Cramer: Don’t hold your breath waiting for LBOs

Tibco shareholders made a pretty penny on Monday after private equity firm Vista Equity partners offered to take Tibco private for $4.3 billion, a 23 percent premium to the stock's closing price on Friday.

"As a private company, Tibco will have added flexibility to serve our customers and execute on our long-term strategy," CEO Vivek Ranadive said in a statement.

In the wake of events such as these, Cramer often sifts through the market to see if another company may be in a similar circumstance. Typically, Cramer thinks that developments such as these spark similar moves elsewhere.

However, in this environment, Cramer doesn't think another LBO of this magnitude is going to happen, at least not anytime soon..

Public and Private
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"Here's the problem: right now there just aren't very many American companies that would make good leveraged buyout targets," Cramer said.

That is, when private equity firms take a company private Cramer says they often follow a fairly structured model.

"They cut costs to the bone and generally try to improve the way the business is run. Fast forward a few years, and the PE guys sell a leaner, meaner, new and improved version of that company back to the public markets for a nice profit."

However, Cramer says the recent downturn mandated that public companies make all sorts of cuts and grow extremely efficient, themselves, or they weren't able to survive.

As a result, "there aren't a lot of opportunities for (private equity), Cramer said.

And to make the environment that much more challenging for PE, mergers and acquisitions are on the rise. "In fact, when it comes to M&A activity, 2014 is on track to be 20 percent higher than the previous peak in 2006."

However, when other companies make acquisitions, they can use stock to fund part of the deal; typically private equity pays with cash. And through a merger, synergies can be generated between the acquiring company and a target. In the private equity model, that's not usually in the cards.

Also, Cramer said with the averages at all-time highs, valuations don't make sense for an LBO, either; a phenomenon also cited by Goldman Sachs.

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"That doesn't mean the age of the leveraged buyout has come to an end," Cramer added, "private equity guys are still sitting on a fortune that needs to be put to work."

It's just that Cramer doesn't think American companies make good targets, right now. "I can see private equity looking to put money to work outside of the United States, but not domestically. Not right now."

And that's something Cramer thinks investors should keep in mind as they seek new opportunities.

Although you may hear "private equity firms worldwide are just sitting on top of $465 billion, and that they can borrow money at incredibly low rates," Cramer says don't look for many more leveraged buyouts such as what happened with Tibco.

"Largely, there aren't many other American companies where that kind of deal would make much sense," said Cramer. "Not until we get a major swoon in the market, can I see private equity stepping in."

Jim Cramer Mad Money
Source: CNBC

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