Tight Credit Could Stall Buyout Boom

The severe turmoil in the credit markets last week has raised serious questions about the future of the buyout craze that gave rise to the biggest deals in U.S. corporate history.

For the past few years, a group of elite Wall Street players have been buying up major American icons and taking them private. These massive acquisitions have depended on access to cheap credit, which is supplied by a complex relationship between investment banks and hedge funds.

But with credit markets tightening, the pace of these deals, at least in the short run, is expected to dramatically slow. Already-announced multibillion-dollar buyouts, like Tribune Co., Sallie Mae and Hilton Hotels, are likely to be far more complicated to close, analysts said.

If one or two of these big deals were to collapse, it might not send the economy into a downturn. But it would profoundly shake investors' confidence in a financial system already under siege from billions of dollars in losses from home mortgage defaults. That could make it even more difficult for companies and home buyers to get loans.

Private-equity firms, which use big pools of private money to buy companies, generally describe the tightening credit as a temporary setback. But some market watchers are predicting the end of the buyout boom. Either way, both sides say, the private-equity movement is at a crossroads.

"There is a crisis of confidence in the credit markets that is . . . letting a little helium out of the buyout balloon," said Colin Blaydon, director of the Center for Private Equity and Entrepreneurship.

Buyouts are credited with bringing efficiency to industries such as steel and airline parts. But they are also criticized for forcing employees to take on more risk for the success of their companies, as in the case of Tribune. The deals created a new class of powerbrokers, like Stephen A. Schwarzman, who made $400 million last year and holds about a $6.4 billion stake in his company Blackstone Group. But they also enriched universities and pension funds that have been increasingly investing in private-equity funds and helped propel the stock market to new highs.

Fueled by easy-to-get money from the credit markets, buyout shops gained the ability to acquire all but the largest corporations in the past few years. Many companies began to see the benefits of going private -- they could get funding from buyout firms and did not have to deal with the scrutiny that comes from being public.

This year, buyout shops announced $600 billion worth of acquisitions and were on track to set a record, according to Thomson Financial. But in July, the number of deals dropped considerably. And many companies that had agreed to be bought out by private-equity firms are now seeing their shares slump before the deals have been consummated, a Wall Street bet that these agreements will be renegotiated or fall apart.

The stock of Tribune Co. closed Friday 22 percent below the price real estate mogul Samuel Zell agreed to pay in April. Zell is acquiring the media company for $13.2 billion. Shares of Hilton Hotels recently have traded 12 percent below what private-equity giant Blackstone consented to spend in July. It agreed to buy the hotel chain for $26 billion.

One deal that analysts say is particularly vulnerable is the $25 billion acquisition of Sallie Mae. Its stock closed 20 percent below its deal price Friday.

In April, the student loan giant announced that it had agreed to be acquired by buyout firm J.C. Flowers for $25 billion. The deal was hailed as a breakthrough for private equity which had never before been able to acquire a major financial firm. Other financial stocks, such as Bank of America and Student Loan Corp., rose on the news as traders speculated the Sallie acquisition would lead to a frenzy of new buyouts in the financial sector.