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Leveraged Buyouts Dry Up, But Signs of Hope Remain

In a time of collapsing mega-deals, a few well-structured buyouts with sound companies can still get done.

Deals to take 3Com and Avaya private that made news on Friday show that major private-equity transactions are squeaking through these days, making a lie of the recent refrain that deal-making is dead.

Wounded, yes. Dead, no.

"We've been through a real shock to the system, and if you're not somewhat nervous then you don't have a pulse," said Alfred E. Goldman, chief market strategist of A.G. Edwards. "But, it's like any investment, the good will triumph over the bad ones."

The dislocation of global credit markets -- where buyout shops raise money to acquire companies and then take them private -- has caused big private equity deals to dry up.

Wall Street has been watching closely to see if Kohlberg Kravis Roberts could complete its $26 billion acquisition of First Data amid the summer's market turmoil. It was considered a harbinger for future debt deals, and at one point there was concern the private equity firm wouldn't attract enough investors to buy billions of dollars in debt.

Bankers on the deal were able to sell about $10 billion -- nearly double what they set out to raise when they began marketing the deal last week. And that bodes well for some 85 pending deals that are seeking to raise $277 billion, according to data provided by Dealogic.

With the First Data deal nearly completed, it sends a very strong signal that the worst might be over. There is no question that buyout shops may never again see the kind of easy credit terms that helped fuel the industry in recent years -- but there's a growing sense that deals will still go through, as long as the companies involved are well run, are not loaded with debt and have good prospects to expand their business.

3Com, Avaya and Sallie Mae

For example, private equity firm Bain Capital said Friday it is buying networking hardware and software maker 3Comfor $2.2 billion. The deal also gives Huawei Technologies, China's largest telecom equipment maker, a minority stake in the U.S. company, providing 3Com a chance to delve further into the Asian market.

Meanwhile, Avaya shareholders approved an $8.2 billion sale to investors led by Silver Lake Partners and TPG. There was concern market conditions could hurt the deal to bring the communications and software company private, but several proxy advisory firms recommended investors back the plan as Avaya vowed that the deal was not in trouble.

That's not to say the entire industry is in the clear.

"The deals prior to everything we went through this summer certainly is what everyone is watching," said Ryan Larson, senior equity trader at Voyageur Asset Management. "But, after the repricing of all that risk, the private equity firms are being more diligent. Anything announced since then might be more likely to happen."

This poses a quandary for some investors who hold shares in companies being taken private that have yet to secure financing. Analysts believe the strong financial deals will eventually get done, but those showing any signs of trouble could be a good time for investors to lock in profits.

For instance, SLM Corp. -- otherwise known as Sallie Mae -- was a deal that troubled Wall Street almost since the day it was unveiled. There have been lingering concerns about legislation, since passed, that would hurt the student loan market.

The stock surged from $41 a share when the deal was announced in April to a high of $58 but plunged to $41.73 on Wednesday when J.C. Flowers said it might have to abandon the deal.

Similarly, speculation that Harman International Industries might have some financial hardships ahead caused Kohlberg Kravis Roberts and GS Capital Partners to rescind their $8 billion offer.

They had offered $120 per share on April 26, and the stock climbed to a 52-week high of $125.13. Last week, rumors -- and subsequent confirmation -- that the private-equity firms were nixing the deal sent shares plunging to a low of $75.52 almost overnight.

"If it was a good deal when it was initially purchased than you just need to exercise patience," Goldman said. "There's some more sense returning to that market."

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