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August 21, 2006

Microsoft a private equity target? ... nah

Posted by Benjamin J. Romano at 10:27 AM

After the record-setting $33 billion acquisition of hospital-operator HCA earlier this summer, the Financial Times suggested private equity firms raise their sights higher:

Why have they failed to tilt at the scores of companies much larger than HCA or NTL [a European cable group that could be on the block for $20 billion] that have far less efficient balance sheets, bigger cash flows and a crying need for focus? Consider Microsoft, which has a balance sheet so inefficient that it would make a private equity investor weep. There was not an iota of debt in the thing at the last year-end. Worse, this mature software giant was sitting on cash and investments of $34.1bn -- more than the value of the total HCA deal.

Daniel Primack, the respected private equity analyst and editor of PE Week Wire (which alerted us to the FT story), wrote today that a leveraged buyout of Microsoft is an "inane suggestion."

Primack, who gave his thoughts this morning on CNBC, broke it down like this: Leveraged buyout firms don't have enough money. Bankers won't back the deal. It would hurt fundraising for the firms.

The last point is particularly interesting here. Primack and the FT noted that institutional investors are pushing more money into private equity funds. The state of Washington, for example, has $1.5 billion in the most-recent Kohlberg Kravis Roberts fund, which was one of the buyers of HCA.

Wrote Primack:

So imagine if KKR suddenly helped buy Microsoft and -- as the FT suggests -- lays off lots of workers, sells off/shuts down a few divisions and ignores the rest because it's already gotten paid via dividend recaps? No elected official in Washington would ever again be able to justify an investment in KKR, nor any other firm that helped strip jobs from one of the state's largest private employers.

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Tricia Duryee
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Benjamin J. Romano
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