M&A Watch: Where Private Equity May Look Next for Deals

Mergers and acquisitions are headed for another record year, fueled by a seemingly endless cascade of private-equity money.

“I can’t think of anything that’s off limits,” says Michael Kelly, managing director at Hamilton Lane. "There are good companies in any industry."

As of mid-May, total M&A activity world-wide totaled about $2.19 trillion, compared with the record $3.87 trillion for all of 2006, according to Dealogic. In the U.S. M&A activity totaled $717.37 billion through May 16, on pace with last year’s $1.49 trillion. Both are shy of 1999 and 2000, when activity topped $1.5 trillion in each year.

Private-equity buyouts have totaled $218.7 billion so far this year, compared with $421.56 billion last year and $53.9 billion in 2000.

So far this year, buyouts represent 30% of the the total value of all U.S. deals, slightly ahead of last year's pace, and about 14% of all mergers.

"The premise for private equity is that you invest in sound companies that need some additional hands-on help to make them better,” says Kelly.

"It Will End"

Of course, the boom in private-equity deals isn't expected to go on forever.

“It will end,” Steve Rattner, managing principal of Quadrangle Group, told CNBC’s “Power Lunch” recently. “We are in a credit bubble. Credit is an over-valued commodity at the moment. The lenders are not getting compensated relative to the risks they are taking and at some point that will change. Right now, the default rates are at historic lows and that will also change. When it all changes, we’ll get back to some kind of norm."

But for now, the deals just keep coming.

Major buyouts announced just this past week include Cerberus Capital Management’s $7.4 billion deal for Chrysler, Warburg Pincus’ $4.5 billion acquisition of Bausch & Lomb, and Blackstone Group’s $7.8 billion acquisition of Alliance Data.

As for future deals, the potential list includes some of the biggest and best-known companies.

Merrill Lynch sees possible buyouts of such companies as Molson Coors Brewing, Archer Daniels Midland, Constellation Energy, ConAgra Foods, Union Pacific, Forest Laboratories, Gap,KeySpan, Costco Wholesale and Electronic Arts.

Morgan Stanley’s potential LBO candidates include Alltel, Dow Chemical, Lockheed Martin, Northrup Grumman and Sara Lee.

Sectors to Watch

Chris Childres, managing partner at Edgewater Capital Partners, says he sees potential in specialty chemicals, highly engineered and specialty products.

“Private equity continues in certain sectors to out-perform other asset classes,” Childres says. “I don’t think its tapped out.”

Healthcare is a good bet for future private equity activity, analysts say. But nursing homes are not considered good buyout candidates--despite millions of aging baby boomers--due to continuing uncertainty about reimbursement rates.

Cyclical industries are generally promising territory for buyouts, and Chrysler is the latest example. The auto parts sector is likely to continue to attract attention. Railroad equipment suppliers, including freight car builders, also look attractive.

Fast food may continue to serve up tasty deals. Domino Pizza re-emerged as revitalized company and launched an IPO in 2004. But past isn’t necessarily prologue because the industry is highly competitive and customer preferences can change quickly. In the future, pros say look for companies that sell healthy fare.