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Signs Of Caution In Private Equity

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Jun 19 2007 12:00am EDT

Signs of Caution in Private Equity?

Tenille Tracy sees one private-equity consortium outbid another private-equity consortium to win Home Depot's HD Supply business for $10 billion, and she smells weakness:

There has been talk that private-equity firms are exercising more caution in their deal making. Given that half of the potential bidders ducked out of this deal, that caution is becoming more apparent.

I think there may indeed be some newfound caution in the private-equity market: after bandying around numbers in the $6 billion to $8 billion range for the combined Jaguar and Land Rover, for instance, analysts are now soft-pedalling, saying that the UK car companies might go for just $1.5 billion. I guess we'll see.

And there are indications of caution in the Home Depot sale, too. The final price tag of $10 billion is large, but it's well short of the $13 billion that some observers expected the unit to fetch when its sale was announced in February.

On the other hand, the fact that some private-equity companies dropped out of the bidding altogether should not be taken as a sign of weakness. It's a known fact that private-equity shops hate to bid against each other in the first place, and if there are half a dozen consortiums circling a potential acquisition, most of them are naturally going to drop out rather than wade into a bidding war. Much better that another shop pays too little than that you yourself pay too much.

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