The Masters of the Universe are back

Private equity firms like Blackstone, KKR and TPG are doing deals again. That may be a sign that the credit markets really are returning to normal.

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By Paul R. La Monica, editor at large

How has the $787 billion stimulus package affected the economy?
  • It has aided a recovery
  • It has made the situation worse
  • It has had no impact
  • It's too soon to tell

NEW YORK ( -- Mergers are all the rage in Corporate America again. Healthy companies are looking to take advantage of their strong balance sheets and surging stock prices to strike while the iron is hot.

So far this month, Hewlett-Packard has agreed to buy 3Com, Stanley Works announced a deal for tool rival Black & Decker, and in the biggest deal of them all, Warren Buffett's Berkshire Hathaway is taking over railroad Burlington Northern Santa Fe.

But these strategic deals aren't the only type of mergers that have made a comeback.

Private equity firms, the so-called "Masters of the Universe" or "Barbarians at the Gate" that became famous for taking over companies in the 80s, are starting to get more active as well.

On Thursday, Pinnacle Foods Group, which is owned by private equity firm Blackstone Group (BX), said it was buying frozen foods company Birds Eye for $1.3 billion.

Earlier this month, defense contractor Northrop Grumman (NOC, Fortune 500) agreed to sell its advisory services unit TASC to an investor group led by private equity firms General Atlantic Partners and Kohlberg Kravis Roberts & Co. for $1.65 billion. (KKR, of course, is the original Barbarian. Its takeover of RJR Nabisco in 1989 was the subject of the book "Barbarians at the Gate.")

Also this month, private equity firm TPG and the Canada Pension Plan teamed to buy prescription drug data provider IMS Health (RX) for $4 billion. That deal is the biggest leveraged buyout of the year.

The return of the Barbarians is worth noting. It could be yet another reflection of growing optimism about the economy. After all, private equity firms don't often hold on to companies they buy for long.

The goal is usually to clean a company up and generate a healthy return by selling it to another company or bringing it public once again. If private equity firms are now willing to invest instead of sit on cash, they must see something they like.

"Private equity firms have raised a significant amount of money and they have to deploy that cash. So they are going to step up and make some investments," Haag Sherman, managing director with Salient Partners, an investment firm in Houston.

But there's another reason why more LBOs could actually be good news.

Private equity shops tend to rely on debt to finance their takeovers. As such, their return to the M&A landscape could mean that the credit markets and the banking system really are starting to return to normal.

"The credit markets are no longer on life support. So that has led to stabilization in stocks and the economy, and that's a good sign," Sherman said.

To that end, Barclays Capital, Credit Suisse, BofA Merrill Lynch, HSBC, and Macquarie Capital all kicked in debt financing to Blackstone for the Birds Eye deal.

Antony Page, a professor at Indiana University School of Law-Indianapolis who focuses on mergers and acquisitions and corporate law, said the comeback in private equity deals could be a refection that banks are willing to once again take on more risk and increase their lending.

But Page said it also shows that private equity firms are being more cautious and are not willing to throw large amounts of money at deals that may not make financial sense. Otherwise, banks would probably remain reluctant to back them.

"Private equity firms are being more selective and the deals are probably looking better for the banks. So banks can be more comfortable about financing them," he said.

Sherman stopped short of saying that the days of easy cheap money are here again. For many consumers, it is still difficult to get approval for a mortgage or a credit card.

Just because Blackstone can get money to buy Birds Eye doesn't necessarily mean that banks are going to suddenly start making crazy subprime mortgage loans again.

And that's a good thing. Another credit binge would prove that no lessons were learned from this recession and could set the stage for another nasty downturn.

Still, the latest results from the Federal Reserve's quarterly survey of senior bank loan officers show that credit is not as tight as it was earlier this year.

According to that survey, released earlier this month, a smaller percentage of banks reported tighter standards for credit cards and other consumer loans than they did in July.

So as long as the economy doesn't backslide into recession, it seems likely that some banks will be more willing to extend credit to those who need it and deserve it.

"There are good banks and bad banks. Some won't have to hunker down and preserve capital, " Page said. "Standards won't be as loose as they were. But there should be some hope for people who have good, if not great, credit and are still good credit risks."

Talkback: Do you think the credit markets have returned to normal? Share your comments below.  To top of page

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