may be next private-equity target

Alisa Roth Apr 9, 2007

KAI RYSSDAL: Rumors of the death of the private equity boom are turning out to be greatly exaggerated. Just today, we’ve got reports of the biggest leveraged buyout of all time. The British tabloid the Sunday Express says KKR is interested in buying Dow Chemical for $50 billion.

If the name’s familiar — KKR, that is, not Dow — it’s because just a month or so ago it announced a deal for the Texas utility TXU for a then-record 32 billion.

Marketplace’s Alisa Roth reports what today’s news represents may be more important than the deal itself.

ALISA ROTH: According to the rumor, KKR would team up with other investors to take over Dow Chemical. KKR’s not commenting, and Dow says it’s not interested in being bought.

Though nobody can confirm the particulars of the story, everyone agrees that, in concept at least, it’s plausible.

Used to be, private equity firms only went after companies that were struggling. Snapped them up at bargain prices. Took them private, fixed them up, and then took them public again.

But private equity firms have been raking in the cash lately, and are widening their view of targets. Suddenly everything is fair game. Even very big businesses that aren’t really struggling.

MARINE BURNS: And there seem to be very few companies now that buyout firms would not consider approaching.

Marine Burns edits the trade publication Private Equity Insider. She says these days, private equity’s interested in any company that can bring a profit.

And they’re willing to spend more for it, too. University of Michigan finance professor David Brophy.

DAVID BROPHY: There was a time when the general feeling was that there was a kind of ceiling on how big this business could get, but the ceiling keeps being raised.

But with such massive amounts of money at stake, private equity firms are often reluctant to take on all the risk themselves. Even if they could afford it, which isn’t always the case.

In this case, KKR would reportedly team up with a number of Middle Eastern investors to buy Dow. These so-called club deals defray the risk for the investing firms.

But, points out Burns, that can mean trouble for those who buy into funds controlled by more than one of the partners.

BURNS: They end up with a huge amount of exposure to that one particular deal on both the funds that they bought into.

Of course, she says, that means a double payout if the turnaround is successful.

In New York, I’m Alisa Roth for Marketplace.

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