By Amy Or
December was the busiest month since August 2011 for private
equity firms who were eager to agree to, and hopefully close, deals
by year-end to avoid a hike in the capital gains tax.
The acceleration of deals was a sudden change of pace from
before the U.S. presidential election, when some buyers were
unwilling to commit until the outcome of the contest became
clear.
But in the past month, uncertainties over the financial
implications of the so-called "fiscal cliff" meant sellers were
intent on finalizing transactions before year's end so they qualify
for the current capital gains tax rate.
"Year's end is always busy (for mergers and acquisitions)," said
Matthew Richards, a partner handling private-equity transactions at
law firm Ropes & Gray LLP. "This year is unusual compared to
prior years as we didn't know which way the election would go, and
that determined which way tax would go."
That rate is set to increase in 2013, though the outcome of
negotiations over the fiscal cliff could determine exactly how much
the rate rises.
KKR & Co. (KKR) Co-Chairman and Co-Chief Executive Henry
Kravis said at a financial conference earlier this month that his
firm was seeing "a lot of people saying, if you want to buy my
company, you have to close it by Dec. 31."
Against that backdrop, a total of 73 deals, worth a total $6.03
billion, were announced this month by buyout firms, the most since
August 2011, according to Dealogic. Then, there were 74
transactions, worth a combined $7.14 billion, Dealogic said.
The mad dash included the sale of JHP Pharmaceuticals LLC by
Morgan Stanley Principal Investments, which invests Morgan Stanley
(MS) capital, to Warburg Pincus. The $195 million deal for the
specialty pharmaceutical company that manufactures and sells
sterile injectable drugs was announced Monday--the last day of the
year--and closed the same day.
"It's just part of a rash of deals rushing to close before
year-end," said Ernie Toth, a JHP spokesman. He declined to comment
whether the fiscal cliff was a factor in discussions over the
timing of the sale.
Transactions sometimes take 30 to 60 days to close, to allow
time for regulatory or shareholder approval, or to arrange for the
relevant financing.
But not all announced deals are as aggressively structured as
the JHP one. Investment bank Duff & Phelps Corp.'s (DUF) sale,
announced late Sunday, to an investor group consisting of the
Carlyle Group, Stone Point Capital LLC, Pictet & Cie and Edmond
de Rothschild Group is expected to close in the first half next
year, pending stockholder and regulatory approvals.
As many deals are too small in size to track, Dealogic couldn't
accurately reflect how many of those December deals closed before
the New Year.
Sterne, Agee & Leach analyst Jason Weyeneth said even if
transactions didn't get finalized by Monday, financial damage to
the fund or the firm isn't expected to be substantial as the
increased taxes will mostly "pass through" to fund investors.
As buyout funds are set up in a partnership structure, investors
or limited partners will bear the increased taxes when they will
receive their original capital and the profits upon sale of
portfolio companies.
Some investors, like public pension funds, are tax-exempt, and
therefore aren't affected. Others, including private equity firms
that put up its own capital in the fund, are subject to potentially
higher tax receipts.
Write to Amy Or at amy.or@dowjones.com
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