Toll mounts as more LBOs crater

Collapse of Acxiom takeover joins the growing list of private equity deals hit by buyer's remorse.

By Grace Wong, staff writer

LONDON ( -- The $2.2 billion buyout of database manager Acxiom is only the most recent private equity deal to be called off - and it won't be the last.

Acxiom (Charts) said Monday that its takeover by private equity firms Silver Lake and ValueAct Capital had fallen apart. It joins a growing list of companies whose private equity buyers are backing away now that the debt used to finance deals has become more expensive.

The sudden deterioration in conditions in the buyout market has had implications for deals big and small. The $25 billion buyout of Sallie Mae (Charts, Fortune 500) and $8 billion deal for Harman International Industries (Charts) are both in jeopardy after buyers balked at completing the deals as they are currently structured.

"Some deals, upon reflection, didn't turn out to be as good as people had originally thought," said Columbia Business School professor Donna Hitscherich.

The growing number of deals getting called off highlights the tough position that buyout firms and takeover companies find themselves in now that the private equity business has fallen from its peak.

Deals inked during the height of the private equity boom no longer look attractive, and with the backlog of pending U.S. buyouts estimated at nearly $400 billion, the hits are likely to keep coming.

Walking away isn't something buyout firms take lightly, and doesn't come without its costs. "Once someone indicates they don't want to complete a deal, it gets expensive," said Martin Winter, a senior partner at law firm Taylor Wessing in London.

The majority of agreements inked during the height of the buyout boom call for buyers to pay a fee if they breach the merger agreement, usually about 3 percent of the deal's value. For example, the buyers of Acxiom agreed to pay $65 million to terminate the agreement.

Buyout firms can attempt to avoid paying such fees by citing a "material adverse change" to the business they've agreed to take over. In doing so, they risk sparking a legal battle, like the one college loan provider Sallie Mae has threatened to enforce its deal.

Private equity firms have good reasons to avoid litigation, which can end up hurting their reputations, according to Phillip Phan, a professor of management at Rensselaer Polytechnic Institute.

"Private equity is still very much a cottage industry," he said. Dealmaking is rooted in relationships, and "as the market for deals gets tougher, the reputation of buyout firms becomes more valuable."

Private equity firms aren't the only ones with a lot on the line. Phan thinks it's likely that more deals - especially the bigger ones - will be revised. As a result, shareholders will suffer as prices get lowered.

Of course, companies - and their shareholders - lose either way. In the current environment, it's unlikely that many new bidders will emerge when a deal falls apart. On Monday, shares of Acxiom fell 22 percent after its takeover collapsed. Top of page