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RBS' move was unusual because the private equity firms had indicated interest in the business. It normally makes little sense for sellers to limit the universe of possible buyers by simply cutting off whole categories of the investing world from bidding. But these are not normal times. The credit crunch has lasted almost a full year. Throughout that year, public and at times acrimonious blowups of big private equity deals have occurred. For instance, JC Flowers & Co. LLC backed out of a $26 billion buyout of SLM Corp.; Goldman Sachs Capital Partners canceled an $8 billion deal for Harman International Industries Inc.; Bain Capital LLC, Carlyle Group and Clayton, Dubilier & Rice Inc.'s $10.3 billion buyout of Home Depot Inc. unit HD Supply Inc. was reduced to $8.5 billion; and Thomas H. Lee Partners LP and Bain Capital's $23 billion buyout of Clear Channel Communications Inc., originally announced for $25 billion, was restructured, to the detriment of sellers. The result: an increasing sense that private equity firms will play a smaller, some say negligible, role in large-scale transactions, at least for the immediate future. According to one partner at a private equity firm, bankers have actually waved off sponsors' bids on some deals. "In a couple of deals this year we wanted to see, bankers have told us, 'We're only showing it to strategics,' " the partner says. "It's a combination of sellers being leery of private equity buyers and the question of certainty." What's the problem with private equity? The business, argues one partner at an LBO house, is suffering from a damaged reputation, which is keeping boards from considering them as viable selling options. In other words, boards don't trust them, for whatever reason. "Almost everybody on a corporate board was either involved [in a busted buyout] or knows someone who was," he says. "It can't help but affect their decisions." Adds a financial sponsors banker: "The feeling is that sellers are worried. And they should be. You can't read about Clear Channel and not worry, 'What is it that I'm getting with this contract?' " Buyout activity is certainly substantially reduced, even compared with overall declines in M&A. According to data provider Dealogic, the volume of announced deals between January and May 27 this year was $1.4 trillion globally. That's down 33.7% from the $2.1 trillion recorded for the same period in 2007, just before the credit crunch began. While strategic acquisition activity so far this year has fallen 24% from the year-earlier period, buyouts have fallen by 74%. Of the total $1.4 trillion in deals between January and May, just 6.5%, or $91.3 billion, were announced buyouts. A year ago, the percentage was 16.5%. That's a big difference. There's a strong argument to be made that the data simply reflects the predictable fallout from the credit crunch, which closed off PE access to leverage that allowed it for several years to go head-to-head with strategic buyers in multibillion-dollar auctions. Take General Electric Co.'s decision to sell assets, announced last month. Soon after GE announced it would sell its appliances business in an auction led by Goldman, Sachs & Co., GE chief executive Jeffrey Immelt named potential suitors for the $7.2 billion business. In comments to reporters in China on May 28, Immelt listed South Korea's LG Electronics Inc., China's Haier Group Co., Turkey's Arçelik AS and Mexico's Controladora Mabe SA de CV as possible buyers. Note that he named no private equity firms, although initial reports suggested some buyout shops might be involved. Right now, says one private equity partner, "there's no such thing as a financing package in excess of $2.5 billion." The partner says lack of financing is why his firm has not participated in recent megabillion-dollar deals. "If a board doesn't want you in a process, the bankers will let you know. I haven't heard anything like that." On March 17, forestry company Weyerhaeuser Co. of Federal Way, Wash., announced it would auction off its packaging business to International Paper Co. The price: about $6 billion. Sources say that while there was "substantial" strategic interest, no private equity bidders showed up, partly because of tacit discouragement by Weyerhaeuser driven by financing uncertainties. Does it go deeper than that? Some observers argue that the ascendancy of strategic over financial buyers is also a matter of current corporate priorities. As one lawyer says, in today's economic environment, asset sales are motivated by sellers' desire to shed noncore assets and streamline businesses or to raise cash to meet obligations, as opposed to exploiting rising valuations in a hot market. In other words, certainty trumps price, and private equity bids appear to be anything but certain. "It's categorically true that the perception of deal certainty has been materially eroded by the events of the last few months," an M&A banker says. That perception may influence sellers to keep private equity bidders at a distance despite boards' fiduciary responsibilities to sell at the highest price, which usually translates to attracting as many bidders as possible. "Absent a conflict of interest, it's a business judgment on how you run your auction, and certainty is an important factor in formulating a business judgment," says James Woolery, a partner in Cravath, Swaine & Moore LLP 's M&A practice. Boards can decide how to sell a business without fearing a trip to a Delaware court -- although excluding buyout bidders may stir up activist discontent. Another dealmaker says that after Clear Channel, boards simply can't trust auction bids. "In an auction, even if there are initial bids, it's not certain you'll get what was indicated," a lawyer says, adding that he has seen a few below-the-radar auctions fail in recent weeks after squabbling over final terms followed initial bids. "And you only get one bite at the apple. If your auction fails, you'll have to go back to the strategics with your tail between your legs." Or, as one leveraged finance banker puts it, "If you're on a public board, right now you have no confidence in any numbers sponsors give you." According to Dealogic, 93 auctions were in progress in the U.S. at the end of May. But auction numbers aren't available for earlier, comparable periods, so it's difficult to put that into context, especially considering the generally low level of M&A activity overall. Anecdotally, however, several dealmakers agree that the auction is falling out of favor as a corporate strategy for offloading assets. "We're definitely seeing a growing trend towards targeted processes because of recent difficulties we've seen in holding auctions," says William Wagner, a partner at New York-based law firmBaker & McKenzie LLP. Targeted sales occur when corporate sellers approach likely strategic buyers of an asset and try to hammer out a deal quickly and quietly. One recent example of a targeted sale came on May 30, when San Diego's Copley Press Inc. announced it had agreed to sell its Copley News Service unit to Creators Syndicate Inc. amid speculation that that company was on the verge of shutting down. Although terms weren't disclosed, Jeffrey Potts, of newspaper broker JP Media Partners, says the transaction wasn't conditioned on price as much as synergies the buyer expected. Adding weight to the push toward targeted deals is the widespread perception that inviting certain parties, notably financial sponsors and their lending banks, into open auctions boosts the likelihood that the deal will leak before it's completed, amplifying the perception of seller weakness. One banker argues that auctions, especially from 2004 to 2007, when buyouts boomed, were geared specifically to encouraging bids from LBO shops in hopes of maximizing prices. "Before, you'd hold an auction in the hopes of attracting a few sponsors who would beat each other over the head on price and boost your valuation," he says. "Now, boards are using more of a rifle shot, as opposed to a shotgun strategy." Cravath's Woolery notes that several auctions in recent months failed because declining valuations and the retreat of financial bidders caught boards off guard. He adds, however, that this tends to be limited to larger deals. "We're familiar with several processes that are busted," he says. "But private equity firms are still very active and still very much a part of the middle market. It's only when you get over the $2 billion mark that you see a drop-off." Cary Kochman, the Americas' co-head of M&A at UBS, agrees. "You can do a $1 billion deal and have a robust auction where several private equity firms show up," he says. "But the larger environment is not as healthy." According to Dealogic, there has been more sponsor activity for smaller deals, although it's still down substantially from last year. The data shows that announced buyouts worth from $100 million to $1 billion between January and May this year have fallen 39% from over the same period last year, declining from $64.3 billion to $38.7 billion. For deals between $1 billion and $10 billion, the decline totals 72%, dropping from $162.5 billion to $44.1 billion. Of course, few believe the shift from auctions is a permanent condition. With the retreat partly a function of the credit crunch, auctions will likely rebound as credit conditions improve. And despite the tumult in buyout deals over the past few months, private equity firms will continue to have chances to bag bigger transactions. In the recent $4.1 billion buyout of Bristol-Myers Squibb Co. wound-therapeutics unit ConvaTec, PE firms Nordic Capital and Avista Capital Partners lined up financing from European sources and injected equity totaling 50% of the deal to win the auction. One source close to the deal says there was no logical strategic buyer for ConvaTec, which made the buyout shops the default choice. Certainty of financing was an issue, however. That buyers turned to a club of European banks, which by U.K. funding rules locked them into their lending commitments, clinching the deal. Will we eventually return to an environment in which financial sponsors and strategics battle on a level playing field? Much, of course, depends on financing markets. Some big buyout shops would say yes. Others are not so sure. "There was a time when strategics could always afford to pay more because of their natural business advantages," says one sponsor. "Only in the warped world [of the credit boom] could sponsors expect to beat them on price. Now, we're headed back to the normal world." If true, that will be a significant adjustment. Who knew that normal could be so difficult? -- Vipal Monga CategoriesPrivate capital video
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When Royal Bank of Scotland Group plc announced last month that it would sell its insurance business, it took the remarkable step of 
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