The best private equity deal to ever fall apart

(Fortune) -- When news started to trickle out two weeks ago that a consortium of private equity firms were in talks to buy up a Fortune 500 provider of real estate and financial services called Fidelity National Information Services, chatter among financial types went right off the scale. At a proposed $15 billion, the offer, from Blackstone Group LP, Thomas H. Lee Partners and TPG Capital, would have been the largest leveraged buyout since the end of the great PE boom in 2007.

But by last Monday, the talks had fallen apart. Fidelity National (FIS) was reportedly dissatisfied with the consortium's offering price. Sources on the private equity side of the deal said that Fidelity wanted considerably more than the $32 a share the consortium was offering. So the company decided to pursue a leveraged recapitalization instead. That might sound like a failure, but in these times, it's not. At all.

The deal's collapse isn't a historical footnote -- to folks inside the PE industry, it marked something of a watershed moment. Ours may no longer be the age of the private equity mega-deal, but mere talk of a $15 billion dollar takeover seemed to indicate that, slowly but surely, private equity is on its way back.

"There are clearly indications that things are getting better," says Shawn Hessing, National Managing Partner for Private Equity at the auditing firm KPMG. "We are seeing deals pick up. The debt markets are improving. I do think things are still a little pricey - the credit terms are not what they were," he says. But Hessing adds, "there's a sense that maybe the bottom has been reached and it's now time to buy."

The death and surprising rebirth of the mega-deal

It's been a troubled few years for the buyout business. Back in 2006-2007, at the height of the boom, private equity seemed to have a hand in almost every major brand in the country, and mega-deals in the $30 billion plus range were not at all uncommon. In 2007, there were a whopping 2,859 private equity deals done in the U.S. with a median valuation of around $116 million dollars, according to John Gabbert, Founder and CEO of financial data provider Pitchbook.

Then the meltdown came. Credit markets seized up and leveraged buyouts all but evaporated. PE firms were still involved in other sorts of work - distressed transactions, workouts, but buyout kings like Blackstone's Steven A. Schwarzman were clearly keeping their powder dry.

By 2009, the number of deals had dropped to 1,072, with a median valuation to $61.3 million. The credit crunch meant that getting the funding necessary for a large-scale leveraged buyout was more difficult then it had ever been before. Mega-deals were dead. "A year ago, there was essentially no leverage available to complete deals. It didn't matter what size or what industry, the market was closed." says James Coulter, a founding partner at TPG Capital.

These days, though, the credit markets have improved, at least enough for deals to pick up and get larger. "There is more credit available for leveraged acquisitions than I would have expected even 6 months ago," Coulter says. "It is more expensive and less available than it was in 2007, but because the prices of companies are lower, transactions can be very attractive."

Jessica Canning, Global Research Director at Dow Jones Private Markets, says that in the first quarter of this year there have been 123 private equity deals announced, compared with 76 in the first quarter last year. Deals this year, according to data from Pitchbook, include the $5.2 billion dollar TPG and CCP Investment Board takeover of IMS Health announced this past November, the $3.4 billion dollar Silver Lake and Warburg Pinkus takeover of Interactive Data Corporation (IDC) announced this month, and the $1.6 billion Bain takeover in April of a unit of Dow Chemical (DOW, Fortune 500). "It does look like there is some traction in the buyout space right now," Dow Jones' Canning says, adding "we are starting to claw back to pre-crisis levels."

There are, of course, still hurdles to recovery. For one thing, the specter of a metastasizing European debt crisis remains a big concern. And getting credit, though looser, still remains an issue. Even if banks are starting to unfreeze lending, credit isn't as ample as it was at the boom's height, limiting the size and frequency of deals. "Back in the '06-'07 timeframe, credit was relatively easy to obtain. The rates were very low," says KPMG's Hessing. "It's not where it was then, so in this respect, credit is still an issue. There's a lot of talk about [interest] rates going up. The terms are more restrictive than they were."

FinReg questions loom

And then, of course, there's increased government regulation - something PE kings are keeping a particularly close eye on as Congress starts talking about a so-called "carried interest tax," a proposal to tax private equity and hedge fund profits as income, rather than capital gains (hiking the rate on these sorts of returns by about 20 percentage points). With the Senate's passage of financial reform last week, and the Obama Administration attempting to stage manage reconciliation with the eventual House bill, the effects of reform on PE are still somewhat unclear, but will soon come into sharper focus.

Even so, as the financing for deals slowly but surely starts to unfreeze, a tentative optimism is taking hold in the buyout space. The next $15 billion buyout offer to hit a boardroom table might be the one that gets accepted. "I guess," Coulter said, "looking at the progress in the industry over the last year, I can't help but think of that Mark Twain quote - 'reports of my death are greatly exaggerated.'"