Market overview

The markets have declined slightly in recent days as investors await the Fed’s meeting later this week, at which rates are widely expected to remain unchanged. Although inflation concerns have had an impact on the markets, with Treasury yields shooting to a five-year high in early June, there are indications that inflation remains within the Fed’s “comfort zone”.

Despite a recent drop in oil prices, concern over the effect of rising treasury yields on corporate profits has led to a slide in the US stock market.  Reports showing increased wage pressure, a concern that the Fed may raise rates later in the year, and ongoing subprime mortgage concerns have added to the pressure on stocks. 

The subprime mortgage meltdown has continued to weigh on the broader market as the recent bailout of a Bear Stearns hedge fund that made heavy bets on subprime mortgage-backed securities was followed by news that a second Bear Stearns fund may be headed in the same direction.  New home sales figures in May also failed to provide any positive news in the housing market.  Sales of new homes fell for the fourth time in the past five months, dropping 1.6 percent in May, and the National Association of Home Builders reported last week that builder confidence was at its lowest rate in 16 years. Despite the continuing gloomy outlook in the housing market, Treasury Secretary Henry Paulson recently said he believes we are at or near the bottom of the housing downturn.

Deal overview

Distributors of everything from laboratory products to concrete have been hot properties lately, with a number of high-profile deals announced for distribution companies. In the deal receiving the most headlines, Home Depot, in a retreat from former CEO Robert Nardelli’s strategy, announced the sale of HD Supply for $10.3 billion.  This sale comes roughly 18 months after the company’s $3.5B purchase of Hughes Supply and 6 months after Nardelli was fired. The winning bid came from a consortium of private equity buyers: Bain Capital, The Carlyle Group and Clayton, Dubilier & Rice. 

Private-equity firm Madison Dearborn Partners has also been active in the distribution space.  In early May, Madison Dearborn Partners announced a deal to buy VWR International, a U.S. laboratory supply company with $3.1 billion in global sales, from Clayton Dubilier & Rice for more than $3.5 billion. Following that announcement, Madison Dearborn Partners agreed to take private CDW Corporation, a distributor of technology products, in a transaction valued at approximately $7.3 billion.  The deal calls for CDW shareholders to receive $87.75 in cash for each share of common stock, a 16.1 percent premium over CDW’s trading price before the deal was announced.

This month’s metric looks at the percentage of Mergers and Acquisition transactions in the last twelve months in which the acquirer sought less than 100% ownership of the target. As the Exhibit illustrates, financial buyers are more likely than strategic buyers to acquire a partial interest. This corroborates Mirus’s experience with many private equity firms who expect the company’s management team to retain a portion of the company to ensure that incentives are properly aligned.

Strategic buyers are more likely to fully absorb a target to reap the full benefits from cost synergies, cross-selling opportunities to existing clients, product line expansions, enhanced market penetration, expanded geographic reach and other integration benefits. Additionally, strategic buyers are typically reluctant to leave minority shareholders in place post-transaction for corporate governance and financial reporting reasons.